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Tariff Turbulence: What New Trade Policies Mean for Auto Dealers
Globalization – that is a word heard more than ever in the 21st century. As technology and industry continue to advance, the nations of the world rely on each other’s specialties more than ever. The other word that goes with this shifting economic landscape is politics as economic interdependence has served to develop tension amongst multiple nations.
This tension is currently being realized in the form of recent U.S. trade policy changes. These tariffs will impose a 25% levy on all vehicles manufactured abroad. The 25% levy on automobiles manufactured abroad also includes parts on vehicles that have final assembly in the United States.
How the tariffs will ultimately impact the automotive industry market remains to be seen. What we do know is that some analysts have suggested vehicle prices may increase anywhere from $4,000 to $20,000 per vehicle (Anderson Economic Group). Maintenance costs on automobiles are also expected to increase. Most automotive parts inventory held in stock are imported, often from Canada and Mexico. The accompanying tariffs on automotive parts will cause the public to see higher repair bills when visiting dealership service centers. Higher repairs costs also mean that we can expect insurance premiums on vehicles to rise.
Considering the effects on the public and the manufacturers, what issues specifically could be faced by automotive dealers themselves? The NADA warns that even dealers selling mostly U.S. assembled vehicles will be exposed to tariff risk due to imported parts. On average, U.S. built cars are made up of only 60% U.S. made parts.
Dealerships that sell more cars manufactured abroad will be subject to greater price increases on their products. While MSRP from the manufacturers will likely increase with the tariff costs, many dealers of imported vehicles could be forced to sell at lesser margins as a means of staying competitive with domestically produced brands. However, dealers of domestically produced brands will also find themselves forced to decrease margins due to a general decrease in consumer demand for higher priced vehicles. If dealers cannot reduce prices sufficiently, economic demand for new vehicles will most likely decrease significantly. Dealers could also suffer excess inventory levels along with increased costs in maintaining said inventory. In short, dealerships are likely to face decreasing profit margins and higher operating costs. Dealer principles will be wise to watch their net working-capital requirements with their manufacturers and creditors.
The impact of the tariffs on each individual dealership will be highly dependent on each manufacturer’s cooperation with its dealer networks. Certain manufacturers have decided to absorb the tariff costs and not pass these costs on to their dealer networks. For instance, BMW will price protect vehicles such as the 2 Series, and 3 Series which are both manufactured in San Luis Potosi, Mexico. Likewise, Hyundai CEO, Jose Munoz announced the automaker plans to absorb all tariff costs in a bid to remain competitive in the highly important U.S. market. On the other side of the coin, Volkswagen intends to add an import fee to the cost of each vehicle delivered to its dealer network. Infiniti has responded by placing a halt on production on the QX50 and QX55. Given the varied responses by the manufacturers, each individual dealer should be encouraged to understand the upcoming policies of his or her manufacturer.
Opportunities for dealers do exist. Some analysts predict a potential shifting of vehicle demand to the used automotive sector. Dealers can potentially capitalize on this by appropriately stocking used inventory in advance of this potential demand shift. Dealers with a higher proportion of U.S. manufactured inventory could be set to dominate their local markets due to a minimal tariff impact.
The impact of the tariffs on the automotive landscape is largely unknown and will be challenging to navigate. What is known is that the automotive industry will find a way to capitalize on the current situation as they did during the COVID-19 pandemic. Dealers should analyze their unique situation under the tariff law and prepare a plan that will best suit their individual needs.