The U.S. auto industry braces for potential upheaval as the government prepares to impose tariffs of 25% on imports from Mexico and on non-energy imports from Canada. This decision could significantly impact vehicle prices and production strategies across the continent. With the average sales price for a new car reaching an all-time high of $49,327 in December, consumers may soon face even steeper costs for their next vehicle purchase.
The tariffs are expected to affect a market that has traditionally operated as a single economic entity, allowing for seamless movement of parts and vehicles across borders. The U.S. government currently tracks the domestic content of vehicles, determining how much of each car's parts is manufactured within the United States. Presently, only two vehicles—the Tesla Model 3 and the Honda Ridgeline—are recognized as being 75% "American-made" according to these metrics.
Ford's F-150 leads among Detroit automakers for having the highest percentage of domestically produced parts. However, the reality remains that there is no car entirely built with American-made components. Most vehicles that meet or exceed 50% domestic parts are either manufactured by Tesla or by foreign brands assembled in the U.S.
Industry experts predict that the cost of producing vehicles in North America will surge between $3,500 and $12,000 due to these tariffs. Patrick Anderson, CEO of the Anderson Economic Group, warns that producers may stop manufacturing certain models altogether if tariffs become permanent. "Producers will stop making some of the models," he stated, emphasizing the challenges on the horizon.
The ramifications extend beyond just pricing; they threaten jobs as well. According to the Labor Department, about 1 million individuals work in car manufacturing and parts production, with around 300,000 employed in U.S. assembly plants. A cutback in production is likely to send prices soaring quickly, reminiscent of the situation after the early stages of the COVID-19 pandemic when supply chains were disrupted.
Currently, U.S. car dealers maintain an average two-month supply of vehicles on their lots. However, if production slows due to increased costs, consumers may soon experience "sticker shock," warns Peter Nagle, an automotive economist for S&P Global Mobility. "There’s probably not a vehicle on the market today that wouldn’t be affected in some form or fashion by tariffs," he noted.
The uncertainty surrounding tariffs has left many industry insiders questioning the long-term viability of their operational strategies. "As much as the market is pricing in a big impact of tariffs and lost profitability, think about a world where we’re spending billions in capital, and then it ends," one analyst remarked. This unpredictability creates challenges for manufacturers seeking stability in their production methods.
Ford's CEO Jim Farley expressed deep concerns about the potential long-term effects of tariffs on the industry. "Let’s be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the U.S. industry that we’ve never seen." The sentiment is echoed by General Motors CFO Paul Jacobson, who stated that if tariffs become permanent, companies must reevaluate their production locations and strategies.
The auto industry has spent decades operating under the assumption that North America is a unified market. This interconnectedness has enabled manufacturers to optimize production and keep costs manageable. However, with looming tariffs, many experts predict a shift in this paradigm.
Patrick Anderson further explained the logistical challenges involved in relocating production plants. He noted, "I don’t see how you can move a production plant across a border within months or even a year." He emphasized that relocating a plant is a lengthy process fraught with complications. "It’s a multi-year process to move a plant. There’s no pathway to pull up stakes in Ontario and move to Indiana."
As the government deliberates on these tariffs, industry leaders are left navigating an uncertain future. They face difficult decisions regarding investment and resource allocation in light of potential changes in trade policy.
"Those are questions that just don’t have an answer today," one insider lamented, reflecting the sentiment of many grappling with this unpredictable environment.
