Late-night talk-show host James Corden taps into our love of cars with his regular bit Carpool Karaoke. He invites popular musicians to sing and be interviewed while driving in a car. If talk of tariffs has got you down, a recent Corden drive with Paul McCartney down Penny Lane is sure to bring a smile.
Corden came to mind as we dug into the impact tariffs will have on the US and global auto industry.
The verbal ping pong about tariffs between the world’s leaders has the auto industry and its investors on edge. It’s certainly not helping an industry that faces slowing sales growth.
Try to keep smiling while we take a drive into the morass:
(1) Tariff talk with Europe. The US is the largest importer of motor vehicles in the world. “According to the European statistics office, Eurostat, the U.S. imported cars amounting to 254 billion euros ($296.12 billion) in 2016, while Europe imported only 77 billion euros,” a 6/27 CNBC article reported. The EU places a 10.0% tax on auto imports, while the US places a 2.5% duty on auto imports. Perhaps it was with this in mind that President Trump threatened to impose a 20.0% tariff on cars imported from the EU.
EU officials have tried to justify their tariffs. “‘It is true we have a slightly higher tariff on cars than the Americans … But they have much higher (tariffs), for instance, on trucks, on lorries, they have higher on shoes, on clothing,’ Cecilia Malmstrom, the EU’s trade chief said Wednesday,” according to the CNBC article. “She told reporters in Brussels that the EU cannot simply remove the tariff on U.S. cars (10 percent) overnight, because under World Trade Organization (WTO) rules, the EU would have to do the same for every country in the world. ‘And I don’t think member states are willing to do that,’ she added.”
In the EU, it is Germany that exports the most cars to the US. German auto makers and suppliers export $34 billion worth of goods to the US each year, while Germany imports just $7.5 billion worth of American goods, a 6/20 WSJ article reported. The Germans counter that the US export numbers are low because GM and Ford build their cars in Europe. That said, Germany, which represented 55% of the total EU car exports last year, seems ready to negotiate.
German auto manufacturers reportedly back the elimination of all import tariffs on trans-Atlantic trade in automotive products and industrial goods. The German government supports such an effort as well.
However, such a proposal might face opposition in the US because it would eliminate the 25.0% US tax on imports of light trucks, including SUVs and pickup trucks. It would also require the elimination of tariffs on EU steel and aluminum products.
It might also face opposition in France. Unlike Germany, French car makers Renault SA and Peugeot SA don’t export cars to the US, so any free-trade deal would be of little value to them. In fact, a deal could open the French market to unwanted competition.
(2) Tariff talk with China. The US places a 2.5% tariff on cars imported from China, and China puts a 25.0% tariff on cars imported from the US. Both countries place a 25.0% tariff on truck and SUV imports from the others country. In May, China said it would cut tariffs on car imports to 15.0%, but when President Trump ordered duties on Chinese goods, China reversed its offer to lower tariffs and threatened to increase them instead.
“About 267,000 U.S.-built vehicles were sold in China last year, according to research firm LMC Automotive,” a 6/21 WSJ article reported. Ford exported 45,000 vehicles to China, Tesla exported 15,000, and Fiat Chrysler exported about 17,000 cars it made in the US to China. Most of GM’s cars sold in China are produced in China. Daimler, BMW, and Volkswagen produce almost 500,000 vehicles a year in the US that are exported to China, Canada, Mexico, and Europe.
(3) Impact on Americans. Higher tariffs might help manufacturers, but they could hurt consumers, as the sticker price of an imported car might climb. If the Trump administration goes through with a 25.0% tariff, it would cost American consumers $45 billion annually, or $5,800 per vehicle, according to the Alliance of Automobile Manufacturers, a 6/26 Reuters article reported.
Moody’s didn’t even think manufacturers would come out winners. It warned that tariffs would be “broadly credit negative” for the auto industry. “A 25% tariff on imported vehicles and parts would be negative for nearly every segment of the auto industry—carmakers, parts suppliers, car dealers, and transportation companies … Should any tariffs be levied, carmakers would need to absorb the cost to protect sales volumes while hurting profitability; increase prices to pass the tariff costs to customers, which could hurt sales; or a combination of both,” a 6/25 CNBC article reported.
(4) Market reaction. Relative to all the global bickering and tweeting about tariffs, the stock market reaction has been rather muted. For the week ending Tuesday, the S&P 500 Automobile Manufacturers stock index has fallen 3.0%, and the index is down 3.7% ytd (Fig. 1). It continues the relatively sideways action the Auto Manufacturers index has experienced over the past five years, after rebounding sharply in the wake of the 2008 selloff (Fig. 2).
Debbie expects auto sales to be slightly off their strong pace of recent years but to remain strong in 2018, north of 17 million saar. That’s in line with LMC Automotive’s forecast for 2018: total light-vehicle sales of 17.1 million units, a decrease of 1.0% from 2017. US motor vehicle sales in May came in at 16.9 million saar, with sales of domestic light trucks far outpacing sales of domestic cars (Fig. 3 and Fig. 4).
(5) Analysts’ forecasts. Analysts are not expecting much from the S&P 500 Auto Manufacturers (F and GM). The industry is expected to grow revenues by 0.9% this year, and revenues are expected to decline by 0.2% next year (Fig. 5). Earnings are forecast to decline 7.5% in 2018 and grow only 0.3% in 2019 (Fig. 6). The industry’s shares trade at 7.0 times forward earnings per share, in line with where they’ve traded over the past three years or so (Fig. 7).
Earnings could take a hit if leaders around the world do as they say and raise tariffs around the world. There’s also some concern that auto loans have gotten aggressive in order to attract buyers and pay for cars and trucks that have increased in price. More loans with maturities beyond five years have been extended, and more high-risk borrowers have entered the mix, a 6/10 WSJ article reported. Meanwhile, the absolute amount of car loans outstanding has soared to a new record of $1.1 trillion (Fig. 8). Tariff saber-rattling isn’t something the industry needs right now.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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