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Tesla Hikes Prices, Can Automakers Ride Out Tariff Storm?

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U.S. automakers have started feeling the heat of the trade war, with Tesla, Inc. (TSLA - Free Report) deciding to hike prices of its Model X and S cars in China by 20% each. As expected, the burden of the tariffs is seemingly being passed on to its customers.

Not only Tesla, but also two other German automakers, BMW (BAMXF - Free Report) and Daimler (DDAIF - Free Report) , which make cars in the United States and sell in China, have hinted at raising prices. On the other hand, Ford Motor Company (F - Free Report) has said that it won’t hike prices right away, which will most likely shrink its profit margin. Understandably, the auto industry stands to suffer the most with President Donald Trump having implemented the first set of tariffs on goods imported from China on Jul 6.  

Tesla Hikes Car Price in China

Tesla’s decision to hike prices for its Model X and S comes at a time when it is planning to build a facility in Shanghai to cater to China’s bourgeoning market. Tesla exports about 15,000 cars to China annually from its U.S. plant, with that country accounting for 17% of its total revenues.

Without a plant in China, Tesla’s revenues will now be hit hard. In fact, Tesla’s CEO Elon Musk is expected to visit Beijing on Wednesday. The decision to raise prices is a clear indication of the deep impact that tariffs will leave on the auto industry.

Interestingly, Tesla had slashed around $14,000 on its Model X in China in May after it announced tariff cuts on imported cars. However, the fresh round of tariffs will now play spoilsport.

Ford China Sales Suffer, GM Feels The Heat?

U.S. auto sales jumped in June with both Ford, Fiat Chrysler Automobiles N.V. (FCAU - Free Report) reporting higher sales figures. General Motors Company (GM - Free Report) , which doesn’t report monthly sales anymore, too posted sales increase for the second quarter.

However, Ford’s sales have been suffering in China, with its top line declining 38% in June, thus making it the company’s worth-ever first half. Ford sold 62,057 cars in China in June, down 25% from the year-ago period. Now, it remains to be seen whether Ford’s decision to hold price hike for the time being, can at all act as a sales catalyst amid higher tariffs.

General Motors Company (GM - Free Report) on the other hand has seen its China sales grow over the years. The company sold 4.4 million cars in China in 2017, up 4.4% from 2016. However, on Jul 6, the automaker warned that another round of tariffs could weigh on the company, leading to “less investment, fewer jobs and lower wages” for its employees. General Motors has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Foreign Automakers to be Hit Hard

Domestic automakers aside, foreign automakers selling U.S.-produced cars in China will also have to bear the brunt of higher tariffs. Diamler AG last week hinted at plans to maintain a competitive position in China.

Similarly, BMW, which produces cars in Spartanburg, SC, and then sells them in China, has hinted at raising prices of its U.S.-produced cars. It is quite likely that foreign cars might now decide to shift their production out of the United States to dodge higher tariffs in China.

Bottom Line

Understandably, automakers have two ways of surviving the tariff trauma. Tesla has already shown the first by hiking prices in China, with a couple of others likely to follow suit. The other is adopting Ford’s approach of not increasing prices, but at the cost of profits.

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