Tariffs force some automakers to dim earnings outlook
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Significant increases in commodity costs blamed for GM's expected lower profits.
WASHINGTON — A Trump administration-led trade war with China and US tariffs on steel and aluminum are putting pressure on earnings for automakers, prompting General Motors to slash its outlook and, among other factors, cutting into Ford Motor Co.’s earnings.
GM cited “recent and significant increases in commodity costs” for why it now expects 2018 profits of $5.14 a share, down from its previous forecast of $6 and below analysts’ expectation of $6.42.
Ford’s shares slumped all day and fell more after it announced a 48% second-quarter profit decline to $1.1 billion. The company cited a number of factors, including a parts shortage that cut into its lucrative pickup truck sales. But Chief Financial Officer Bob Shanks also blamed what he called an uncertain policy environment, causing higher commodity costs, mainly steel and aluminum.
But the automakers may benefit from an easing of tensions between the US and Europe after President Donald Trump and the leader of the European Commission pulled back Wednesday from the brink of a trade war over autos. In a meeting at the White House, the two sides agreed to hold off on new tariffs. That suggested that the Trump administration would suspend plans to start taxing European auto imports – a move that would have marked a major escalation in trade tensions between the allies.
But the agreement was vague, the coming negotiations with Europe are sure to be contentious and the administration remains gripped in major disputes with China and other trading partners.
Last month, German automaker Daimler AG lowered its 2018 earnings outlook, due in part to increased import tariffs for US vehicles in China. The company said it now sees fewer SUV sales and higher costs at its Mercedes-Benz Cars division than previously expected as a result of the tariffs, and “this effect cannot be fully compensated by the reallocation of vehicles to other markets.” Daimler produces vehicles in the US.
In late May, Trump imposed steep tariffs on steel and aluminum coming out of Canada, Mexico and the EU. The 25% tariff on steel and 10% tariff on aluminum, which took effect in June, have driven up costs sharply as domestic producers raise prices.
“Our biggest exposure, our biggest unmitigated exposure is really steel and aluminum when you look at all of the commodities,” said GM Chief Financial Officer Chuck Stevens on Wednesday. “And frankly, the biggest driver of that is steel.”
Trump’s latest plan is to consider slapping tariffs on imported autos and auto parts – a move he says would aid American workers but that could inflate car prices, make US manufacturers less competitive and draw retaliation from other nations.
The Center for Automotive Research last week estimated that the potential import taxes of 20% to 25% on autos and auto parts would raise the price of an average car by $4,400. The duties would eliminate more than 714,000 US jobs.
The president has ordered the US Commerce Department to investigate whether auto imports pose a threat to US national security that would justify tariffs or other trade restrictions. Earlier this year, he used national security as a justification for taxing imported steel and aluminum.
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Last week, critics from the auto industry lined up at an all-day hearing with the Commerce Department to urge the administration to reject auto tariffs. They argued that the taxes would raise car prices, squeeze automakers by increasing the cost of imported components and invite retaliation from US trading partners – and allies – like the European Union and Canada.
Auto tariffs would escalate global trade tension dramatically: The US last year imported $192 billion in vehicles and $143 billion in auto parts – figures that dwarf last year’s $29 billion in steel and $23 billion in aluminum imports. Not to mention the $34 billion in Chinese goods the administration has so far hit with tariffs in yet another dispute over the predatory practices China deploys in a push to challenge US high-tech dominance.
Leaders in the auto industry have been raising concerns over the tariff impact for weeks.
“Imposing tariffs will increase costs for consumers, lessen consumer choice, lower consumer demand, reduce car and light truck production and sales, lower investment levels, and lead to job losses in the US auto sector,” said Matt Blunt, president of the American Automotive Policy Council, in June.
Other industries are also feeling the pain. Harley-Davidson says it expects new tariffs to increase the company’s annual costs by as much as $100 million as long as the trade dispute between the U.S. and other countries goes on.
Executives with the Milwaukee company spoke with investors for the first time since announcing last month that production of motorcycles sold in Europe would move overseas in order to avoid retaliatory tariffs the EU is imposing on American exports.
Harley-Davidson said it’s working with the Trump administration and other governments to try to get the tariffs removed.
In the short term, the cumulative impact will increase Harley-Davidson’s costs as much as $55 million this year, the company said. Costs from raw materials subject to tariffs, like steel and aluminum, account for $15 million to $20 million, and the EU tariffs add another $30 million to $35 million, according to Harley-Davidson.
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