Following yesterday’s news that Trump will enlist a blanket 25% tariffs on all auto imports, effective 2 April, Rella Suskin, equity analyst at Morningstar, has provided the following insight on what this could mean for the automotive sector, with a particular focus on Europe.
To date, the tariffs are described as ‘permanent,’ applying equally to imports from all countries and covering both fully assembled vehicle imports and parts. Vehicles meeting the trade terms outlined in the United States-Mexico-Canada Agreement (USMCA) will only face tariffs on non-US parts. These tariffs are stated to be in addition to any future tariffs that may be introduced. Following the announcement, US and Japanese automakers saw their share prices drop by mid-single digits, with European counterparts expected to follow. We anticipate a 20%-30% negative impact on our fair value estimates if these tariffs remain in place permanently.
However, for now, we are leaving our valuations unchanged as we evaluate the likelihood of the tariffs being upheld and consider the potential for retaliatory actions from the European Union. Current prices offer a sufficient margin of safety for investors, with shares trading at substantial discounts to our valuations.
European automakers have been increasing their presence in the US to counter subdued growth in Europe and significant declines in sales in China. However, with US car prices likely to rise significantly, demand is expected to drop, potentially undermining their strategies for geographic diversification and growth. This would put substantial downward pressure on sales and profitability in the US for all European automakers with exposure to the region.
Domestically produced vehicles are expected to gain market share, but very few, even from US-based manufacturers, are made with 100% US content. Short-term supply chain challenges are also anticipated. Furthermore, we foresee announcements of increased capital expenditure from many automakers, which would impact free cash flow, alongside restructuring expenses that could erode profitability. For smaller-scale automakers, relocating certain production aspects to the US may not be feasible or economical.
BMW and Mercedes derive around a quarter of their sales from the US, and while approximately 50% of their US-sold vehicles are assembled domestically, most of their engines and transmissions are still imported from Europe, making them non-USMCA-compliant. Stellantis, which earns just under 50% of its revenue from the US, faces significant exposure to the anticipated softer market demand. Around 60% of its US-sold vehicles are assembled domestically, with the rest largely manufactured in Mexico. For Stellantis, USMCA compliance ensures that only the parts manufactured outside the US will incur tariffs.
Currently, the United States accounts for a mid-teens percentage of Volkswagen brand sales volumes. The company’s plans to expand significantly in the US are evident through ongoing construction of a manufacturing facility for its US-focused Scout brand, set to debut in 2027. Unlike Mercedes and BMW, Volkswagen sources most of its engines and transmissions domestically within North America. On the other hand, Audi, Porsche, and Ferrari import 100% of their cars into the US. Renault, meanwhile, has no sales exposure in the American market.
