The auto industry's math problem

Here's the dilemma that automakers face as President Trump's tariffs pile up: They can raise car prices, sacrifice profit margins or redirect R&D spending to expand U.S. manufacturing.

• But somebody, somewhere, has to pay the bill for the higher costs that compounding tariffs bring.

Why it matters: The auto industry can't absorb the costs of tariffs and invest in electrification and autonomy and software-defined vehicles and new factories, all while fighting off rising Chinese competitors.

• The math just doesn't add up.

Between the lines: If car prices go up, Americans will buy fewer of them, meaning less revenue to fund U.S. growth.

• If companies hold steady on pricing, their modest profit margins will vanish, replaced by red ink — another limitation on growth.
• If they build a new factory in the U.S., they'll have less to spend on innovations like electric vehicles and automated driving, slowing their historic transformation and falling behind China.

Context: Compared to the pandemic supply chain crisis or the semiconductor shortage, the cost burden automakers face now is bigger, says Neal Ganguli, partner and managing director in the automotive and industrial practice at AlixPartners.

• "This takes your margin completely away," Ganguli told Axios.
• The industry's largest trade group is concerned, too.
• "Additional tariffs will increase costs on American consumers, lower the total number of vehicles sold inside the U.S. and reduce U.S. auto exports — all before any new manufacturing or jobs are created in this country," said John Bozzella, president and CEO of the Alliance for Automotive Innovation.

What to watch: In the short term, there are certainly things automakers can do in response to Trump's tariffs, including shifting some foreign production to underutilized U.S. factories.

• There are a dozen unionized GM, Ford and Stellantis assembly plants in the U.S. that aren't operating at full capacity, according to UAW President Shawn Fain, who is vocal in his support of tariffs if it means more union jobs.

Yes, but: Shifting production to the U.S. is costly and can't happen overnight.

• Building a new plant costs at least $1 billion — usually two or three times that — and takes three to five years. Retooling an existing factory is faster but would still cost several hundred million dollars.
• U.S. autoworkers also earn far more than their Mexican counterparts, which means higher labor costs.

More likely, companies will try to squeeze a little more production out of existing factories by adding overtime or speeding up assembly lines.

• That can help around the margins, but would not significantly change their manufacturing footprint.
• They could also use their Canadian and Mexican plants to supply products for export to other countries.

What they're saying: In messages to their workforces, GM and Ford are trying to reassure employees that they'll work through the challenges, and that they should stay focused on their jobs and watch expenses.

Longer term, however, companies need to find new ways to do business in order to survive.