Tariffs and Automotive
no one in the industry has a 25% margin, and the supply chain is only as strong as its weakest link
I’m off to Detroit for the Federal Reserve Bank of Chicago’s 31st annual auto industry conference, held at theit Detroit Branch. It’s quite a venue, and the timing and speaker lineup is impeccable; I know many of them, and they know the mechanics of trade and have deep ties to industry executives. It will be lively! Following that I will spend 2 days at Automotive News headquarters, again in Detroit proper, but that’s a closed door meeting to judge technology award winners. Even AN staff aren’t allowed into the room, as our discussions revolve around order books, margins, and technical details. We take our NDAs seriously. As to the Fed conference, I will post updates as relevant, or you can watch the livestream, as per this link.1
Lots of automotive trade crosses the main bridge from Canada into the US, I suspect on the busiest days that amount approaches $100 million. Tariffs could then total $25 million a day. The starting point was small or no tariffs, so the customs brokers who submit the paperwork do not have millions of dollars in their escrow accounts. US Customs may not have the computer capacity or manpower to verify that each importer for a truck carrying parts for several different state-side customers has payments in place. So at best it’s an administrative nightmare, and it may prove impossible to clear shipments to enter the US in a timely manner.2
Now that might not matter, or not immediately, but the automotive industry operates on a just-in-time basis. For some bulky parts that have to match the color and options of each vehicle, such as seats and instrument panels, production is scheduled the night before, when the assembly line assembly sequence is finalized, made by the supplier in the morning, loaded on a truck in assembly line sequence before lunch, and delivered and in a car that’s rolled off the line before the afternoon is over. That’s true to for engines and transmissions, which can differ for each pickup truck that goes down the line, and pickups are big business. Research by Thomas Klier at the Chicago Fed and his collaborator Jim Rubenstein has documented those links for both the US and the EU, showing the close geographic connection between drivetrain plants and the assembly plants to which they ship. And Canada does ship engines into the US, because when I worked in a car plant in Detroit 50 years ago we shipped parts to them, and I have periodically checked that the engine plant is still in operation. Yes, over 50 years: that relationship dates to the integration of the US and Canadian industries following the signing of the US-Canada Auto Pact of 1966. Canada was, after all, our closest ally.
But along with the engine plants owned by an OEM shipping to one of their plants in the US, and the global Tier I’s that ship directly to assembly plants, there are a host of small Tier II and Tier III suppliers. Even the big players are lucky to earn a 10% margin – one global supplier I met with recently was happy when their sales staff negotiated 7%. So with virtually no exceptions suppliers take a huge loss if they add 25% in tariffs to their costs. Given the lack of lead time, they haven’t been able to negotiate a detailed what-if with their customers. Some are cash-strapped, and can’t readily pay funds they don’t have into a custom broker’s escrow account, even if they have a gentleman’s agreement that their automotive customer, such as a Tier II supplier, will make them whole. Eventually. The GM’s and Toyotas try to track their suppliers’ suppliers’ suppliers, but there are thousands. They cannot (will not!) bail out a host of small firms about whom in practice they know little, and with whom they’ve never had direct contact.
In the end the supply chain is only as strong as its weakest link. With thousands of suppliers, some shipments won’t get through. As soon as they see that suppliers won’t be delivering, the car companies will be proactive and announce the shutdown of their assembly plants in a planned manner. It’s not a question of whether they will stop production. It’s a question of when. Due to JIT – industry efficiency – we will know that within the week.
Oh, and car plants and their suppliers, the manufacturing end of the industry, employed 1.04 million workers in December 2024. Dealers and service shops employed 3.73 million – yes, automotive overall is a service industry, not a manufacturing one. Most of those jobs are not at immediate risk.
Note the Fed conference generally avoids industry execs as speakers. The audience includes people with deep experience in engineering, factory management, finance and sales. They don’t take well to evasion, and unlike the analyst call-ins following quarterly reports, ask challenging questions. It’s not interesting to hear 30 minutes of platitudes followed by 15 minutes of “no comment.” So get people with things to say and the freedom to say them.
It gets more complicated, because there are drawback provision where a part imported from Canada with US content gets the basis reduced to reflect only the value added in Canada. Car companies tracked to be able to certify they met domestic content thresholds, but not to track the amounts for each and every box loaded onto a US-bound truck.