How the European auto industry may be harmed by Trump's tariffs on Mexico

Donald Trump's proposed tariffs on imports from Mexico could potentially impact European carmakers like Volkswagen (ETR:VOWG_p) and Stellantis (NYSE:STLA) more severely than direct tariffs on EU goods, according to analysts and industry experts.

The U.S. president-elect announced plans to impose a 25% tariff on imports from Canada and Mexico unless measures are taken to curb drug trafficking and migration at the border. Such a move would seemingly contravene the free-trade agreement between the three nations.

If implemented, these tariffs would cast uncertainty on the future of global automakers’ operations in Mexico, a hub for cost-effective production close to the U.S. market. Companies may consider shifting manufacturing operations to the U.S., impacting their strategies.

Luxury European brands, which rely on neither U.S. nor Mexican production, will monitor developments closely, particularly as Trump has also threatened tariffs on European cars, potentially increasing prices for U.S. consumers.

Carmakers with significant operations in Mexico, such as Stellantis and Volkswagen, felt the pressure, with Stellantis and Volkswagen shares declining 4.7% and 2%, respectively, on Tuesday.

In a note to clients, Bernstein analysts expressed concern that the proposed tariffs would leave automakers and suppliers insufficient time to adjust supply chains. "The ramifications for U.S. manufacturers of tariffs on imports from Mexico and Canada are enormous, making it hard to view this as more than a bargaining tactic," they wrote.

Automakers are already grappling with declining demand, higher costs, slow progress in transitioning to electric vehicles, and growing competition from Chinese brands like BYD (SZ:002594).

Mexico is a critical supplier for the U.S. automotive market. In 2023, the U.S. imported nearly the same value of cars from Mexico as from Europe but imported almost four times the amount of car parts. Between January and July, 80% of Mexican car exports (around 1.57 million vehicles) went to the U.S., per the Mexican Automotive Manufacturers Association.

For Stellantis, which operates high-margin production plants in Saltillo (Ram pickups) and Toluca (Jeep Compass), each percentage-point increase in tariffs on Mexican imports could reduce pre-tax profits by roughly €160 million, or 1.4% of its 2025 projections, according to Intermonte analysts. This could translate to losses between €3.6 billion and €4 billion.

Volkswagen’s U.S. operations, heavily reliant on Mexico, face significant risks. Approximately 65% of the vehicles VW sells in the U.S. may become uncompetitive if tariffs are imposed. Its Puebla plant, Mexico's largest auto factory, produced nearly 350,000 cars in 2023, including the Jetta, Tiguan, and Taos, primarily for export to the U.S.

While VW and Stellantis declined to comment, industry experts suggest automakers and suppliers are running multiple scenarios in anticipation of potential policy changes.

Nick Klein, VP at logistics firm OEC Group, noted that Trump has historically used tariff threats as leverage, making it difficult to predict the final outcome.

Some companies are better positioned to increase U.S. production to offset tariff impacts. Mercedes-Benz (OTC:MBGAF) and BMW (ETR:BMWG), for example, could expand operations at U.S. plants, though adapting for new models would require substantial investment. BMW CEO Oliver Zipse mentioned during a November call that the company could redirect some exported vehicles from its South Carolina plant to the local market to mitigate tariff impacts.

The growing trend of U.S. protectionism, under both Trump and Joe Biden, alongside supply chain disruptions during the COVID-19 pandemic, has already prompted suppliers to invest heavily in U.S.-based production.

European automakers and suppliers have poured $12 billion into South Carolina's automotive sector since 2006, accounting for 58% of the state’s $20.7 billion in total investments. These investments significantly outstrip the $3.8 billion contributed by U.S. firms, with 40% of the state’s key suppliers being German or French.

Continental, a major parts supplier with facilities across the U.S., operates under a "local for local" principle, focusing on producing for the U.S. market within the country. The company plans to continue U.S. investments regardless of the administration in power, said CFO Olaf Schick.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.