Tariffs take bite out of auto earnings
Rising commodity costs worry GM, Ford, investors
Commodity prices costly for GM, Ford.
Automakers have been reaping a windfall from a strong economy and sales of big, profitable vehicles for the last several years.
But the profit bonanza may be coming to an abrupt end amid concerns about escalating costs stemming from a global trade dispute. And consumers may have to pay the bill in the form of higher prices.
President Donald Trump’s sudden imposition of steel and aluminum tariffs and the possibility of tariffs on imported and exported vehicles threaten to undermine the industry’s finances and increase prices for consumers.
His tariff threats have drawn support from the United Auto Workers union, which represents hourly U.S. workers for GM, Ford and Fiat Chrysler, and from U.S. steel companies.
But automakers are losing sleep over trade fears. As Trump gets closer to a potential 25 percent tariff on Europe-imported vehicles, the tariffs he already has imposed on foreign metal are beginning to take a toll.
The rising cost of commodities – largely due to Trump’s 25 percent tariff on imported steel – took a bite out of General Motors during the second quarter. Although GM turned a $2.4 billion profit, the company on Wednesday reported $300 million in increased commodity costs, worrying investors.
Ford said it earned a profit of $1 billion during the second quarter, down nearly 50 percent from the same period a year ago amid sluggish sales in China, the effects of the tariffs and the costly disruption this spring of F-150 pickup production due to a fire at a supplier’s plant. It said the tariffs resulted in $145 million in higher costs and could rise to as much as $600 million for the full year.
The stocks of GM, Ford and Fiat Chrysler fell 4.6 percent, 0.4 percent and 11.8 percent, respectively, on Wednesday.
“The big challenge we’re having right now is on raw materials, especially aluminum and steel,” GM Chief Financial Officer Chuck Stevens said.
Reports of an agreement between the Trump administration and the European Union to achieve concessions on trade helped ease some fears late Wednesday afternoon.
Trump told reporters at the White House that his administration had agreed with the European Union to enter talks to eliminate most “nonauto” tariffs, including recent retaliatory measures. But until a deal gets done, fears of increased costs and prices will linger.
Although GM gets most of its steel for American-made vehicles from the U.S., global price increases sparked by Trump’s tariffs have been inescapable.
Unlike GM, Fiat Chrysler has contracts in place to acquire steel at a fixed price through the rest of 2018. But the relief is probably limited. Commodity costs are likely to rise in 2019, Chief Financial Officer Richard Palmer said.
Who will absorb the increase? The options are the automakers, their suppliers, consumers or a mix of the three.
The estimated impact on vehicle prices of steel and aluminum tariffs have ranged from about $200 to $300.
To be sure, that amount won’t hurt the industry too much. Automakers continue to profit as consumers abandon passenger cars in favor of more profitable SUVs, pickups and crossovers. The average transaction prices for a new vehicle in June was $35,511, up 2.1 percent from a year earlier, according to Cox Automotive.
But potential price increases from Trump’s threatened vehicle tariffs would likely be much more damaging: about $5,000 per vehicle, according to LMC Automotive analyst Jeff Schuster.