Dropping Auto Production: A Challenging Scenario Ahead
Global automobile manufacturing output may recede by approximately 2% as a consequence of imposed US tariffs.
The automotive sector braces for a rough ride with reports suggesting a 1.55 million-unit drop in production compared to 2024. This marks the second consecutive year of production decreases.
The USA, selling approximately 16 million vehicles annually, ranks second globally, only behind China. Interestingly, almost half of the vehicles sold in the USA are imported, with between 30% to 60% of auto parts coming from overseas. The implementation of Donald Trump's tariffs is believed to decrease new vehicle sales in the USA by 3%, and production in North America by 9%.
The onset of 25% tariffs on imported vehicles and parts, effective April 3, has already stirred the pot. While the US President clarified that vehicles produced under the USMCA agreement would be exempt from tariffs, only "non-US content" would be taxed, it's left the industry guessing.
Consequently, automakers like Nissan, Volvo, and Mercedes-Benz are contemplating moving production to the USA, while others, such as Aston Martin and Jaguar Land Rover, have paused shipments. The global automotive industry anticipates the impact of these tariffs to echo effects akin to the COVID-19 pandemic and the 2008 global financial crisis, as reported by the Financial Times, citing a high-ranking industry executive. The anticipated downturn is expected to commence in the summer of 2025.
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Tariff Impacts: A Deep Dive
Tariffs aren't just about additional costs—they also pose challenges for the interconnected US, Canadian, and Mexican trade ecosystems. Automakers may struggle to pass on the cost of tariffs via price increases, prompting adjustments in production and sales strategies to maintain profitability.
While the COVID-19 pandemic disrupted supply chains due to shortages of components like semiconductors, tariffs create problems via increased costs and potential shortages due to regulatory barriers. Unlike the pandemic, however, tariffs primarily affect demand through increased prices rather than causing mixed effects on demand like the pandemic did.
Meanwhile, the 2008 crisis led to a sharp decline in consumer spending and automotive sales. Tariffs will depress sales, too, but primarily through increased costs and prices, rather than triggering a large-scale financial downturn like the 2008 crisis did. The financial crisis also resulted in significant industry consolidation, while tariffs are unlikely to cause such large-scale consolidation unless they're sustained long-term.
- The tariffs on imported vehicles and parts, effective April 3, are expected to increase costs for the automotive sector, potentially leading to adjustments in production and sales strategies to maintain profitability.
- The implementation of tariffs could cause a decrease in vehicle sales in the USA by 3%, as reported by a high-ranking industry executive, and echo effects akin to the COVID-19 pandemic and the 2008 global financial crisis.
- In response to the tariffs, global automakers like Aston Martin and Jaguar Land Rover are pausing shipments, indicating a potential decrease in foreign auto production in the USA, especially from countries not part of the USMCA agreement.
