Nomura: US automakers will take the bigger hit from Trump’s tariffs

U.S. President Trump’s decision to impose tariffs on steel and aluminum imports will bite the earnings of U.S. automakers far more than their foreign rivals — and those tariffs likely aren’t going away, investment bank Nomura said in a note on Tuesday.

Those tariffs have already pushed up spot prices for steel by around $150 a metric tonne and aluminum prices are up around $100 a metric tonne compared with 2017 averages, Nomura said.

Among the automakers, GM and Ford would feel the biggest bite to their earnings from higher metals cost based on automakers’ production mix in the U.S., Nomura said. It estimated the hit to GM at around $290 million for a full year, or 3.1 percent of its 2018 operating profit. For Ford, the estimates were $260 million and 5.6 percent. GM could face another hit as it has the largest exposure to China, making it susceptible if China retaliates against the U.S., Nomura noted.

That’s far larger than just $160 million, or 0.8 percent of fiscal 2019 operating profit, for Toyota. Among other foreign automakers manufacturing in the U.S., Hyundai’s hit was estimated at $50 million, or 1.0 percent of 2018 operating profit, and Nissan’s was at $115 million, or 1.9 percent of its operating profit.

Swallowing the cost?

Nomura estimated the tariff-imposed cost increases would add around 0.25 percent on average to the price of a mass-market vehicle, such as a Camry.

But with the U.S. auto market already at “a high plateau” and incentives creeping up, Nomura said it would be unlikely for carmakers to fully pass on those cost increase as it could hurt their sales volumes.

“Although this would hit margins, the North American auto market remains highly profitable for automakers and should be
able to absorb this impact, if input prices do not continue to rise further,” Nomura said.

The tariffs may ironically worsen another of Trump’s hobby horses: Manufacturers moving production out of the United States.

“To mitigate the impact, automakers are more likely to focus on improving cost efficiencies, and possibly by (temporarily) tweaking their production footprint while NAFTA is still in force,” Nomura said.

The tariff that never went away?

Nomura noted, however, that the higher, tariff-spurred costs might linger for a long time.

The report noted that the claimed goal of the tariffs is to raise domestic metals prices to levels profitable enough for U.S. producers to increase production and hire more people.

The bank said that means that giving some countries exemptions to the tariffs could lead to hikes in tariffs for countries without exemptions. There’s also no time limit on the tariffs or guidelines for when to end them, the bank noted.

Nomura said that means the protectionist measure could become a political hot potato shoved onto a future president, and that the tariffs would become a persistent, long-term drag on the earnings of U.S. automakers.

“Rescinding these tariffs could become a political hot potato for a future President. We therefore think that these tariffs would result in persistently higher input costs for automakers’ manufacturing operations within the U.S.,” Nomura said.

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