The auto industry's math problem

• 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 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.

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 much more — 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 with overtime or faster line speeds.

• 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 workers should stay focused on their jobs and watch expenses.

But it's more than just tariffs causing the auto industry to buckle at this moment.

• They face a litany of issues including regulatory pressures, technological change, powerful Chinese competition and a stagnant sales market.

Why it matters: For decades, the answer to such challenges has been consolidation. But bigger doesn't necessarily mean better, as recent troubles at Stellantis and Volkswagen Group suggest.

• "When an organization grows to a scale of 10 million units, in selling and producing cars, it becomes really troublesome," Toyota Motor Corp. Chairman Akio Toyoda told Automotive News.
• "When you're at that scope, nothing can be decided. Mass production is focused on areas of the lowest cost, and the product becomes a commodity," he said.

Reality check: The old playbooks aren't enough anymore to ensure a sustainable, profitable auto industry, says Lenny LaRocca, U.S. auto sector leader for the consulting firm KPMG.

• "This is a watershed moment for OEMs [original equipment manufacturers] and suppliers to rethink their business models," he tells Axios.
• "The low-hanging fruit has already been done. They knew what to do with COVID, semiconductors and the slowdown in EV sales. Eventually, they have to rethink their structure."

What's next: Instead of outright mergers, carmakers are more likely to form loose alliances to share parts or supply chains, allowing more speed and flexibility, on top of shared cost savings.

To tap new revenue, they'll pursue business models like Ford Pro, the automaker's growing commercial fleet business, which has nearly 650,000 subscribers that use Ford software to boost the productivity of their fleets.

• With $9 billion in EBIT profit on $67 billion in revenue last year, Ford Pro is a "hidden gem" that the rest of the industry covets, analysts say.

The bottom line, says AlixPartners' Neal Ganguli: "You have to change to exist."