According to Moody’s Investors Service, President Donald Trump’s warning to impose 25% tariffs on imported cars and car parts will have serious impact not only on the U.S. automobile industry but also on the global auto industry. In fact, the auto industry, which is heavily dependent on a complicated global supply chain and is embracing a gamut of technological changes such as autonomous and electric vehicles (EVs) technology, is vulnerable to distortionary trade policy. Another group that will also be badly hurt is U.S. car dealers and parts manufactures, which depend on imports.
Trump issued warnings to its trade partners, asking them to repeal tariffs or face the consequences. Trump has already cautioned China that the United States will impose additional retaliatory tariffs on exports if China slaps tariffs on U.S. exports. Trump also threatened to slap 20% tariffs on European vehicles in response to the European Union’s (EU) decision to impose 25% tariffs on more than $3 billion in U.S. goods as retaliation for U.S. tariffs on steel and aluminum.
Autos’ Impending Pains
The effects of these announcements have already started to show up. Harley-Davidson, Inc. HOG announced its plan to shift the manufacturing of its motorcycles in the United States — which are sold in EU — to international facilities. The decision was taken after EU hiked import tariffs to 31% for products manufactured in the United States, effective Jun 22, 2018.
Moody’s predicts Ford Motor Co. F and General Motors Co. GM to be impacted by the tariffs right away, as both these auto giants import a large number of vehicles from Canada and Mexico to the United States. Fiat Chrysler Automobiles NV FCAU manufactures about half its vehicles in the United States, with the remaining units imported primarily from Canada and Mexico.
Looking toward Asia, car makers from Japan and Korea will be forced to make major changes to their domestic production if tariffs are slapped. While Toyota Motor Co. TM, Nissan Motor Co. Ltd. NSANY and Honda Motor Co. HMC manufacture a sizable part of their global production in the United States, exports to the United States from Japan comprise a considerable part of their domestic production.
The luxury brands of European automobile makers such as BMW, Mercedes-Benz, Audi and Porsche, Jaguar, Land Rover and Volvo are likely to be less impacted as buyers of these luxury brands tend to be less price sensitive than buyers of mass-market brands.
Currently, while Toyota sports a Zacks Rank #1 (Strong Buy), General Motors carries a Zacks Rank #2 (Buy). Harley-Davidson, Ford and Nissan all carry a Zacks Rank #3 (Hold). Fiat Chrysler and Honda have Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell), respectively.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Nissan, Honda, General Motors, Toyota, Harley-Davidson, Ford and Fiat Chrysler have an expected long-term growth rate of 3.3%, 4.1%, 5.5%, 5.7%, 8%, 8.5% and 23.7%, respectively.
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