Dealership service departments aren't feeling much pain — yet — from the higher tariffs imposed by President Donald Trump on replacement auto parts imported from China.
But as the U.S.-China trade war gets hotter, retailers and industry experts predict that franchised dealerships will be forced to pass tariff-related price increases for repair parts on to their service customers or accept lower fixed ops profit margins.
"It's like a slow boil," Paul McCarthy, president of the Automotive Aftermarket Suppliers Association, a division of the Motor & Equipment Manufacturers Association, told Fixed Ops Journal.
Higher parts prices charged to consumers are "not something we will wake up tomorrow and see," he says. "But over the long term, consumers will begin to feel the pain."
According to the U.S. Commerce Department, the U.S. imported $20.15 billion in auto parts from China in 2018, second only to Mexico — another threatened target of U.S. tariffs — with $56.34 billion. Total U.S. auto parts imports last year were $158.67 billion.
The supplier association defines automaker-branded and independent replacement parts as aftermarket parts, McCarthy notes. Most parts imported from China are aftermarket-related, he says. A breakdown of what share of these parts is automaker-branded was unavailable.
Two sets of tariffs affect the U.S. auto sector, but so-called Section 301 tariffs — a reference to part of a U.S. trade law — that are specific to China have the larger impact on dealership service departments' costs.
Currently, $250 billion worth of imports from China, including many auto parts, face a 25 percent tariff. This category includes brake pads, windshield wipers, mirrors and other frequently replaced parts as well as all engine parts, McCarthy says.
This month, the Trump administration imposed a 10 percent tariff, to take effect Sept. 1, on another $300 billion in imports, including materials and components used to make auto parts.
The imposition of the 25 percent rate on a wide array of parts took effect in May. Price increases for these parts are "just starting to trickle through," McCarthy says.
The initial tariff on the parts was 10 percent, and that increase was muted by a weakening of China's currency, the yuan, against the U.S. dollar, making the parts relatively cheaper, he adds. The Chinese government also encouraged suppliers in that country to absorb some tariff-related costs to keep exports flowing, thus supporting economic growth, he says.
Dealership service departments work with suppliers that belong to the Specialty Equipment Market Association to boost sales of accessories and customization parts. The tariffs have caught his members off guard, says Stuart Gosswein, SEMA's senior director of federal government affairs. The impact of the tariffs has been uneven, he notes.
"It ends up being very individual," Gosswein says. "Some companies have tried to absorb the cost. Others are passing it along."
The U.S. has placed, or is threatening, several types of tariffs on Chinese imports, including auto parts.
Trump has said he imposed the tariffs to help correct the trade imbalance between the United States and China and to force action on Chinese trade practices he calls unfair. But the tariffs are not slowing imports of auto parts from China, says Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Mich.
To the contrary, she says, parts imports from China continued to grow each month last year compared with 2017 even after the tariffs were initially imposed. CAR calculates that auto parts imports from China to the United States rose 15.5 percent in 2018 over the previous year.
U.S. tariff policy "slowed imports of vehicles from China and slowed exports of vehicles and parts to China," Dziczek says. "It did not slow imports of parts from China."
CAR did not have figures or projections for replacement parts imports from China for 2019. Overall, Dziczek says, the China tariffs "have added about $200 to the cost of manufacturing a vehicle. For some cars, that is the entire profit margin."
Sourcing from a country without a tariff won't work, Dziczek adds. Under a separate set of tariffs called Section 232, all U.S. imports of aluminum and steel were taxed, but some countries, including Australia, were exempted. When suppliers bought more of these products from Australia to avoid tariffs, she notes, imports from Australia surged and the Trump administration called on the Australian government to control the imbalance.
"It is like squeezing a balloon," Dziczek says. "It is going to come out somewhere else."
In any case, she says, the parts price increase will hit everyone equally: "There is not a way to arbitrage it."
Doug LaCroix, fixed operations director at Red McCombs Automotive, a dealership group in San Antonio, predicts the impact of the parts tariff on dealership service departments will be "minimal and temporary. Everyone will be in the same boat, whether you are large or small."
Red McCombs Automotive has seven new-vehicle dealerships as well as several body shops and used-car stores. The group also sells about $1.5 million a month worth of automaker-branded parts to dealers in south and central Texas, LaCroix says.
Burlington Automotive Group operates seven new-vehicle dealerships in Pennsylvania and New Jersey, including four Kia stores. Wayne Hileman, the group's co-owner, says the 25 percent tariff on Chinese parts hasn't affected his business yet. But he expects it will eventually raise the cost of replacement parts, especially those for engines and transmissions.
Hileman says he fears a far-reaching impact on parts costs as they affect policies such as Kia's unlimited mileage lifetime warranty. Kia has issued recalls this year of some Soul and Sportage models. Hileman notes the manufacturer "gave customers good incentives to stay" with Kia, including a new engine and warranty with unlimited miles for some recalled units, Hileman says.
"What if that happens again?" he says.
Other automakers also offer generous warranties. Mitsubishi, for example, provides a 10-year/100,000-mile limited powertrain warranty. Jeremy Barnes, Mitsubishi North America's senior director of communications and events, says the automaker has "no plans to change our warranty pricing at the moment due to tariffs."
When tariff-related price increases for replacement parts start to trickle down to dealerships, says McCarthy of the aftermarket suppliers group, service departments won't necessarily be hurt as long as they don't lose customers.
A trade deal between the United States and China that would eliminate or reduce the import tariffs remains a possibility, he says.
He adds, "The reality is that uncertainty is the new certainty."
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