The Auto Industry’s Test Case
Last night, President Trump announced a 25% tariff on imported cars and car parts coming into the U.S. This isn’t surprising or out of left field, but the market seems to be surprised it’s now reality and not a negotiating tactic.
If there’s a place to test the impact of tariffs, it’s in the auto industry. Higher costs won’t slowly be rolled out, like they may with tariffs on avocados, and vehicles are a discressionary purchase. They’ll likely hit stocker prices within the next month.
What will customers do if the price of a vehicle rises $3,000 to $10,000, as some project?
How will dealers and automakers adapt?
It’s likely we see fewer sales because prices will go up. That said, the impact of imports will likely be lower than auto loans nearly doubling. And that didn’t cripple the industry.
Many vehicles are already manufactured in the U.S. and some components won’t see tariffs yet. So, final assembly can be shifted and component supply could move as well.
This will take time, but I don’t think it’s devestating for the industry, especially when you look at the profitability per vehicle today. $General Motors(GM)$ may see lower margins in the future, but I think most cost increases will quietly be passed on to consumers and there’s some room to eat tariffs and not destroy profits.
$Tesla Motors(TSLA)$ is seen as the winner from tariffs because it generally has fewer imported components. But supply and demand is more important in the auto industry than the cost of tariffs.
Deliveries are falling despite Tesla lowering prices over the past three years and profitability has plunged since 2022. Tesla may be better off than it was yesterday, but that’s not saying much.
As with most things, “it’s complicated” is probably the right answer when it comes to tariffs.
What I think we can expect is the following:
Slightly higher auto prices
Lower auto volumes
More auto jobs/plants moving back to the U.S.
The president clearly values the last point over the others. Maybe that’s great for the economy long-term? Maybe it causes a recession this year?
What we need to understand is the rules of the road and tariffs are here to stay. It’s now time for management teams to adapt a.
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