The auto industry is facing a potential increase in tariffs on car imports into the United States, which could significantly impact the earnings of European and U.S. carmakers. S&P Global has estimated that a 20% tariff on light vehicle imports from the European Union (EU) and the United Kingdom (TADAWUL:4280) (U.K.), along with a 25% tariff on imports from Mexico and Canada, could cost carmakers up to 17% of their combined annual EBITDA in a worst-case scenario.
Among those most vulnerable are premium original equipment manufacturers (OEMs) such as Volvo Cars and Jaguar Land Rover (JLR), which rely heavily on European production. General Motors (GM) and Stellantis also face risks due to their substantial assembly operations in Mexico and, to a lesser extent, Canada. However, BMW and Mercedes have more contained exposure.
While the full impact of the tariffs is uncertain, it is expected that OEMs will take mitigating actions to manage the potential increase in tariffs. These actions, along with the combined effects of tariffs, tighter CO2 regulation in Europe from 2025, and earnings pressure from stronger competition in China and Europe, could increase the risk of credit rating downgrades.
The article discusses how the tariffs could affect carmakers' earnings, highlighting that the actual effect on EBITDA will likely be materially lower than the maximum exposure estimated. Toyota (NYSE:TM) Motor Corp. (Toyota) and Hyundai Motor (KS:005380) Co. (Hyundai-Kia) are also mentioned, with the scope, magnitude, and timing of new tariffs remaining 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 due for review in mid-2026. On November 25, 2024, Trump announced intentions to impose a 25% tariff on imports from Canada and Mexico, which could have a negative incremental effect on the auto industry.
Carmakers are categorized into three groups based on the maximum share of EBITDA at risk from the proposed tariffs. Those at risk below or at 10% include BMW, Ford Motor Co (NYSE:F). (Ford), Mercedes-Benz Group AG (Mercedes), and Hyundai-Kia. Those above 10% and below 20% include Volkswagen AG (ETR:VOWG) (VW) and Toyota. And those at risk above 20% include GM, Stellantis N.V., Volvo Car AB (ST:VOLCARb) (Volvo Cars), and Jaguar Land Rover Automotive PLC (JLR).
The potential rating impact from tariffs will depend on the current rating headroom and the success of mitigation strategies. However, the stand-alone effect of higher tariffs is not expected to be sufficient to cause a downgrade due to the offsetting measures OEMs are likely to take.
The article also notes that Toyota and Hyundai-Kia will likely remain among the top importers of finished light vehicles into the U.S. in 2025, with total import volumes expected to exceed 10% of the companies' global sales. Stellantis' exposure to European imports is low, but it would be affected by duties on Mexican and Canadian imports. VW's exposure is primarily through its premium Audi and Porsche (ETR:P911_p) models, while BMW and Mercedes have relatively low tariff exposures.
U.S. automakers Ford and GM have significant production in Mexico, benefiting from lower labor costs and favorable trade agreements. The tariffs could put about 17% of affected European and U.S. carmakers' EBITDA at risk, with Volvo Cars and JLR seeing more than 20% of their EBITDA at risk over the short term. Conversely, BMW's and Mercedes' EBITDA at risk would be at or below 10%.
The effects of potential tariffs on EU imports will be negligible for U.S. automakers, but there is a meaningful risk related to Mexico and Canada. For Ford, models imported from Europe account for less vehicle volumes in the U.S. than the company's larger trucks and SUVs. GM exited the European market in 2017, and the higher 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 placed to contain the financial effect of stricter 2025 EU CO2 emission standards. Ford Motor Co. (BBB-/Stable/A-3) faces a smaller ratings cushion to absorb further potential underperformance through 2025. General Motors Co. (BBB/Stable/--) shows strong cost management and stable pricing, with a considerable ratings cushion that could mitigate the potential tariffs' impact. Hyundai Motor Co. (A-/Stable/--) is expected to sustain EBITDA margins above 10%, with potential tariffs constituting a manageable risk. Jaguar Land Rover Automotive PLC (BBB-/Positive/--) has a high EBITDA at risk due to its U.S. sales being sourced entirely from Europe. Mercedes-Benz Group AG (A/Stable/A-1) faces similar challenges to BMW in China and could be more at risk from stricter EU CO2 emission standards in 2025. Stellantis N.V. (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 solid despite challenging business environments, with potential tariffs on imports from Mexico and Canada being manageable. Volkswagen A.G. (BBB+/Stable/A-2) must address challenges in right-sizing its European cost structure and boosting the customer appeal of its BEVs, particularly in China. Volvo Car AB (BB+/Stable/--) has the highest percentage of EBITDA at risk due to its reliance on European production.
OEMs are expected to develop strategic tools to reduce the effects of tariffs on credit metrics, and the successful implementation of these tools can bolster their rating headroom. Some may apply for tariff relief, pass part of the cost increase to customers, or optimize the tariff burden via transfer pricing. On-shoring production can partly ease the tariff burden, but it comes with its own costs and complexities. Existing investment plans by BMW, VW, Ford, and GM could lead to further capacity additions by 2027, and potential tariffs could incentivize additional capacity expansions in the U.S.
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