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Stock Analyst Update

What Potential New U.S. Auto Tariffs Mean for Industry

Toyota and GM's Buick brand have concerning exposure, but it's too early to say that we'll change their fair value estimates as a result.

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On May 23, The Wall Street Journal reported the U.S. Commerce Department is considering starting an investigation, which could last over 10 months, that might lead to tariffs of up to 25% on imported vehicles in the United States. We don't see these tariffs lasting forever and we think these tariffs will ultimately cost American jobs. Just as the White House did with steel and aluminum tariffs announced in March, it would invoke Section 232 of the Trade Expansion Act of 1962 citing national security. We disagree but measures like this are ultimately about protecting American manufacturing jobs in states that voted for Trump rather than national security. We don't have detail yet as to if auto parts are also impacted and what countries are impacted, but we assume it would be for countries outside of North America due to NAFTA exempting Canadian and Mexican auto imports into the U.S.

If that assumption holds, we see  Toyota (TM) and  GM's (GM) Buick brand with the only concerning exposure in our U.S. autos coverage but it's too early to say we will change fair value estimates. We calculate that through April, U.S. sales of vehicles made outside North America were 5.9% for GM but 64% for Buick due to the Envision from China, Encore from South Korea, and Regal models from Germany. About 30% of Toyota's U.S. sales come from Japan including about 56% of all Lexus sales. About 84% of Lexus RX crossovers are made in Canada and about 90% of Lexus ES sedans are made in Kentucky, but all other Lexus vehicles are made in Japan and already subject to a 2.5% tariff. A 25% tariff would hurt Toyota given Lexus is likely much more profitable than the volume Toyota brand, but if Germany is also subject to the tariff then many German Three sedans would also be hit with the tariff. We see Lexus more at a pricing disadvantage against the Germans in light trucks as BMW makes most of its X-Series vehicles in the U.S., except for the X1 and X2, and Mercedes makes the GLE and GLS in the U.S.

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David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.