Trump tariffs would be bad for the entire global auto industry, says Moody’s

President Donald Trump’s threat to slap 25% tariffs on imported cars and car parts would be a credit negative, and not just for the U.S. but for every segment of the global automobile industry, from car makers to parts suppliers, dealers and transportation companies.

That’s the view of Moody’s Investors Service in a report published Monday, that highlights the pressure tariffs would place on an industry that relies on a complex, global supply chain and is facing major technological changes as self-driving and electric vehicle development continues apace.

Trump on Sunday issued new threats against America’s trade partners, calling for them to remove barriers and tariffs, or face the consequences. Trump has already warned China that the U.S. will seek additional tit-for-tat tariffs on Chinese exports if China slaps retaliatory tariffs of its own on U.S. exports.

On Friday, Trump threatened to put 20% tariffs on European cars in response to the EU’s decision to impose 25% tariffs on more than $3 billion in U.S. goods as retaliation for U.S. tariffs on steel and aluminum that the Trump administration put into effect on June 1.

The effects of the existing tariffs are now showing up in company announcements. Harley-Davidson Inc. said Monday it would have to eat the “substantial” short-term costs of the tariffs imposed by the European Union, but it planned to move some production overseas to ease the burden over the longer term.

Ford Motor Co. and General Motors Co. would be immediately impacted by tariffs, said Moody’s, as both import a large number of vehicles to the U.S. from Canada and Mexico. In GM’s case, about 30% of its U.S. unit sales are supported by imports, while at Ford, the comparable figure is 20%. GM also sources a large portion of its high-margin trucks and SUVs from Mexico and Canada. Ford’s imports are almost exclusively cars, a market it has recently decided largely to exit.

“Both GM and Ford would need to absorb the cost of scaling back Mexican and Canadian production and shifting some back to the U.S.,” Moody’s Senior Vice President Bruce Clark wrote in the report. “They would also likely need to subsidize sales to offset the tariffs during the near term, and could eventually pass on the higher costs to consumers.”

The entire supply chain would be disrupted by tariffs, said Clark. Car companies’ strategy of optimizing product cost and timing currently means multiple cross-border trips for finished goods, and that could incur multiple tariff charges. Avoiding those would mean a complete overhaul of the process.

Non-U.S. car manufacturers will be hit harder than their U.S. rivals, particularly those companies that do not have plants in the U.S. Jaguar Land Rover Automotive PLC, for example, has no U.S. production, while Volvo AB is planning to start U.S. production next year.

Daimler AG , BMW and Volkswagen AG all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW.

“However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”

European automobile makers may have more luck with premium brands, including BMW, Daimler’s Mercedes-Benz, Audi and Porsche, Jaguar, Land Rover, Volvo, and FCA’s Jeep, Maserati and Alfa Romeo. The buyers of such luxury brands tend to be less price-sensitive than the buyers of mass-market brands.

Renault SA would take an indirect hit from tariffs, due to its partnership with Nissan Motor Co. Peugeot does not sell vehicles in the U.S.

Looking toward Asia, Japanese car makers would be forced to make big changes to their domestic production if tariffs are introduced. While Toyota Motor Co. , Nissan Motor Co. Ltd. and Honda Motor Co. manufacture a sizable proportion of their global production in the U.S., exports to the U.S. from Japan make up a noteworthy part of their domestic production.

Moody’s estimates that Toyota exports roughly 22% of cars produced in Japan to the U.S., while Nissan exports about 31% of its domestic production to the U.S. market. Honda has the most diversified production of the three and a low ratio of exports to the U.S. but is planning to increase exports in 2018.

Korean car makers, Hyundai Motor Co. and Kia Motors Corp. import a bit more than half their vehicles sold in the U.S., mostly from Korea but also from Mexico. Both were planning to produce more SUVs and crossovers in the U.S. in the next two years.

“The companies are likely to reduce exports from the U.S. to Canada or other regions if tariffs are imposed,” said Clark. “However, these efforts will be insufficient to fully offset potential negative effects.”

Mexico would be hurt more than other markets as many big car makers have assembly plants there to serve the U.S. market. Mexico produced 3.8 million vehicles in 2017, 82% of which were exported. Of that total, 84% went to the U.S. and Canada. In the first quarter of 2018, the car industry accounted for 2.9% of Mexico’s GDP, meaning tariffs would hurt more than the car manufacturers and auto-parts suppliers.

Chinese car makers will be mostly unaffected. Dongfeng Motor Group Co. Ltd. , Beijing Automotive Group Co. Ltd. and Geely Automobile Holdings Ltd. export less than 5% of their unit sales, mainly to emerging markets.

One group that will be especially hard hit is U.S. car dealers, which rely heavily on imports. “These companies have minimal U.S.-produced vehicle penetration to offset reduced sales from price increases on imported vehicles,” said the report.

Most at risk is Penske Automotive Group , which has a large presence in the U.K. and Europe, while Lithia Motors Inc. will be least affected, given its high percentage of domestic vehicle sales.

“Tariffs would be fairly benign for auto-part retailers insulated by replacement-part demand for the 260 million vehicles currently on the road,” said Clark.

Finally, railroad companies could also take a hit if crossborder transportation of autos and car parts shrinks, said the analyst.

Kansas City Southern can expect fewer goods crossing the southern U.S. border, while Union Pacific Corp. would have some offset in increased carloads within the U.S.

GM shares were down 2.1% late Monday, while Ford was down 1.8% and Tesla Inc. 0.8%. The Dow Jones Industrial Average and the S&P 500 were down 1.8%.