Tariffs. The buzz term on everyone’s lips and one of the biggest disruptors in the auto industry since COVID-19. But why? Why the tariffs? A significant part of the reason is to stimulate growth in local manufacturing as part of protecting national economic interests. With the automotive industry forming a big part of that conversation, it has mainly been hit, and the trickle-down effect has significant impacts.
Not just on the import of cars, but also on the global supply chain, the supply of natural resources, steel, aluminum and other car parts which are imported into North America that just every car manufacturer makes use of.
The effect will be felt not only at the price point of vehicle sales for international and local brands, but also in the after-sales market across the board, as car repair costs, insurance, and other related business costs involved with vehicles will be impacted.
To understand the full effects, one would require a crystal ball, but despite numerous multinational conversations underway and widespread uncertainty, the dice have been cast. Tariffs are in effect, and the auto brands and everyone affected are navigating life after the fact.
No matter which way you look, any increase in public-facing costs has dollar signs written all over it. Dollar signs that may negatively impact the same workers the tariffs are there to protect.
Japanese Brands and a Noose That Loosens (Somewhat)
Toyota will be one to watch. Japanese car brands, such as Toyota, may be in a more favorable position due to a deal being brokered, resulting in a tariff agreement of 15% on imports compared to the standard 25% on car imports imposed elsewhere. However, they will still feel the impact. Toyota, the largest Japanese trading partner in the auto sector with the US, will be pushing for improved tariffs beyond that.
The Japanese Auto Company reported improved unit sales in the first half of the year, but this was likely due to consumers seeking to take advantage of deals before the impending tariff increase, particularly on hybrid vehicle options. Although that may seem like a positive on the face of it, there are murmurs suggesting that the second half of the year will be where the real effects are felt, citing a possible downswing in sales as the market adjusts, waiting for more clarity. Keep a close eye on those monthly sales numbers.
With eleven manufacturing plants within US boundaries and large numbers of vehicles imported, sales are expected to be impacted, possibly leading to increases in list prices. That’s if other measures can’t be exercised. Other brands that operate outside the border have seen a blend of favors, such as the UK, which settled on a 10% tariff on the first 100,000 vehicles. The rest of the EU countries are struggling with a 27.5% tariff.
Stellantis, which owns the RAM, Chrysler, Dodge, and Jeep brands, is also expected to see an increase in expenses. They’ve been rather negative about their future numbers, but given the mix and complexity of the group, that is to be expected. It’s still not a good feeling for the industry.
Given that Toyota manufactures many American-sold units in Canada, Mexico, Japan, and the US, including part of the allocation of America’s favorite SUV, the RAV4, which is produced in Canada, this is one to keep an eye on.
All-American or Not?
Let’s take America’s golden child, the Ford F-Series. Is it the all-American hero or a victim of the global trade environment? On the face of it, it appears to be the former, but dig a little deeper, and you’ll find that car components, such as the transmission, alternator, wheels, and tires, as well as half shafts, are sourced from around the world, including Mexico and Canada. Both countries are facing the complexity of the border, which is proving to be more of an issue than needed.
Another example is that Ford produces the Mach E, Bronco Sport, and Maverick in Mexico, as well as the Mustang GTD in Canada. It’s all rather complicated as more is understood. The global village is facing one of its most significant disruptions to date.
Other major brands, such as General Motors, are also expected to take a hit due to the large imports of components required for manufacturing within the US, as well as the Chevrolet Silverado and GMC Sierra, which are both manufactured in Ontario. Even though Mexico is receiving a 90-day reprieve to negotiate tariffs while talks are still ongoing, the outcome may still be a zero-sum game. Someone will need to bear the loss and absorb the consequences.
Supply Chain Pressure: Is Everyone In This Together?
Undoubtedly, the disruption of tariffs is impacting the auto manufacturing sector in a broad-based sense. Global entities that manufacture components required within the United States, as well as those that have based their manufacturing operations beyond the borders, are now needing to understand what post-tariff life looks like and whether it’s even profitable to produce.
A consideration like relocating operations within the borders is certainly possible, but it will come at a significant cost. If that isn’t possible for any reason, can alternative sources be found within America? That answer is “yes,” but at what cost in terms of time? Component products require rigorous quality control standard testing, and that won’t happen overnight, especially if the developed IP is not present.
There are certainly mixed feelings worldwide as global trade is thrown into a dark pit of uncertainty. While the supply chain figures things out, production will be impacted, slow to respond, and costs may increase. But, in the long run, will the situation right itself, or will suppliers absorb some of the blow with reduced profits, and will business continue as usual while the world becomes poorer?
Beyond The Car Parts Industry: Repairs And The Insurance Industry
Given the rise in vehicle costs, we will also see an increase in insurance premiums, driven by the rise in auto repair costs. Insurance, a critical part of the after-sales life, will undoubtedly feel the pressure of tariff increases, and the consumer, at the end of the day, will carry that cost.
Even warranty plans and the auto-repair industry, which many consumers consider when purchasing a new car, will now face more scrutiny given the cost impact and after-sales market of parts supply down the road of car ownership. No matter which way you look, any increase in public-facing costs has dollar signs written all over it. Dollar signs that may negatively impact the same workers the tariffs are there to protect.
And Now, The Job Market
It’s a sensitive topic. Now more than ever, one of the biggest underlying reasons behind the tariffs. We’re facing engaging scenarios here, but whether the local industry can keep up with the demand for sales will largely depend on the supply of labor and the increase in costs associated with it, given that it was more affordable to import initially to meet current demand.
Sure, if tariffs serve their purpose, there may be a positive impact on labor in some cases, but at what cost will it come? This is yet to be seen, especially in the short to medium term, and what impact will that have on the price of a car?
Another two considerations that we need to understand: 1 – whether there is a demand to work in manufacturing? Does a section of the American labor force want to work in manufacturing, and if so, 2- how much will automation play a part as technology continues to evolve? Those are two questions for another day.
Lastly, will the income nationally generated from tariffs be put to good use, possibly with a subsidy to offset increased labor costs of manufacturers? The more we get into this, the more questions we have.
Tariffs have a cause-and-effect relationship, and there is much to consider, which is why the market has experienced significant disruption as the world responds with a cautious approach, treading on eggshells. Will tariffs, however, serve their purpose and generate the injection for the labor market and manufacturing in homeland-USA?
Time will only tell, but especially during the short to medium term, it’s somewhat uncertain, and depending on which side of the fence you sit on, it certainly feels like a movie at times, but no one knows whether the ending will be happy.
