Forecast: Automotive Sector's Annual EBITDA May Drop by 17% Under Trump Tariffs
The automotive sector is facing a potential tariff increase on car imports to the U.S., a situation that could significantly impact the profits of European and American car manufacturers. According to S&P Global's forecasts, a 20% tariff on light vehicle imports from the European Union (EU) and the United Kingdom (UK), and a 25% tariff on imports from Mexico and Canada, could cost car manufacturers up to 17% of their annual total EBITDA in the worst-case scenario.
Among those most vulnerable are premium original equipment manufacturers (OEMs) like Volvo Cars and Jaguar Land Rover (JLR), which rely heavily on production in Europe. General Motors (GM) and Stellantis are also at risk due to significant assembly operations in Mexico and, to a lesser extent, Canada. However, BMW and Mercedes have a more limited exposure.
While the exact impact of the tariffs remains uncertain, OEMs are expected to take mitigating measures to manage the potential tariff increase. These measures, combined with the cumulative effects of tariffs, stricter CO2 regulations in Europe starting in 2025, and stronger competition in Europe and China, could increase the risk of credit rating downgrades.
The article discusses how tariffs could affect car manufacturers' profits and emphasizes that the actual impact on EBITDA is likely to be significantly lower than the estimated maximum exposure level. Toyota Motor Corp. (Toyota) and Hyundai Motor Co. (Hyundai-Kia) are also mentioned, but the scope, magnitude, and timing of the new tariffs remain uncertain.
Potential tariffs are part of a broader review of trade policies, including the Inflation Reduction Act and the free trade agreements with Mexico and Canada that are to be reviewed mid-2026. Trump announced an intention to impose a 25% tariff on imports from Canada and Mexico on November 25, 2024, which could have a negative incremental impact on the automotive sector.
Car manufacturers are categorized into three groups based on the maximum EBITDA risk posed by the proposed tariffs. Those at risk of 10% or less include BMW, Ford Motor Co. (Ford), Mercedes-Benz Group AG (Mercedes), and Hyundai-Kia. Those at risk between 10% and 20% include Volkswagen AG (VW) and Toyota, while those with over 20% risk include GM, Stellantis N.V., Volvo Car AB (Volvo Cars), and Jaguar Land Rover Automotive PLC (JLR).
The potential rating impact from tariffs will depend on the current rating cushion and the success of mitigation strategies. However, due to the balancing measures that OEMs are likely to take, the effect of higher tariffs alone is not expected to be sufficient for a downgrade.
The article also notes that Toyota and Hyundai-Kia are expected to remain among the top finished light vehicle importers in the U.S. by 2025, with total import volumes projected to exceed 10% of the companies' global sales. Stellantis has low exposure to European imports but will be affected by tariffs on imports from Mexico and Canada. VW's exposure primarily comes through premium Audi and Porsche models, while BMW and Mercedes have relatively low tariff exposure.
American car manufacturers Ford and GM have significant production in Mexico, leveraging low labor costs and favorable trade agreements. Tariffs could put about 17% of affected European and American car manufacturers' EBITDA at risk; Volvo Cars and JLR could risk more than 20% of their EBITDA in the short term, while BMW and Mercedes' risked EBITDA is expected to be 10% or below.
The potential impact of tariffs on EU imports on American car manufacturers will likely be negligible, but there is significant risk associated with Mexico and Canada. For Ford, models imported from Europe represent a smaller vehicle volume in the U.S. compared to 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 productions in Mexico.
The article concludes with company-specific assessments, indicating that BMW AG (A/Stable/A-1) is well-positioned to limit the impact of stricter EU CO2 emissions standards by 2025. Ford Motor Co. (BBB-/Stable/A-3) has a smaller rating cushion to absorb potential performance declines by 2025. General Motors Co. (BBB/Stable/--) demonstrates strong cost management and stable pricing, holding a significant rating cushion that could help mitigate the potential effects of tariffs. Hyundai Motor Co. (A-/Stable/--) is expected to maintain EBITDA margins above 10%, and potential tariffs pose a manageable risk. Jaguar Land Rover Automotive PLC (BBB-/Positive/--) faces high EBITDA risk due to complete reliance on European sales, while Mercedes-Benz Group AG (A/Stable/A-1) may encounter increased risks from stricter AB CO2 emissions standards in 2025, similar to challenges faced by BMW in China. Stellantis N.V. (BBB+/Negative/A-2) may face challenges to profitability and cash flow due to tariffs on imports from Mexico and Canada. Toyota Motor Corp. (A+/Stable/A-1+) remains resilient despite challenging business environments, and potential tariffs on imports from Mexico and Canada are deemed manageable. Volkswagen A.G. (BBB+/Stable/A-2) needs to address challenges in accurately sizing its cost structure in Europe and enhancing the customer appeal of its BEVs, particularly in China. Volvo Car AB (BB+/Stable/--) has the highest percentage of EBITDA risk due to its dependency on European production.
OEMs are expected to develop strategic tools to mitigate the effects of tariffs on credit metrics, and the successful implementation of these tools could bolster rating cushions. Some may apply for tariff exemptions, pass on part of the cost increase to customers, or optimize tariff burden through transfer pricing. Onshoring production could partially alleviate tariff burdens; however, this also comes with its own costs and complexities. BMW, VW, Ford, and GM's current investment plans could lead to further capacity increases by 2027, and potential tariffs could encourage additional capacity expansions in the U.S.