Tariffs a problem, but USMCA could give Magna a leg up: Walker

Magna CEO Don Walker.

AURORA, Ont. — The head of Magna International Inc. says US tariffs on Canadian steel and aluminum continue to dent the auto parts maker, but suggested President Donald Trump’s move to rev up production lines on US soil could give it an advantage.

“I think the tariffs continue to hurt us,” chief executive Don Walker said, citing higher costs.

“It’s mainly hurting our US plants right now, because it’s very difficult to get offsets for that.”

The US slapped tariffs of 25% and 10% on steel and aluminum imports, respectively, from Canada in June, prompting retaliatory tariffs by Canada.

However, the US-Mexico-Canada Agreement, signed in November but still awaiting ratification, encourages auto companies to invest or expand in the US and Canada. It requires that 40 per cent of a car’s content be made where auto workers earn at least $16 an hour and sets a higher threshold for North American content.

“I think, logically, the more production is brought into the States, the better it should be for Magna because we’re the biggest supplier here. We have a big footprint by a large amount over anybody else,” Walker told a conference earnings call with investors to discuss the company’s latest results.

The Ontario-based company has about 25,000 employees in the US, 23,000 in Canada and 28,000 in Mexico, placing it in the middle of ongoing uncertainty around the tariffs and the trade deal.

Just how soon the renewed trade agreement can be implemented remains up in the air.

It likely can’t be passed until the tariffs are lifted, said Gordon Giffin and Jim Blanchard – former US ambassadors to Canada – and former Canadian ambassador to the US Gary Doer at a panel in Washington, DC. Meanwhile, a number of Democrats and Republicans maintain they won’t support the trade pact in its current form.

Magna estimates the US tariffs will cost it between US$45 million and $50 million in 2019, following a $30-million hit in the last two quarters.

A spokeswoman said the number could go down, “depending on mitigation efforts,” or up if the US follows through on threats to raise tariffs on $200 billion worth of Chinese goods to 25% from 10%.

“I’m not a big fan of tariffs in general,” Walker said. “There’s higher tariffs between the US and China, so the input costs go up a little bit.”

US tariffs against China have triggered a tit-for-tat trade war affecting hundreds of billions of dollars in goods over the past year.

“There are so many moving pieces right now. It’s hard to tell what’s going to happen,” Walker said.

Magna incurred an impairment charge of US$60 million last quarter related to its transmission supply business’s joint venture with Ford in Europe.

“This impairment reflects future volume declines for manual transmissions, which Magna previously mentioned was experiencing demand headwinds,” said BMO Capital Markets analyst Peter Sklar in a research note.

Magna raised its dividend Friday as it reported its fourth-quarter profit fell from the same period a year earlier.

The company, which keeps its books in US dollars, said it will now pay a quarterly dividend of 36.5 cents per share, up from 33 cents per share.

The increased payment to shareholders came as Magna said it earned $456 million or $1.37 per diluted share for the quarter ended Dec. 31. That compared with a profit of $559 million or $1.54 per share in the same quarter a year earlier.

Sales totalled $10.14 billion, up from $9.68 billion.

On an adjusted basis, Magna said it earned $1.63 per share for the quarter, up from $1.58 per share a year earlier.

Analysts on average had expected a profit of $1.59 per share, according to Thomson Reuters Eikon.