President Trump's expanding trade wars have inflicted heavy damage on U.S. and global automakers. Trade tensions with China helped push 24 global auto stocks down an average of 12% in May through Thursday, including General Motors Co. (GM) and Ford Motor Co. Now, the group is suffering more declines in Friday trading after Trump announced plans to impose tariffs on all Mexican goods by June 10.
If the Mexico tensions continue, auto stocks could drop an additional 5% to 10% in the second half of 2019, wrote Evercore ISI analyst Chris McNally in a note, per a detailed Bloomberg report. “Given this Mexico news was a big surprise, the short-term move in stocks can be anticipated to be even more severe,” wrote McNally.
President Trump's threat to impose a tariff as high as 25% on Mexican goods puts the entire U.S. auto supply chain at risk as these companies rely significantly on Mexico to provide both components and manufactured cars.
US-Mexico Trade War Weighs on Auto Supply Chain
- Trump threatened to impose tariffs as high as 25% on Mexican goods
- Auto stocks could fall an additional 5% to 10%, per Evercore ISI
- Supercomposite Automobiles and Components Index on track for its worst monthly performance since December
Through Thursday, the conflict already had trimmed 12% from the 24-member S&P Supercomposite Automobiles and Components Index, shaving about $20 billion in market value from carmakers, per Bloomberg. The sector is on track for its worst monthly performance since December, when it posted a 14% loss. McNally at Evercore ISI noted that the latest crisis has caused the market to largely forget about risks surrounding dismantling the North American Free Trade Agreement.
Goldman Sachs echoed the downbeat sentiment in a note to clients, per Bloomberg, saying, “without a response from manufacturers or the supply base to shift production footprints, this would likely increase the price of vehicles for the consumer and negatively impact automaker/supplier margins.”
Trump's tariffs also are likely to impose major disruption and costs on BMW AG as it prepares to open the doors at a $1 billion factory in Mexico. The plant was expected to account for 20% of its North American production, per Bloomberg.
According to data from Deutsche Bank and the U.S. government, the three domestic automakers depend heavily on Mexico for content. Fiat Chrysler Automobiles NV (FCA) depends on Mexico for 24% of its imported content and 18% of its imported vehicles, while GM depends on Mexico for 29% and 13% respectively, per CNBC. Ford is 17% for both categories. Citi pegs the total hit to GM’s annual earnings in the “several-hundred-million-dollar” range, per Reuters.
Tesla Inc. (TSLA) gets about 25% of content for the Model 3 sedan from Mexico, according to RBC, per Bloomberg.
One thing is clear. Trump's new tariffs will inflict pain on automakers and the broader U.S. and North American economy. “This will impact consumer spending. This will impact corporate earnings." Kristina Hooper, chief global market strategist at Invesco, told the Wall Street Journal. “Markets were already freaking out over existing tariffs. We’ve just thrown gas on the fire.”