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Auto industry faces rising costs and tariff uncertainty in 2019

Tariffs and rising costs have plagued automakers, weighed on margins and created a climate of uncertainty as companies head into 2019.

Facing headwinds from the impact of a wide variety of tariffs, some of the largest U.S. automakers attending a pair of auto industry conferences in Detroit Jan. 14-16 laid out in stark terms the challenges of navigating through a roiling trade climate.

Speaking Jan. 16 at the Deutsche Bank Global Auto Industry Conference in Detroit, Ford Motor Co.'s CFO Bob Shanks said the automaker is working against "substantial headwinds" that will cut into the company's profits.

"We expect tariffs imposed by both the U.S. and China to be an incremental headwind of about $700 million this year," Shanks said.

Tariffs hit most major U.S. automakers

President Donald Trump imposed tariffs of 25% on steel imports and 10% on aluminum imports in 2018, stemming from an investigation into imports on the basis of national security. The move prompted appeals by hundreds of companies affected by the tariffs.

In addition, U.S. car exports to China have also been targeted by tariffs as part of an ongoing trade war between the two countries. China imposed 25% tariffs on car exports in July 2018 and 5% tariffs on auto parts in September 2018 in retaliation for other U.S. tariffs. China has since rolled back the tariffs to 15% while the two countries work toward a trade deal.

Shanks was referring to both U.S. tariffs on metals imports as well as Chinese tariffs on U.S. auto exports.

Jim Farley, Ford's president of global markets, told reporters on Jan. 15 that the automaker has seen an impact across the "whole income statement" because of tariffs. In September, Ford CEO Jim Hackett said the steel and aluminum tariffs could cost the automaker a combined $1 billion in 2018 and 2019.

"Material cost has gotten more expensive," as have logistics costs in relation to China, Farley said at the Automotive News World Congress in Detroit. This affects Ford's Lincoln brand, which is exported to China and is subject to those trade tariffs.

Farley said the company is seeing "positive signs" and is optimistic about the trading partnership between the U.S. and China, which is "so important to Ford."

In the meantime, Farley said the automaker is taking steps to ensure the business is profitable.

Starting in 2019, Ford will start producing vehicles from both the Ford and Lincoln brands in China. The first Lincoln-brand vehicle will be localized in China later this year, followed by the Ford Explorer.

"That's always been part of the plan," Farley said, adding that the localization should help with logistics and costs.

Mike Manley, CEO of Fiat Chrysler Automobiles NV, said on Jan. 14 that U.S. metal tariffs are projected to raise the company's 2019 costs by $300 million to $350 million, Reuters reported. The automaker confirmed the numbers to S&P Global Market Intelligence, which translate to a price increase of about $135 or $160 per vehicle.

Meanwhile, the CEO of Toyota Motor Corp. North America said tariffs will be part of potentially intense headwinds in 2019 for the company.

"We have rising costs," CEO Jim Lentz said at the World Congress on Jan. 15. "Primarily, today, tariffs are a big part of that."

Although steel and aluminum tariffs have "settled down a bit from the initial 40% increase, it's still 15%-30% depending on the grade of steel," Lentz said.

U.S. seaborne imports of metals with the additional metals tariffs fell by 1.8% in the fourth quarter of 2018, according to Panjiva data.

This suggests that companies are raising prices, or accepting lower prices, instead of sourcing everything to the U.S., according to Panjiva.

Auto suppliers are also feeling the impact of tariffs, including Canada's Magna International Inc., where tariffs added $8 million in costs to the company in the third quarter of 2018.

"I'm very frustrated we still have tariffs in [North America]," Don Walker, CEO of Magna, said Jan. 15.

"I think it's insane," Walker said. "I think it's driven the price of steel up so now carmakers and other people are becoming less competitive [in the U.S.]."

Walker said when the steel and aluminum tariffs were implemented, the price of steel starting increasing immediately.

"It drives the input costs up and you become less competitive" compared with Europe and Asia, Walker said, adding that North American needs to rely more on Mexico for low-cost sourcing and labor.

However, Walker remains optimistic about the future with China.

"I think there's a high motivation, quite frankly, on both the U.S. and China to try and come up with a reasonable solution" on the tariffs, Walker said.

Rising costs also having an impact

Rising costs for auto companies can translate to higher vehicle prices, Cox Automotive Chief Economist Jonathan Smoke said on Jan. 17 on a panel at the World Congress event.

"We saw an increase in vehicle prices that is absolutely clear on the new vehicle side," Smoke said. "Vehicles are roughly 2% more expensive now."

More expensive vehicles could impact sales for automakers and cut into their margins.

Smoke said since the new U.S.-Mexico-Canada Agreement has not been ratified yet, there is a level of uncertainty there.

"Even if it's completely ratified by all three countries and goes into place, there will be price increases from that," Smoke said.

On the other hand, Smoke said, it could mean better sales for automakers as consumers hurry to buy cars before tariffs potentially cause more severe price hikes in vehicles.

Smoke expects Trump to move forward with implementing tariffs from a separate Section 232 investigation, which is looking into the imports of cars and auto parts on the basis of national security. The Trump administration is approaching a Feb. 17 deadline for the Commerce Department to submit a report to the president.

"My best guess is he is going to go forward because ultimately that becomes the lever to deal with China, to deal with the EU, to deal with Japan," Smoke said. "And ... if Brexit happens, we have to add the U.K. to that list."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.