U.S. Auto Makers Sweat Under Threat of Tariffs on Mexican Imports

Date : 05/31/2019 @ 2:37PM
Source : Dow Jones News
Stock : General Motors Company (GM)
Quote : 39.48  0.36 (0.92%) @ 1:00AM

U.S. Auto Makers Sweat Under Threat of Tariffs on Mexican Imports

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By Mike Colias 

President Trump's threat to impose escalating tariffs on Mexican imports foists fresh bad news on the U.S. auto industry, which had pinned hopes on a tentative deal reached last year to preserve free trade between the countries.

For Detroit's Big Three auto executives, the prospect of tariffs on Mexican imports has been the most worrisome of the trade threats leveled by Mr. Trump during his presidency. Mexico-built cars accounted for 17% of Detroit auto makers' overall U.S. sales in 2018, including some of the industry's biggest money makers, large pickup trucks.

The tariffs also would hit foreign car companies and automotive suppliers. Overall, the U.S. imported $52.6 billion of vehicles and $32.5 billion in auto parts last year from Mexico, the highest totals of any country, according to Commerce Department data.

Mr. Trump on Thursday said the U.S. would implement a 5% tariff on all Mexican imports June 10 if the country doesn't take steps to stem the flow of migrants over the U.S.-Mexico border. That tariff would rise gradually to 25% by October.

The companies declined to comment Friday on Mr. Trump's threat. The Alliance of Automobile Manufacturers, which represents about a dozen major auto makers including the Detroit car companies, also declined to comment.

General Motors Co. is among the most exposed to fresh tariffs on Mexican-produced cars. GM sold about 663,000 Mexico-built vehicles in the U.S. last year, or 22% of its domestic sales, according to an estimate from research firm LMC Automotive.

GM's lucrative Chevrolet Silverado and GMC Sierra pickup trucks -- which combined are its top-selling U.S. vehicles and biggest global profit generator -- would be hard hit. This year through April, Mexico accounted for about one-third of GM's production of the trucks, according to WardsAuto.com.

About 18% of Fiat-Chrysler Automobile NV's U.S. sales were imported from Mexico last year, including about a quarter of its profitable Ram pickup trucks. Ford Motor Co.'s Mexican imports accounted for about 10% of U.S. sales, according to LMC.

Even the initial 5% tariff, if enacted, could trim earnings by as much as 10% on an annualized basis for the most exposed auto companies, including GM, Fiat Chrysler and suppliers such as seat maker Lear Corp., Evercore ISI estimated in a research note Friday.

Auto stocks fell sharply in premarket trading, including a 5% drop in shares of GM and Fiat Chrysler.

Tariffs on auto parts from Mexico also would squeeze the industry. Both foreign and U.S. auto makers have established extensive supply chains in Mexico during the 25 years since the North American Free Trade Agreement took effect. Some parts cross the border multiple times before making their way into a finished automobile.

Some of the Detroit auto makers' U.S. vehicles are made with significant numbers of parts shipped in from Mexico, and tariffs would raise costs for those models. For example, the Cadillac Escalade, Chevy Suburban and GM's other large sport-utility vehicles are built in Texas, but nearly half of the parts used to assemble the SUVs come from Mexico, federal data show.

Foreign auto makers also have taken advantage of Nafta by opening new Mexican plants to supply their U.S. dealerships and would be hurt by fresh tariffs. For example, nearly half of Volkswagen AG's U.S. sales last year were imported from Mexico, according to LMC.

Auto executives last fall lauded the Trump administration's tentative deal to revise Nafta. The new trade pact, still subject to congressional ratification, maintains tariff-free trade among the U.S., Mexico and Canada while raising the amount of a car's content that must be sourced in North America to avoid tariffs.

Those changes could raise costs for car companies by forcing them to rejigger their supply chains to comply with the new thresholds, analysts have said. Still, Mr. Trump had threatened to scrap Nafta altogether, a prospect that executives have said would be disastrous, forcing them to raise vehicle prices and putting billions of dollars in profits at risk.

Auto executives have complained that the mere prospect of future tariffs has stalled decisions on capital investments in factories as they wait to see how Mr. Trump's trade policies -- and potential retaliation from trading partners -- shake out.

"We can only decide what we have to do once we know exactly what will be the decisions of the U.S. administration, which nobody knows," Jacques Aschenbroich, chief executive of French parts supplier Valeo SA, said last summer when asked by analysts how future tariffs could affect investment moves.


(END) Dow Jones Newswires

May 31, 2019 09:22 ET (13:22 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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