Trump's Tariffs: A 17% Profit Punch for Carmakers

The automotive industry is bracing for a significant blow as President-elect Donald Trump's proposed tariffs on imported goods threaten to cut into automakers' profits. According to a note from Wolfe Research, the 25% tariff on goods from Mexico and 10% on Canada could add US$1,500 to US$3,000 to the price of an average vehicle, leading to a potential 17% decline in combined core profits for major automakers. This would "devastate" the auto industry, as tariffs of that magnitude on the US$97 billion worth of auto parts and four million finished vehicles coming from Canada and Mexico would be "extremely difficult for consumers who are already facing affordability issues."

Trump's tariffs, if implemented, would have a considerable impact on the profitability of automakers that rely heavily on imported parts from Mexico and Canada. Companies like General Motors (GM), Stellantis, Ford, and Volkswagen (VW) are particularly vulnerable due to their high exposure to imported components. GM and Stellantis import over 50% of their truck models from Mexico, while Ford imports the Mustang Mach-e and other models from the country. These automakers may struggle to pass the increased production costs to consumers, given the current affordability concerns.

The potential 17% loss in combined core profits for major automakers could have significant implications for their cash flow and dividend payouts. Assuming a 20% dividend payout ratio, this loss in profits could translate to a reduction of around US$340 million in total dividend payouts, impacting shareholders. However, the actual impact on cash flow and dividends will depend on each company's specific financial situation and their ability to mitigate the effects of the tariffs.

To mitigate the impact of Trump's tariffs, automakers may need to diversify their supply chains, invest in domestic production, and improve their global reach. Diversifying supply chains can help reduce reliance on affected markets, while investing in domestic production can lower input costs. Additionally, expanding global operations can help tap into new markets and offset potential losses from tariff-affected regions. For instance, Ford's expansion into India and China could provide a buffer against tariffs in North America.

The reduced profitability caused by Trump's tariffs could also impact the industry's ability to invest in research and development (R&D), especially in new technologies like electric vehicles (EVs) and autonomous vehicles. A 17% hit to core profits could slash R&D spending by up to US$10 billion, hindering innovation and delaying the adoption of new technologies. This could put American automakers at a disadvantage compared to their international counterparts, who plan to invest heavily in R&D. For example, Volkswagen plans to spend US$91 billion on EVs by 2030, while Stellantis aims to invest US$35.5 billion by 2025.

If Trump's proposed tariffs are implemented, they could open up alternative investment opportunities in the automotive supply chain and adjacent industries. The increase in demand for domestic battery production, given China's dominance in the sector, may lead to significant investment opportunities in American battery manufacturing facilities. Additionally, the rise in steel prices due to Trump's tariffs may boost demand for lighter, more fuel-efficient vehicles, creating opportunities in materials and technology companies specializing in these areas. Furthermore, the potential shift in production from Mexico to the U.S. could open up investment possibilities in U.S.-based manufacturing plants and supply chain companies.

In conclusion, Trump's proposed tariffs on imported goods pose a significant threat to the profitability of the automotive industry. The potential 17% loss in combined core profits could impact cash flow, dividend payouts, and R&D spending, hindering the industry's ability to innovate and compete. To mitigate these risks, automakers may need to diversify their supply chains, invest in domestic production, and expand their global reach. Additionally, investors should consider alternative investment opportunities in the automotive supply chain and adjacent industries, as they may emerge due to the tariff-induced changes. By staying informed and making strategic adjustments, the automotive industry can navigate these challenges and maintain its competitiveness in the global market.