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S&P: US auto tariff hike would hit EU carmakers


S&P: US auto tariff hike would hit EU carmakers

Earnings and credit ratings for the six major European automakers would take a hit if U.S. President Donald Trump decides to impose a 25% tariff on European auto imports to the U.S., according to a report by S&P Global Ratings.

The affected auto companies — Volkswagen AG, Fiat Chrysler Automobiles NV, Daimler AG, Bayerische Motoren Werke AG, Volvo Car AB (publ.) and Jaguar Land Rover Ltd. — are projected to take an earnings hit, potentially resulting in a negative ratings action, Ratings said in the March 26 report.

S&P Global Ratings credit analyst Vittoria Ferraris said a tariff hike would lead to a 15% drop in aggregate adjusted 2019 EBITDA for the six European car manufacturers with significant sales in the North American Free Trade Agreement region.

In February, the U.S. Commerce Department completed a Section 232 investigation report regarding the impact of auto imports on national security. The report was submitted to Trump, but the results have not been publicly released and Trump has not issued a decision.

The EU imposes a 10% tariff on car imports from the U.S., and Trump has said he believes tariffs on European cars should therefore be higher.

Impact on individual automakers

Anna Stegert, a Ratings analyst, said during an S&P webcast after the report was released March 26 that the assumption is automakers would try to pass on part of the increased tariff costs to consumers.

However, some companies are better positioned to pass those costs on, Ferraris, who also joined the webcast, said.

"You can do it depending on the mix you sell in the U.S.," Ferraris said. "You probably can do it on super premium and premium segments."

For automakers that cannot do that, there is another option.

"If they can't really change their prices what they will do is move supply chains" closer to the U.S., Stegert said.

The report suggests that European carmakers would need up to two years to reorganize their supply chains.

U.K.-based Jaguar Land Rover and Sweden-based Volvo could be the hardest hit, as they source either no production or very little of their supply chains within the NAFTA region, which comprises the U.S., Mexico and Canada. Cars made within the region that adhere to the rules of origin are shipped within the trading bloc duty-free.

The report's scenario of 25% tariffs would create a competitive disadvantage for Jaguar-Land Rover because its sales in the NAFTA region rely entirely on imported vehicles. The additional costs from a tariff hike would reverse the effect of the automaker's cost-reduction measures, assuming the company cannot pass the tariff-related costs on to consumers.

With Volvo, the impact would also be significant because its SUV XC series produced in Sweden contains no U.S.-sourced content even though it represents approximately 80% of Volvo's U.S. sales volume.

Fiat Chrysler sources 55% of the cars it sells in the U.S. within the NAFTA region. But it could experience a 20% fall in EBITDA if 25% tariffs are imposed on auto imports as a large share of the value chain for its Jeep models, especially the Jeep Renegade, are outside the NAFTA region.

Germany-based Daimler would lose more than 10% of projected 2019 S&P-adjusted EBITDA because its models with U.S. appeal have limited locally sourced content.

Germany-based BMW's U.S. plant is its largest global production facility. But tariffs could impact the automaker's earnings because approximately 40% of content for BMW's most-popular models in the U.S. originate outside of the country.

Germany-based Volkswagen will be least impacted, according to the report. The impact on expected 2019 EBITDA falls below 10% because several of Volvo's bestsellers in the U.S. are also sourced in the NAFTA region.

Impact on European economy expected to be modest

However, the effects of a tariff hike on European economies and sovereigns at large would be only "modest," Ratings said, as European economies are too diverse to be stymied by tariff hikes in a single industry, according to the report.

The overall macroeconomic effect for the EU economy would be limited to losing 0.1 percentage point of GDP.

Germany's economy would be hit the most by a tariff hike, but it would only lose approximately 0.45 percentage point of GDP over a six- to 24-month period.

Germany has a highly diversified economy that benefits from a global customer base for its exports, according to the report. German auto exports to the U.S. are a low percentage of its GDP, equivalent to slightly more than 1%, the report said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.