Carmakers face tough time over US tariffs

Raise prices or cut into their margins, open or close factories: carmakers must soon make major decisions as the United States imposes stiff tariffs on imported vehicles.

The 25-percent tariffs that the administration of President Donald Trump started to impose from Thursday apply to cars and parts not manufactured in the US.

Even US automakers will be affected as they import foreign parts and manufacture vehicles for the US market in neighboring Canada and Mexico.

Bank of America estimates that the tariffs will apply to 7.3 million vehicles, or 8 percent of global sales, and will expose carmakers to added costs and chaos.

One, albeit temporary, strategy to cope with the new tariffs is to avoid them by shipping as many vehicles as possible to the US before they come into force.

"Shipments have expanded quite a bit to absorb the first shock" of the tariffs, said Cigdem Cerit, an auto industry expert at Fitch Ratings.

South Korea's Hyundai was among the automakers to build up its stock of cars, according to Cox Automotive, an automotive services firm.

US-European auto giant Stellantis — a 14-brand company whose vehicles include Jeep, Peugeot and Fiat — ate into its ample stocks that had weighed on results in previous quarters.

"After an initial, short surge in buying, we expect vehicle sales to fall, new and used prices to increase, and some models to be eliminated if tariffs persist," said Jonathan Smoke, chief economist at Cox Automotive.

It is an open question about how much car prices will rise and to what extent sales will fall.

Bank of America estimates that US vehicle prices would rise by about $10,000 if manufacturers fully pass on the cost of tariffs and maintain their profit margins.

"However, we don't expect consumers would absorb the price increase in full," said analysts at the bank.

Carmakers "are more likely to sell vehicles at break-even until they rebalance the production footprint", it said, estimating that US consumers would see price hikes of around $4,500.

Mid-range imported vehicles are likely to feel the pinch, such as the Chevrolet Silverado pick-up and the Toyota RAV4 SUV.

But even manufacturers like Porsche could have trouble passing on the cost of tariffs on low-end models like its Macan SUV, said Fitch's Cerit.

Ferrari was the first carmaker to announce a hike in prices — as much as 10 percent — on vehicles sold in the US, its top market.

A major question is whether consumers continue to buy the same vehicles at a higher price, said Deloitte auto analyst Guillaume Crunelle.

He believes that is unlikely as "people buy in the price bracket that corresponds with their means".

Trump has stated that the goal of the tariffs is to encourage manufacturing jobs to return to the US, but it is unclear whether that will be achieved.

Crunelle said companies will ask themselves: "Is it more competitive to manufacture in the US, with a weaker market, or to pay customs duties?"

US manufacturers are still hoping that tariffs will be reduced on vehicles imported from Canada and Mexico, where they have numerous factories.

"Manufacturers have need for certainty," said automotive sector analyst Sebastien Amichi at the consulting firm Kearney.

Hyundai and Stellantis have announced the opening or reopening of factories since Trump's November re-election.

But such moves can take several years and suppliers, which are also in a weak position due to the switch to electric vehicles, must also follow manufacturers.

European and Japanese carmakers that play Trump's game face a double cost, according to Deloitte's Crunelle: in addition to building new factories they have to pay the costs of laying off the workforce at home.

Some may refuse to have their arms twisted into manufacturing in the US.