Automakers tap COVID playbook to cope with Trump tariffs
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Illustration: Allie Carl/Axios
After weeks of stalled decision-making, the global trade war automakers were hoping to avoid is now here, providing a measure of clarity that had been missing.
- While significant disruption is inevitable, at least there's a playbook from the last big shock to hit the industry: COVID.
Why it matters: Though unwelcome, supply chain upheavals are nothing new for carmakers, who have built a culture of resiliency while dealing with everything from tsunamis and fires to labor strikes and safety recalls — not to mention the global health crisis.
- What's different this time, however, is that the industry is on far shakier ground.
- The trade war is hitting at the same time they're juggling sweeping technological change, regulatory pressures and powerful Chinese competition.
Driving the news: President Trump's promised 25% tariffs on imported goods from Canada and Mexico took effect early Tuesday, along with additional levies on China.
- Canada and China immediately took retaliatory steps and Mexico signaled it, too, will respond with its own measures.
- "This isn't hypothetical. All automakers will be impacted by these tariffs on Canada and Mexico," John Bozzella, president and CEO of the Alliance for Automotive Innovation, said in statement.
The fallout will be almost immediate, with sharply higher vehicle prices and limited availability of certain models, industry experts say.
- S&P Global Mobility sees potential for 20,000 fewer vehicles produced per day — about 30 percent of North American production.
- Automakers have been stockpiling engines and components in U.S. warehouses for weeks, but some assembly plants are likely to shut down within days, said S&P Global Mobility analyst Stephanie Brinley, speaking at an Automotive Press Association event Tuesday.
- "At best, we're probably looking at maybe a week's worth of supply of (parts) inventory," she said.
- "And as you know, if you're building a vehicle, it's going to be stopped on one part (shortage). And we don't know what that magic part is yet."
Flashback: During the pandemic, automakers faced a shortage of semiconductors, which led them to prioritize building high-profit models like pickup trucks and SUVs while idling other plants altogether.
- Some unfinished vehicles were parked in storage until chips could be installed.
Between the lines: The North American auto industry is deeply integrated, with finished vehicles and auto parts flowing freely across borders.
- Under the new tariff regime, levies will be added each time unfinished vehicles cross the border, creating layers of increased costs.
- Plus, new tariffs are coming soon on steel and aluminum, which will add to those higher costs.
Suppliers are already pushing back, telling carmakers they can't absorb the cost of increased tariffs.
- They're demanding higher prices, and seeking to invoke "force majeure" clauses in existing contracts that release them from obligations due to unforeseen events.
- As during COVID, automakers are likely to subsidize suppliers' high production costs to ensure they can ramp up again quickly, if and when the tariffs are lifted.
The intrigue: What you likely won't see is factories picking up and moving from Canada and Mexico to the U.S.
- "OEMs and suppliers will only invest capital and resources if there's long term stability in this issue, and it's not clear we have that quite yet," Brinley said.
The bottom line: The full impact of the tariffs will depend on how long they're in place.
