Thursday, June 20, 2024

Taxes vs Tariffs: How the 2024 presidential election could play out for the auto industry

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The presidential election of 2024 pitting incumbent Joe Biden against former president Donald Trump is significant not only for public policy, the economic landscape, and U.S. foreign policy, but there is also the potential impact on the U.S. auto industry from either candidate taking the White House. Wells Fargo takes a look at how increased tariffs or higher corporate taxes will impact Detroit’s Big 3 automakers.

Biden is running on a platform of raising corporate taxes to 28% from the Trump-era rate of 21%. Wells Fargo analyst Colin Langan sees a higher tax rate more detrimental to original equipment manufacturers (OEMs) and dealers given that the majority of their profits are generated stateside, while suppliers’ profits are outside the U.S. The effective increase for a 7% hike in the corporate tax rate translates into 5-6% increase for automakers, but just 1-3% for suppliers. Langan expects a higher corporate tax rate will lower 2024 earnings from OEMs and dealers by 3-7% and 9%, respectively.

Considering the automakers separately, the impact is less clear, Langan says, given the influence of special items on the adjusted tax rates. He estimates that 25%-30% of General Motors’ (NYSE:GM) and Ford’s (NYSE:F) U.S. pretax rate is reduced by these credits. This will likely translate into an average corporate tax rate increase of 5-6% for GM and Ford, and slightly higher for Stellantis (NYSE:STLA).

In the event of a Trump victory, tariffs on all foreign built cars and parts would likely be raised above the recent increases recently enacted by Biden and would be most disruptive to parts manufacturers than the auto manufacturers. According to Wells Fargo, as of 2023, 37% of U.S. vehicle sales were imports with ~16% from Mexico and Canada, and 22% from Japan, South Korea, and Europe (few vehicles come from China because of the already high tariff). With global automaker margins at ~9%, the addition of a proposed 10% tax by Trump could be difficult for automakers to absorb without raising prices, Langan says. With luxury and small cars the most impacted, this creates opportunities for Tesla (TSLA) in the luxury car segment and Honda (HMC) for small cars at the expense of Volkswagen (VWAGY, VLKAF), Hyundai (OTCPK:HYMTF), Mercedes (MBGAF, MBGYY), and BMW (OTCPK:BMWYY).

If tariffs include Canada and Mexico, the impact is similar across segments with cars seeing a slightly higher risk vs SUVs and pickups. This puts Ford (F) in the most advantageous position to capitalize on tariffs as all of the company’s pickup trucks are made in the U.S. vs 56% for GM (GM) and Stellantis (STLA).

From a sourcing perspective, GM (GM) and Ford (F) are most at risk if either president raises tariffs on parts imported from Mexico, as a 10% tariff on imported components would likely add $1,500 to the cost of a vehicle. The components most at risk, Langan says, are electronics (impacting APTV, LEA, VC, and MGA), engine and transmission (impacting BWA, MGA, DAN), and seating and interiors (ADNT, LEA, MGA).

“Tariffs on China auto components is the biggest risk,” Langan says. As a result of the Trump tariffs in 2019, imports from China have fallen by 4 percentage points since 2017 to just 8% in 2023 reflecting re-sourcing.

Langan has an Underweight rating on Ford (F) as the rise in battery raw costs has negatively impacted the outlook for BEV profitability, and consequently Ford’s (F) profitability. Wells Fargo has a $10 price target for Ford.

General Motors (GM) is also rated as Underweight as the normalization of new vehicle pricing and higher input costs will likely offset expected volume increases. Wells Fargo sets a $30 price target on GM.

Stellantis (STLA) is also given an Underweight rating at Wells Fargo anticipating “significant industry challenges” over the next few years. Stellantis has a €18 price target at Wells Fargo.

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