Part 1 – How Automotive Tariffs Will Impact Fleet – An ARI Special Blog Series

Talking Tariffs 101

Open your mobile device, computer browser, or a newspaper – tariff talk is dominating newsfeeds and headlines. Since April 2018, multiple rounds of tariffs now apply to more than 50 percent of all Chinese industrial and consumer goods coming into the United States.

As our industry actively scans for symptoms of the 25 percent tariff on steel and 10 percent tariff on aluminum, the looming threat of a hefty tariff on imported vehicles is heavy on the minds of automotive and fleet professionals. Will it happen? How will such a measure impact fleet stakeholders, not to mention our economy, on top of the existing metals tariff?

ARI understands this is a critical topic for our customers, our business partners, and our industry as a whole across the world. We’re living in a global economy, and impeding the flow of business across borders can have positive and negative impacts for the short and long-term.

We will be running a series of “How Automotive Tariffs Will Impact Fleet” blog posts penned by our subject matter experts dedicated to covering how this legislation unfolds. Our goal is to simply provide our clients and partners with a fleet perspective of today’s events, and how we’re planning to help you address what may come tomorrow.

Let’s start with our thoughts on what’s happened thus far in 2018 that specifically affects the fleet and automotive industries, and the possibilities on the horizon.

We don’t know what we don’t know

Amidst all the current speculation, one thing is clear: the existing tariffs on aluminum and steel, and any future tariffs on imported vehicles will directly or indirectly affect all automotive stakeholders including consumers. You can download ARI’s Fast Fleet Facts sheet summarizing the current and proposed tariffs along with the potential impact.

Moving beyond that broad statement into the details is where predictions get a bit muddy. The true impact of a vehicle-focused tariff will be dictated by the final language of the policy. The proposed tariff will allegedly apply only to vehicles assembled outside of the United States. However, when it comes to global supply chains, this critical detail makes it difficult to calculate the actual impact on OEMs. Many domestic branded vehicles are assembled in Canada and Mexico, and many imported vehicles are assembled in the United States.

The likely outcome is the tariff will have a negative pricing and business impact on all automakers. Domestic manufacturers like General Motors and Ford have already voiced concerns regarding the long-term impact of these policies. In June, Reuters reported that “The largest U.S. automaker [GM] said in comments filed with the U.S. Commerce Department that overly broad tariffs could ‘lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less — not more — U.S. jobs.’”

Digging into the details

For now, let’s take a look at how stakeholders in the automotive and fleet industries may be affected by current and proposed tariffs:

Each stakeholder group will experience the impact of multiple factors in different ways:

  • Raw Materials: The increase in raw material pricing will be felt by all major stakeholders, likely in the form of vehicle and component price increases. OEMs depend on steel and aluminum for vehicle production, and upfitters/body companies depend on these materials for turning trucks into tools. Cost increases will be inescapable, even if these manufacturers keep an open line of communication with their materials suppliers. These increases are either passed through to fleet customers and consumers, or absorbed at multiple points in the supply chain. Honda recently reported, “…while we’re paying relatively little in the way of tariffs on steel, the price of domestic steel has increased as a result of the tariff, saddling us with hundreds of millions of dollars in new, unplanned cost.”Even if suppliers choose to absorb some of these cost increases to remain competitive, rapidly reduced margins are not necessarily a good thing for our industry long-term. Another factor to consider is that each primary impact can have secondary and tertiary impacts. It’s not simply a straight tariff cost, there will be corresponding domestic price increases. Any changes suppliers have to make will incur costs that will be either passed on to the customer or absorbed by the supplier with possible future consequences.

 

  • Vehicle Pricing: Increases in vehicle prices will be felt in waves depending how the tariffs hit each production stage, but effects may be felt by early 2019. If the cost of a domestic vehicle goes up several hundred dollars due to the raw materials tariff, a consumer may not lose much sleep when leasing or purchasing a new vehicle every three to five years. However, a fleet operator ordering 500 or 1,000 vehicles annually will be significantly impacted by even a small increase in vehicle MSRP – even more so if these vehicles are medium or heavy duty, and need body components constructed from steel or aluminum. ARI has compiled a summary of estimated pricing increases. If we assume an average increase of $250 per vehicle, an order of 750 vehicles will now cost $150,000 more due to the metal tariffs alone. That’s for a light-duty passenger vehicle, meaning that the per-vehicle impact of vocational vehicles will be more significant.If the proposed imported vehicle tariff goes into effect, an increase of several thousand dollars for consumers acquiring imported vehicles will be much more troublesome. For fleets operating imported vehicles, the business impact could be financially catastrophic. Organizations will likely choose to either implement targeted fleet right-sizing efforts, or change their vehicle selectors. The cumulative repercussions of these decisions go beyond just the immediate organization, and can ultimately negatively impact the country’s economy.Another consideration is the impact of retaliatory tariffs on companies in the United States. As the cost of exporting vehicles assembled in this country increases due to the trade war, it will magnify the burden on automakers and the supply chain overall.

 

  • Used Vehicle Market: Both the raw materials tariff and potential imported auto tariff may drive up the price of used vehicles, thereby increasing resale values of fleet vehicles. From a fleet perspective, this increase can potentially help offset the higher prices of new vehicles for a number of years. However, for consumers looking to finance vehicles, too much of an increase could ultimately be a deterrent to acquisition when taking into consideration the six interest rate hikes from the Federal Reserve since 2016. The confluence of these factors, combined with increased new vehicle pricing, may have an overall depressing effect on consumer vehicle sales.

 

  • Other Economic Factors: Tariffs can impact exchange rates, inflation, and employment – all which affect the fleet industry. Proponents of the tariffs envision a resurgence in multiple American manufacturing industries, but there are conversely many concerns regarding the global economy.


Looking Ahead

Our next post in this series will cover the tariff changes posed by the new United States-Mexico-Canada Agreement (USMCA), and what it potentially means for the automotive industry. Future topics will also include fleet perspectives from outside the United States, and how tariffs are affecting upfitters and body companies.

In the meantime, ARI continues to follow all tariff-related news and remaining poised for any necessary action.  We are committed to help our clients and prepare for potential changes on the horizon.