Auto-parts giant Magna braces for possible U.S. border tax

Mexico situation ‘most relevant’ to Canadian firm

North America’s l argest auto-parts maker said a border adjustment tax being studied by U. S. President Donald Trump would probably hurt the automobile industry, while also increasing the odds that future factories will be located in the U.S.

Canada’s Magna International Inc. s ai d t he growth of “protectionist sentiments” could hurt its operations and profitability, according to a statement Friday. The manufacturer is closely watching a potential tax overhaul in the U.S., chief executive Don Walker said on a conference call.

“The industry as a whole is trying to get all the facts to the right people so at least they understand what the impact might be,” Walker said. “The latest I understand is that the difference between Canada and the U.S. as far as trade is concerned really isn’t an issue. Having said that, any border adjustment tax I think would be negative for the whole industry.”

The maker of bodies and chassis, car electronics and vision systems relies on the U. S. for about one- quarter of sales, and counts on Mexico for another 12 per cent. In a meeting with Trump on Thursday, U. S. manufacturers pressed their case that a tax on imports would lead to higher domestic employment. While Trump discussed the potential benefits of such a measure after the discussions, he stopped short of endorsing the proposal.

Based on recent developments, “there’s probably a larger likelihood” that car companies contemplating new investments would put new plants in the U. S. if they had to make a decision now, Walker said. Still, he said, “people will wait to see what the end result is here and make their decision.”

Magna’s earnings from continuing operations were $ 1.24 a share in the fourth quarter, trailing the $ 1.35 average of analysts’ esti- mates compiled by Bloomberg. Sales were $9.25 billion, topping the average estimate of $ 9.21 billion. The Aurora, Ont.- based firm reaffirmed its 2017 sales forecast.

The shares dropped 4.4 per cent to $ 56.60 in afternoon trading i n Toronto after tumbling as much as 6.5 per cent for the biggest intraday decline since Nov. 9 — the first trading day after Trump was elected.

The U.S. is Magna’s biggest market, accounting for more than $ 9 billion in production sales a year, Walker said. About 90 per cent of that ends up in assembly plants within the country, he said.

Canada generates about $6 billion of annual revenue for Magna, with Mexico generating another $4.5 billion, Walker also said. Most of Magna’s Mexican revenue comes from parts that are shipped to carmakers within the country, he said.

The Mexico situation “is the most relevant for Magna,” said David Tyerman at Cormark Securities in Toronto. “Those Mexican plants they supply ship vehicles into the U.S. If a border tax is imposed, then those Mexican- made vehicles will cost more in the U.S. and their sales will fall.”

Currency swings will play a major role in the competitiveness of Mexican- built vehicles, Tyerman said. The peso has dropped about 10 percent against the U.S. dollar since Nov. 8 — the biggest decline among 16 major currencies tracked by Bloomberg. “There are so many moving parts to this story,” Tyerman said. “If the peso falls by the equivalent of the border tax, then you are back to square one. All you’ve done is created an overvalued U.S. dollar.”

The big issue for Magna will be “where our future investments are going to be located,” Walker said. He also expressed hope that any changes to the North American Free Trade Agreement would preserve the trading area’s competitiveness.

“Maybe one of the end results, if you think big picture long- term, is the NAFTA area would become more competitive,” he said. “If you had asked me 15 years ago, I was worried where the assembly plants would be. We’ve actually seen more come to North America over the last 15 years.”