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Potential auto tariffs seen hitting Mazda and makers of car parts

Several large foreign automakers and American trade partners could be at risk of higher production and selling costs should the U.S. impose tariffs on auto imports, according to experts and recent reports.

The U.S. Commerce Department announced May 24 that it would initiate a Section 232 investigation into imports of automobiles and automotive parts imported into the U.S. from all countries to determine whether they threaten national security, a case that could result in tariffs of up to 25% on foreign car imports.

Such a move by the U.S. to impose tariffs on automobile imports, as well as on imported parts, could have far-reaching implications not only for foreign automakers but also for U.S. car companies.

Some foreign automakers without a substantial U.S. manufacturing presence, such as Mazda Motor Corp., could be among the most vulnerable mainstream brands, according to Rebecca Lindland, executive analyst for Kelley Blue Book. Volkswagen AG and its subsidiary Porsche also could suffer, she said.

"Easily Mazda," Lindland said. "They're the number one most vulnerable brand in terms of mainstream vehicles. The other one is Jaguar Land Rover Automotive PLC for luxury."

Dan Ryan, a Mazda spokesman, said in an emailed statement to S&P Global Market Intelligence that the company "shares the administration's goals to increase auto manufacturing in the U.S.," something the company said it supports with a planned $1.6 billion manufacturing plant in Huntsville, Ala., in tandem with Toyota Motor Corp. The automaker says the plant will produce 300,000 vehicles per year.

"Mazda supports policies that remove barriers to trade and help create more U.S. jobs," Ryan said. "Considering nearly 12 million vehicles were manufactured in the U.S. in 2017, we feel strongly that vehicle imports do not pose a credible threat to national security."

According to Kelley Blue Book, Mazda was already experiencing slowing sales in the U.S. before the Trump administration launched its investigation. Mazda's U.S. sales of imported vehicles in the U.S. fell 6.5% to 289,470 units in 2017. Volkswagen, with 339,676 new vehicle sales in the U.S. in 2017, experienced its own 18.7% year-over-year drop.

Mitsubishi Corp., however, saw strong growth in 2017, when its U.S. new car sales were 103,686, a 15.1% year-over-year increase.

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Volkswagen and Mitsubishi did not return requests for comment.

Jeremy Acevedo, manager of industry analysis for Edmunds, an automotive information services company, said in an email to S&P Global Market Intelligence that tariffs would not only result in higher vehicle costs for consumers but could also cause buyers to wait to purchase an imported vehicle until the Trump administration is out of office or until off-lease vehicles hit the market.

"The implementation of these tariffs would be a major blow to the entire automotive industry," Acevedo said. "The vast majority of manufacturers produce at least some models abroad, and the build-out of these production factories cannot easily or cheaply be moved across borders. Automakers will have to contend with a significant hit to their bottom line at a time when the market is already more competitive than ever."

Mexico and Canada account for the largest volume of U.S. imports at $46.92 billion and $42.51 billion, respectively, in 2017, according to Commerce. However, as the U.S. reworks the North American Free Trade Agreement with both countries, exemptions could be in store for those trading partners of the U.S., as has been the case for countries facing the separate 25% and 10% steel and aluminum tariffs imposed by President Donald Trump.

Japan, home of Mazda, Mitsubishi and Toyota, exported $39.78 billion worth of new vehicles to the U.S. in 2017, the third-largest supplier to the U.S. The Trump administration has made boosting the domestic automotive industry a priority, including negotiating trade deals with Japan and South Korea, with the former still very early in the negotiating process.

At $20.18 billion, Germany, home to several automakers, including Bayerische Motoren Werke AG, represented the fourth-highest U.S. market share of imported cars in 2017, according to Commerce.

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Panjiva Research, a division of S&P Global Market Intelligence, showed in a recent report that automakers from Japan and Europe, which account for 28.4% and 12.9%, respectively, of total U.S. vehicles imports in the 12 months leading up to March 31, could be hit hardest by such tariffs.

Tariffs on auto parts imports could also have a major impact.

According to Panjiva, U.S. imports of auto parts reached a new record in March, following 8.9% year-over-year growth. Many of those parts come from NAFTA partners, accounting for 48.1% of the auto parts the U.S. imports, although imports from Canada and Mexico may ultimately be subject to exemptions. But $13.5 billion, or 12.4%, of the U.S. auto parts imports over the past year come from China and another 10.1% from Japan, which could be key candidates for tariffs.

Chris Rogers, research director for Panjiva, said in the note that auto companies will have some time to adjust while the investigation is underway.

"Duties are unlikely to be applied in the case for as much as a year, giving automakers and parts producers plenty of time to work out their options," he said. "Those include: pass-through duties in the form of higher prices for consumers, which may be an option at the less price sensitive/high price end, move production to lower cost countries that are also tariff-exposed [or] move production to a tariff-exempt country."

One way foreign automakers may try to mitigate the impact of tariffs on imports is to stockpile vehicles, according to Lindland.

Stockpiling vehicles remains an option, with Mazda being in the best position due to its fleet of more generic, popular products.

"It's possible," Lindland said. "But that's a lot of investment these companies have to make. Somebody has to carry those cars on their book. It's a lot easier to stockpile XBoxes or iPads than to stockpile vehicles."