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Trump has 3 months to avoid auto industry downturn



Donald Trump
Trump has three months to make this

Mark Wilson/Getty

  • All three major US automakers have lowered their
    full-year profit forecasts for 2018.
  • Trump’s trade wars and tariffs are hurting the business
    both in the US and China, the world’s two biggest
  • The auto industry has been predicting a downturn, but
    might have sent a unified signal to Trump that if
    changes aren’t made fast, the slide could arrive ahead of

Wednesday wasn’t a good day for the US auto industry. It began
with the tragic news that
Fiat Chrysler Automobiles CEO Sergio Marchionne had died after
complications from surgery
, and it ended with Morgan Stanley
analyst Adam Jonas asking Ford CEO Jim Hackett if Hackett thought
he’d be keeping his job.

In between, General Motors, Ford, and FCA all
lowered their full-year profit forecasts while reporting
second-quarter results
, and Ford missed on Wall Street’s
earnings expectations. (Hackett, by the way, told Jonas he wasn’t
going anywhere.)

GM in part blamed the Trump administration’s tariffs on aluminum
and steel for contributing to an unexpected $1 billion headwind
for 2018. Ford also had to deal with more expensive steel due to
tariffs, as well as a fire at a supplier that curtailed
pickup-truck production and a panic-inducing meltdown of the
carmaker’s China operations. Hackett also revealed that Ford
needs to spend $11 billion over the next three to five years to
fix its business.

Everybody’s stock slid, with Ford now perilously close to falling
into single digits.

To put this all in perspective, the Big Three all made
in the quarter, the US auto sales market has been
booming for three years, unemployment is very low in the United
States, and gas is still relatively cheap. There are always
problems in the car business, but for the most part, the business
has been pretty good.

But Trump has done everything he can think of to create new
problems. The tariffs, which have had an immediate negative
impact on Detroit’s costs, are just the tip of an ugly

Hatred for American cars in China?

China Buick
Buick Regal in China.


Discussing second-quarter results with Wall Street analysts, GM
executives were asked if the mounting trade war between the US
and China is engendering anti-American sentiment in the Middle
Kingdom, the world’s largest vehicle market and where GM is
looking for future growth. 

“We haven’t seen any of that yet,” CFO Chuck Stevens said. But he
evoked the specter of Japanese and South Korean difficulties with
the issue in China — somewhat damaged those countries’ ability to
sell cars to Chinese consumers.

In the context of trade hostilities with China, Ford is now
facing a wholesale restructuring of its business in the region
after a swoon in sales, with predictions that duties and tariffs
could cost the automaker upwards of $300 million in 2018. 

FCA, meanwhile, saw a collapse in Maserati sales in China thanks
to the uncertain sales and import market that the trade war has

If anybody thought that the industry could ride out 2018 without
feeling any pain from Trump’s moves, they were wrong. The pain
has arrived swiftly.

Far-reaching consequences

US Auto Sales GraphicBusiness

And it could have far-reaching consequences. Nobody in the Trump
administration has thought this through, and now that they’ve
started a trade war, they can’t lose it. While Detroit’s big
three are all in relatively good financial shape after years of
strong sales, they aren’t immune to difficulties — the business
is extremely capital-intensive in the best of times and
harrowingly so when a positive environment swings negative. 

With the US sales cycle extended well past a logical downturn
point — an annual selling pace of near-or-above 17 million
vehicles has persisted since 2015 — Detroit has been waiting for
tougher times to arrive. They might have held off until 2019,
given that profitable pickups and SUVs have been moving off
dealers’ lots, transaction prices have been historically high,
and the financial arms of both GM and Ford have performed
favorably as credit has kept flowing in the economy.

Until Trump’s trade wars and tariffs hit, the biggest worry was a
big jump in gas prices. That hasn’t happened, and with Detroit
assisting Trump in rolling back fuel-economy standards that were
locked in late in the Obama administration and also relishing a
corporate tax cut, the carmakers thought the trade stuff was all
for show. 

But it wasn’t, and now big trouble has arrived for the US market
— the world’s most competitive — and the China market, where
another $10 million in yearly sales could develop over the next

Trump knows nothing about the global auto industry

Ford Kentucky Truck Plant
Ford pickup-truck factory.


Trump has shown since the 2016 campaign that he knows literally
nothing about the 21st-century car business. That ignorance has
now been compounded by his trade-and-economics team’s dismal
understanding of how the $2 trillion global auto industry has
been organized since the 1990s and after the financial crisis.

The industry is more fragile than commonly thought. The late
Sergio Marchionne put it well when he often explained that weak
discipline, bad execution, and poor leadership are quickly

He wasn’t alone.

“It’s a very tough business,” Ford Chairman Bill Ford once told
me with grim clarity. But Marchionne and Ford were talking about
an industry that’s under tremendous pressure when everything
is going just fine.

Throw in some massive unknowns, and the punishment becomes more
severe, and what was tough can become impossible.

“We just can’t pull enough levers,” Stevens said when asked how
GM was going to deal with additional steel costs in the second
half of 2018.

But Trump can pull a big lever

Donald Trump in a Mack Truck
Trump can pull a big


The guy with the big lever is, of course, in the White House.
It’s time for somebody to tell him that while this thing with the
car business might not seem too bad, it’s far worse than it
looks. The inevitable US sales downturn, mild or severe, could
take shape over the next quarter, undermining Detroit’s already
deteriorating profit outlook.

Survival spending will creep in as everyone fights to maintain
market share. The balance sheets, now fat with cash, will get
slimmer, damaging the automakers’ ability to avoid layoffs when
the slide picks up speed. Investment will go into exile. Stock
prices will tank. 

If we’re at the beginning of some bad times, Trump could
forestall a sub-recession in the auto sector by calling off the
trade war and renouncing the tariffs. But he needs to act fast.
The big three have presented him with an excuse on a golden
platter by sending a united signal through lower second-half
profit forecasts. 

Will he accept the gift? Unlikely. But if he does, there’s a
three-month window before we hit the fourth quarter and negative
momentum will be all but impossible to stop.

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