The auto industry is facing a possible increase in tariffs on car imports to the United States, which could significantly affect the profits of European and American automakers. S&P Global has estimated that a 20% tariff on light vehicle imports from the European Union (EU) and the United States Kingdom (TADAWUL:) (UK), along with a 25% tariff on imports from Mexico and Canada, could cost automakers up to 17% of their combined annual EBITDA in a worst-case scenario.
Among the most vulnerable are premium original equipment manufacturers (OEMs) such as Volvo (OTC 🙂 Cars and Jaguar Land Rover (JLR), which rely heavily on European production. General Motors (GM) and Stellantis also face risks due to its important assembly operations in Mexico and, to a lesser extent, Canada. However, BMW (ETR:) and Mercedes have a more contained exposure.
While the full impact of the tariffs is uncertain, OEMs are expected to take mitigation measures to manage the potential increase in tariffs. These actions, along with the combined effects of tariffs, stricter CO2 regulation in Europe from 2025 and pressure on profits from stronger competition in China and Europe, could increase the risk of credit rating downgrades. .
The article discusses how tariffs could affect automakers’ profits, highlighting that the actual effect on EBITDA will likely be materially less than the estimated maximum exposure. toyota Motor (NYSE 🙂 Corp. (Toyota) and Hyundai Motor (OTC 🙂 Co. (Hyundai-Kia) are also mentioned, although the scope, magnitude and timing of the new tariffs remain uncertain.
The potential tariffs are part of a broader review of trade policies, including the Inflation Reduction Act and the free trade agreement with Mexico and Canada, which is scheduled for review in mid-2026. On November 25, 2024, Trump announced his intentions to impose a 25% tariff on imports from Canada and Mexico, which could have a negative incremental effect on the auto industry.
Automakers are classified into three groups based on the maximum proportion of EBITDA at risk from the proposed tariffs. Those at risk of less than or equal to 10% include BMW, Ford Motor Co. . (NYSE:) (Ford), Mercedes-Benz (OTC:) Group AG (Mercedes) and Hyundai-Kia. Those above 10% and below 20% include Volkswagen AG (OTC:) (VW) and Toyota. And those with a risk greater than 20% include GM, Stellantis NV (NYSE: Volvo Car AB (ST:) (Volvo Cars) and Jaguar Land Rover Automotive PLC (JLR).
The potential impact of tariffs on ratings will depend on the current rating margin and the success of mitigation strategies. However, the independent effect of higher tariffs is not expected to be sufficient to cause a downgrade due to countervailing measures likely to be taken by OEMs.
The article also notes that Toyota and Hyundai-Kia will likely remain among the top importers of finished light vehicles in the US in 2025, with total import volumes expected to exceed 10% of the companies’ global sales. Stellantis’ exposure to European imports is low, but would be affected by tariffs on Mexican and Canadian imports. VW’s exposure comes primarily through its premium Audi and Porsche models, while BMW and Mercedes have relatively low tariff exposures.
American automakers Ford and GM have significant production in Mexico, benefiting from lower labor costs and favorable trade agreements. The tariffs could put around 17% of the EBITDA of the affected European and US automakers at risk, with Volvo Cars and JLR seeing more than 20% of their EBITDA at risk in the near term. On the contrary, the EBITDA at risk of BMW and Mercedes would be equal to or less than 10%.
The effects of potential tariffs on EU imports will be negligible for US automakers, but there is a significant risk related to Mexico and Canada. For Ford, models imported from Europe account for less vehicle volumes in the United States than the company’s larger trucks and SUVs. GM exited the European market in 2017, and the largest percentage of EBITDA at risk for Ford and GM is related to their production in Mexico.
The article concludes with company-specific considerations, noting that BMW AG (A/Stable/A-1) is well positioned to contain the financial effect of the EU’s stricter CO2 emissions standards by 2025. Ford Motor Co. (BBB-/Stable/A-3) faces a smaller ratings cushion to absorb potential underperformance through 2025. General Motors Co (NYSE:). (BBB/Stable/–) shows strong cost management and stable pricing, with a sizeable ratings cushion that could mitigate the potential impact of tariffs. Hyundai Motor Co. (A-/Stable/–) is expected to maintain EBITDA margins above 10%, and potential tariffs are a manageable risk. Jaguar Land Rover Automotive PLC (BBB-/Positive/–) has a high EBITDA at risk because its US sales come entirely from Europe. Mercedes-Benz Group AG (A/Stable/A-1) faces similar challenges to BMW in China and could be at greater risk due to stricter EU CO2 emissions standards in 2025. Stellantis NV (BBB+/Negative /A-2) could face further profitability and cash flow challenges due to tariffs on imports from Mexico and Canada. Toyota Motor Corp. (A+/Stable/A-1+) remains strong despite challenging business environments, with potential tariffs on imports from Mexico and Canada remaining manageable. Volkswagen (ETR:) AG (BBB+/Stable/A-2) must address challenges in right-sizing its European cost structure and increasing the customer attractiveness of its BEVs, particularly in China. Volvo Car AB (BB+/Stable/–) has the highest percentage of EBITDA at risk due to its dependence on European production.
OEMs are expected to develop strategic tools to reduce the effects of tariffs on credit metrics, and successful implementation of these tools can bolster their rating headroom. Some may request tariff relief, pass on part of the increased costs to customers, or optimize the tariff burden through transfer pricing. Offshoring production can partially alleviate the tariff burden, but comes with its own costs and complexities. Existing investment plans from BMW, VW, Ford and GM could lead to further capacity additions by 2027, and potential tariffs could incentivize additional capacity expansions in the US.
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