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Can the Auto Industry Overcome Hurdles Posed by Trade Spats?

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Harley-Davidson, Inc. (HOG - Free Report) on Jun 25 announced that it will move part of its production out of the United States to avoid European Union EU tariffs. The announcement “surprised” President Donald Trump, who had earlier appreciated the iconic American motorcycle manufacturer for “building things in America.”

Understandably, Trump’s decision to impose tariffs on imported steel and aluminum from China, the EU, Mexico and Canada along with threats of raising tariffs on imported cars and auto parts have raised worries among automakers, including Harley-Davidson.

Fears of a trade war have already started taking its toll on a number of industries, with automakers suffering the most. Higher import duties mean a significant blow to the profits of a number of domestic automakers. Given this scenario, the imminent trade war will result in collateral damage for the entire auto industry.

Harley, General Motors to Shift Production

Harley announced that it will be shifting some of its production out of the United States to avoid EU tariffs. Harley’s decision follows Trump’s announcement of levying tariffs on imported steel and aluminum from the EU. Consequently, the EU announced tariffs on $3 billion worth of U.S. goods, including motorcycles. This would raise tariffs on U.S.-made motorcycles from 6% to a staggering 31%.

Understandably, Harley can avoid the tariffs by shifting some of its production from the United States, as the company doesn’t intend to raise retail or wholesale prices. Harley accounted 16% of its sales from China in 2016, its biggest market outside the United States. Moreover, EU tariffs could result in Harley’s profits declining 5-8% in 2018.

Similarly, General Motors Company (GM - Free Report) will be making its new Chevrolet Blazer at its Mexico plant. General Motors believes that Mexican plants have cheaper labor costs compared with U.S. plants. The decision could help General Motors avoid EU and China tariffs. However, it could also prove costly for the company as importing those vehicles back to the United States might attract higher tariffs.

Ford Sales Drop in China

Ford Motor Company’s (F - Free Report) China sales declined 29% in May from the year-ago period. The company’s vehicles sales in China came in at 61,744 units in May. Analysts see sentimental reasons stemming from the ongoing U.S.-China trade spat behind this drop. Ford is an iconic American brand and maybe Chinese consumers are upset with the United States.

Something similar had happened in 2012, when sales of Toyota Motor Corporation (TM - Free Report) , Honda Motor Co., Ltd. (HMC - Free Report) and Nissan Motor Co’s (NSANY - Free Report) China sales declined significantly during a dispute between the Chinese and Japanese governments. Toyota has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Broader Auto Sector Might Suffer 

It’s not only the automakers but the overall auto sector, comprising carmakers, motorcycle manufacturers, car dealers, auto parts and transportation companies, that will feel the heat. According to a Moody’s (MCO - Free Report) report released on Monday, Trump’s proposed tariffs could harm the credit rating outlook for the global industry. The report also said that tariffs would be a negative for domestic carmakers like Ford and General Motors.

Last week, Trump threatened to impose 20% tariffs on auto imports from the EU. Also, tariffs would particularly hit General Motors as it depends heavily on imports from Mexico and Canada to support its U.S operations.

 While 30% of General Motors’ U.S. unit sales are imported from Mexico and China, Ford imports 20% of its vehicles from these two countries. Fiat Chrysler Automobiles N.V. (FCAU - Free Report) manufactures almost 50% of its vehicles in the United States, while the rest is primarily imported from its Mexico and Canada plants.  

Catch-22

Understandably, the trade spat between the United States and China, EU, Mexico and Canada now looks more like a double-edged sword. While producing vehicles in the United States could lead to higher tariffs in China and the EU, producing vehicles in Mexico and Canada and importing them back to the United States could mean paying higher import duty.

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