Trump tariffs become headache for auto industry

President
Donald Trump speaks following a meeting on infrastructure at
Trump Tower, August 15, 2017 in New York City.
Drew Angerer/Getty Images

• After reporting second-quarter earnings, both GM
  and
  FCA stock took losses in the markets.
• The CFOs of both automakers addressed higher steel
  costs due to Trump’s tariffs.
• GM and
  FCA
  cut full-year profit guidance.

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Outgoing General Motors CFO Chuck Stevens has been with company
for four decades, but I’m not sure he’s ever used the word
“headwinds” as often as he did on a conference call following the
carmaker’s second-quarter earnings on Wednesday.

GM posted a
bottom-line beat of analysts’ expectations and raked in about $36
billion on the top line. But the company was forced to trim
its full-year profit guidance from 10% to what Stevens terms a
9-10% range.

Stevens noted that GM is facing a net headwind of $1 billion more
than it originally expected — and that’s taking into account that
the company was already going to confront challenges as it
launches a major redesign of its full-size pickup trucks.

A chunk of that $1 billion is foreign-exchange problems with the
South American market. But $600-700 million, in Stevens’
analysis, is due to more expensive steel.

“The new issue is commodity escalation,” he said, adding
that GM was dealing with “unexpected pressure on the steel
side.”

GM shares slid 5% on Wednesday, to $37.

GM took a hit on Wednesday.
Markets Insider

“GM buys most of its steel from US producers, who have
raised prices in reaction to tariffs on imported steel imposed by
the Donald Trump administration,” Reuters reported after GM
posted its quarterly results.

What will Detroit do?

Invariably, Wall Street analysts wanted to know whether GM
would ask suppliers to share the pain, which raised the specter
of the carmaker’s pre-bankruptcy past, when dealings with
suppliers could be brutal. Stevens said that GM has a far more
constructive relationship with suppliers than it did in the past.
But neither he nor CEO May Barra ruled out negotiations.

Fiat Chrysler Automobiles also suffered in the markets Wednesday,
down a whopping 12% to $17, slashing substantial gains over the
past 12 months.

CFO Richard Palmer assumed the somber duty of delivering the bad
numbers, following the Wednesday morning announcement that former
CEO Sergio Marchionne had died after falling into a coma
following shoulder surgery.

Under the circumstances, Palmer was remarkably calm (Marchionne,
who often bantered with his CFO on earnings calls, would have
been proud). 

“We buy steel in regions where we produce,” Palmer said. He
indicated that FCA as a group isn’t overly concerned about steel
prices now, but he added that the carmaker would “keep an eye on
the first part of 2019” and said that there would “clearly be a
negotiation with suppliers … discussing how we can share the
impacts of raw materials increases.”

On balance, Trump is lucky that the US economy is at
full-employment and that the Detroit big three — GM, Ford, and
FCA — have been raking up massive profits for years amid a boom
in SUV and pickup-truck sales.

Headwinds on tricky seas

GM CEO Mary Barra.
Bill
Pugliano/Getty

But the industry is entering a tricky period. FCA has just
endured the unexpected death of its CEO and is heavily reliant on
pickups and the Jeep brand to maintain profits in North America.
Incoming CEO Mike Manley, who had been running Jeep, is now
staring down tariffs, a trade war, and an uncertain future for
NAFTA while trying to take over at the most international of US
automakers.

GM is trying to maintain profits in its core business while
attacking new opportunities, such as its Cruise self-driving
technology, which is slated to launch in 2019. 

But it just got hit with headwind costs that are double
what it anticipated: $1 billion versus $500 million. And it
remains to be seen what a possible trade war will do to GM’s
China business, which has been strong, but that’s based on joint
ventures with Chinese partners. 

As a whole, the industry is enjoying higher sales in the US
than it expected, after three record or near-record years.
Transaction prices are also high enough to offset some tariff
damage, and Detroit should benefit from a corporate tax cut. But
sales will have to decline at some point, intensifying
competition in the hyper-competitive US market and stressing
automakers’ balance sheets.

Managing in this environment was already going to be tough.
Throwing in higher costs on steel in particular is a headache
that nobody needed.