A New Potential Thorn in Ford's Side

Source The Motley Fool

Ford Motor Company (NYSE: F) has enough on its plate already. Sales in China are struggling, it has higher production costs than many competitors, its warranty costs have weighed on recent quarterly profits, and the company has pushed back roughly $12 billion in electric vehicle (EV) developments due to massive losses with its model-e division.

Unfortunately for Ford investors, there may be a new problem that could cut profits by nearly 17%. Let's dig in.

The impact of potential tariffs

President-elect Donald Trump said he would impose a 25% duty on imports from Canada and Mexico until they clamped down on drugs and migrants crossing the border, which could violate the free-trade deal among the three countries. That said, producing and assembling vehicles is a complicated process, so understanding how these potential tariffs would affect automakers is important.

S&P Global reported that stock downgrades could be possible if the imposed tariffs hit European and American automakers, costing up to 17% of their combined annual profits. The tariffs would likely be more damaging for European carmakers such as Volkswagen and Stellantis, as well as their suppliers.

S&P Global said, "We expect mitigating actions will make potentially higher tariffs manageable, but the combined effects of tariffs, tighter [carbon dioxide] regulation in Europe from 2025, and earnings pressure from stronger competition in China and Europe could increase the risk of downgrades."

Let's get specific

S&P Global's report, as a worst-case scenario, included a 20% tariff on U.S. light vehicle imports from the E.U. and U.K., and a 25% tariff on imports from Mexico and Canada. Such a scenario would cause General Motors (NYSE: GM), Stellantis, Volvo, and Tata Motor's Jaguar Land Rover to lose over 20% in adjusted earnings before interest, taxes, depreciation, and amortization in 2025. That is a massive blow for automakers already dealing with billions in losses from EVs.

The profit risk is lesser for Volkswagen and Toyota, roughly between 10% to 20%. And while a potential thorn in Ford's side, the company is actually poised better than many competitors with its profit risk below 10% -- along with BMW, Mercedes-Benz, and Hyundai.

In general, Detroit automakers face a serious speed bump with the potential tariffs, because the automakers have a large manufacturing operation in Mexico and Canada. General Motors' best-selling vehicle, the Chevrolet Silverado truck, and Ford's most affordable vehicle, the Maverick, are assembled in Mexico, among other places as well, and shipped to U.S. dealerships.

It's not only vehicles that will be impacted, either, as almost $100 billion in vehicle parts are shipped across the Mexican and Canadian borders. According to a Wolfe Research estimate, the tariffs could raise the average cost of a vehicle sold in the U.S. by roughly $3,000, and could dampen U.S. light-vehicle demand by roughly 1 million units. This is a big deal.

What it all means

The good news, if you can call it that, is that the damage of these potential tariffs is so great that it should (emphasis on should) make it so that the tariffs are never actually implemented and are instead used more in negotiations or other influential decisions.

Bernstein Research analysts said: "If implemented this would spell disaster for the U.S. auto industry and Detroit 3 manufacturers, all of whom import significant numbers of vehicles from Canada and Mexico, as well as Volkswagen and other European [original equipment manufacturers] But given the wide-ranging negative implications for industrial production in the U.S., we expect this is unlikely to happen in practice."

Specifically, imports from Mexico and Canada make up roughly 40% of Stellantis and Volkswagen vehicle volumes in the U.S. market. That figure is roughly 30% for General Motors, and 25% for Ford.

Ultimately for investors, this will be a huge topic and development to watch as the incoming administration prepares to take control. If the tariffs are more than just negotiating tactics, it would be a serious blow to automakers' stocks.

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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends S&P Global. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft, General Motors, Stellantis, and Volkswagen Ag and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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