It seems more than a little short-sighted for Team Trump to profess so much desire to bring production and manufacturing to the US, without apparently talking to many, let alone any, people who make things. The Trump tariffs will deliver a crippling blow to an already reeling ex-China auto industry, with little in the way of prospects that much manufacturing will be brought home. Trump’s tariffs and his hostility to electronic vehicles are inimical to industry success, or even merely regaining its footing.
The car industry matters because outside housing, vehicles are the biggest and most important purchase most households make. It was once the engine, pun intended, of US industry, as witness GM president Charles E. Wilson, saying during confirmation hearings to become Secretary of Defense:
I thought what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country. Our contribution to the Nation is quite considerable.
As Big Serge wrote in a magisterial article on World War II, US dominance in vehicles played a critical role in the war, as it produced vast volumes of tanks and transport equipment. The auto business drove the demand for other key sectors: steel and tire factories, oil production, and of course made possible America’s infamous urban sprawl. Carmakers’ status then as defense contractors and private sector masters of logistics and manpower (albeit not of the rapid implementation sort required in war) made their top execs logical picks to lead the Defense Department.
As most readers know, US carmakers started losing ground to German and Japanese manufactures in the 1970s, with the business press and academics criticizing sclerotic US managements. But even after decades of market share loss, the US car industry was still an important enough economic flywheel to get its own bailout in the wake of the global financial crisis.
Trump, mired in his romantic view of the 1890s, is looking forward to the world when Ford’s River Rouge factory employed over 100,000 people. But the future of production is one stripped of workers:
And factories like that require confidence in demand for output, something sure to be surely wanting in most US industry and even more so for cars. The trend among the incumbents for decades has been to lard up the vehicles with features, some admittedly mandated like air bags, but most of which turned cars into feature-bloated computers on wheels: ever more lavish entertainment centers, embedded GPS (drivers here simply use their phones, keyless starting and locking (inferior to and more costly than keys) and rear-vision cameras. The reason we lamented the slow-motion demise of Nissan is that it is the last maker of relatively inexpensive vehicles, which is, or ought to be, a critically important segment, particularly given the price trends Paul Greenwood described in comments:
ou do realise car prices have doubled inntjevpadt decade ? In 2016 a Ford Fiesta kn U.K. cost £10,345 and in 2023 it cost £19,350
Nissan Qashqai from £18,545 to £30,135
Incomes in U.K. stagnated after 2008
Cheapest VW Golf in Germany €31,145
2021 it cost €20,70050 years ago average car price Germany was 38% annual average salary today 2024?it is 10 months average salary Yet Nissan quality took a dive due to its alliance with Renault.
The US version of this story, using data from Kelley Blue Book:
As Newsweek pointed out in January 2024:
In 2023—a year during which inflation slowed down to the point that the Federal Reserve decided to stop hiking rates—new car prices rose by 1 percent to an average of $50,364, while used car prices fell by only 2 percent to an average of $31,030.
But as things stand, cars are still really expensive for many Americans. Just 10 percent of new car listings are currently priced below $30,000, according to CoPilot. Things are not much better in the used car market, where only 28 percent of listings are currently priced below $20,000.
According to an October report by Market Watch, Americans needed an annual income of at least $100,000 to afford a car, at least if they’re following standard budgeting advice, which says you shouldn’t spend more than 10 percent of your monthly income on car-related expenses.
That means that more than 60 percent of American households currently cannot afford to buy a new car, based on Census data. For individuals, the numbers are even worse, with 82 percent of people below the $100,000 line.
A Bain industry overview from January 2025 (as in before the idea of harsh tariffs were in play) described how automakers were focusing on upper-income buyers, and seemingly abandoned most prospective buyer. This is even Chinese cheap and cheerful electronic vehicles having been kept out of the US and EU by 100% tariffs, which would give them some cover in offering more basic, and therefore cheaper, cars. It also describes how suppliers have been so stressed that they might seek support from carmakers, like two drowning people desperately grabbing each other to try to keep their heads above water. Amusingly, this overview promotes a related brief How Auto Suppliers Can Navigate the Industry’s Perfect Storm:
As volatility has become the norm for the automotive industry, it has upended traditional profit margin dynamics. For two decades leading up to 2019, automotive suppliers’ EBIT margins were on average 1 to 2 percentage points higher than those of original equipment manufacturers (OEMs). Then came massive supply chain disruptions with the Covid-19 pandemic and global chip shortage, plus higher raw material and energy prices, and now rising borrowing costs and wage bills due to inflation. Automotive OEMs were able to ride out the supply shortage by focusing production on the highest-margin models and raising prices, but suppliers had no such strategic options…
Here are some of the key takeaways through the third quarter of 2024:
- The third quarter of 2024 marked a turning point. Supplier margins exceeded those of OEMs for the first time since the pandemic upended global markets in 2020, reversing a trend that had stretched 17 quarters. OEMs’ average profit margin fell to 6.2% in the third quarter, down more than 2 percentage points from the 2023 average. Meanwhile, suppliers recovered slightly to a 7.0% average profit margin.
- Decreasing margins for OEMs indicate softening customer demand and increased downward pressure on prices. OEM margins may get squeezed further in 2025 and beyond by persistent inflation and high interest rates causing subdued demand, rising costs, and falling prices. In addition, growing uncertainty around the pace of electric vehicle (EV) adoption will likely force OEMs to shoulder the dual burden of producing both combustion engine vehicles and EVs for an extended period, further pressuring margins. Many OEMs have already announced efficiency and performance improvement programs, including a reduction of material costs, that will likely put additional pressure on suppliers.
- Despite improving margins in the third quarter, a two-fold challenge for many suppliers remains: They’re still suffering from higher input costs (even though material costs have receded from all-time highs) while OEMs increase cost pressure even further. A growing number of suppliers face liquidity challenges that will likely require special support, including from OEMs, to prevent insolvency.
We have skipped over the elephant in the room of electric vehicles, which represent an even more difficult challenge to established car makers than the shift to smaller, more fuel efficient, and cheaper cars did in the 1970s and 1980s.
To simplify, EVs have vastly fewer parts than traditional internal combustion engine powered vehicles and of course also require developing competitiveness in battery performance, particularly charging speed and driving distance per charge. And as a result, cheap and cheerful low end Chinese EVs are reportedly popular in some non-tariffed markets like Mexico.1 And the Chinese EV makers have been going from strength to strength in their home market. Upper end buyers used to prefer European and Japanese brands. No so much now.2
Despite the rapid growth of EV uptake, some experts contend that the ICE can’t be eliminated due to user needs (such as charging stations in the still significantly low-population-density US will never be sufficiently distributed). Toyota, for instance, maintains that the market will top out at a much lower level than is widely assumed. From Forbes in 2024:
Akio Toyoda, the man who led Toyota as its CEO for 13 years, and now holds the chairman spot, believes that battery electric vehicles (BEVs) are not the final answer. No matter what the auto industry undertakes to promote growth, Toyoda says the electric car segment will only ever account for a maximum of 30% of the market. The fact of the matter is that several markets have already cleared that percentage, some significantly.
Notice the terrible position that results for traditional car makers. They have big installed production bases but are faced with a big fall in volumes. Like managing a retreat in war, managing in an industry in fundamental decline is something MBAs and shareholders don’t adapt to well. On top of that, if Toyoda is correct that the future is not an awkward long-term exit, but having to operate in a shrunken industry so as to best harvest not-exactly-legacy assets, and keep ICE customers happy (consider the problem of parts)….when the other incumbents will fight ever harder over the shrunken pool of customers.
And the European and UK player were in even more pain due to the sanctions blowback of persistently higher energy prices, which makes them structurally less competitive. Recall the shock across Germany last fall when Volkswagen announced plans to close at least three plants and downsize others.
Now with that sorry background, to the impact of tariffs on the car biz. Keep in mind a key point often made both with respect to the US reindustrializing and Europe building an arms industry: it would take at least ten years, with substantial government support. But advanced economies became allergic to formal industrial policy, while doing a lot on the sly to curry favor with powerful interests, and even more so under our current libertarian state-smashing exercise.
Benzinga confirms that this general view applies to the US auto industry: “Reshoring auto parts is “essentially impossible” due to high U.S. labor costs and lack of skilled workers.”
As we’ll see soon, parts are the key part of this equation even for cars nominally made in the US. For instance, Mercedes assembles German parts in its factory in Alabama. Ditto for BMW’s facility in Spartansburg, Tennessee. Japanese makers, along with Ford and GM, bet big on Mexican production.
From the New York Times:
Nearly half of all vehicles sold in the United States are imported, as well as nearly 60 percent of the parts in vehicles assembled in the United States. That means the tariffs could push up car prices significantly when inflation has already made cars and trucks more expensive for American consumers….
Mr. Trump argues that the tariffs will increase domestic auto production, but it’s not clear how fast he can accomplish that goal. Tariffs can encourage companies to use more products from the United States and expand production, but new factories typically take several years and can cost billions of dollars to construct.
The additional costs that tariffs will introduce could also backfire economically, harming the U.S. auto industry by squeezing its profits and slowing its sales….
The administration said the 25 percent tariff would apply to both cars and car parts made in Canada and Mexico, despite the U.S. trade agreement signed with those nations. It created a small exception to those levies, saying any content or materials that originated in the United States but were incorporated into cars finished in Canada and Mexico would be exempt.
Otherwise, White House officials indicated that there would be no exemptions, and Mr. Trump said Wednesday that he expected the tariffs to be permanent.
While we are focusing mainly on Trump’s misguided attempt to increase US production by punishing car buyers and makers, the impact on foreign marks is dire. For instance, Jaguar Land Rover has “paused” exports to the US for a month. The BBC notes that the US is the British car industry’s second biggest export market after the EU. The Japanese didn’t just bet big on Mexico for parts; they also export “foreign” cars from there. 3 Volkswagen has similarly halted rail shipments of its cars from Mexico and its “tariff affected vehicles” will stay in US ports until the German manufacturer figures out what to do.
The Wall Street Journal gave an in-depth account of the expected cost to the American industry and its workers. It opens with Ford, which depicts 80% of its vehicles as made in the US. Except not:
But a look under the F-150’s hood reveals a key vulnerability for the company in Trump’s new tariff regime: There are thousands of parts that cross the border from Mexico and elsewhere. More than half the value of the truck’s components comes from outside the U.S.—at least two dozen countries, including alternators and wheels from Mexico and tires from South Korea.
Starting next month, each one of those parts could face a fresh 25% tax. So even though Ford’s trucks are built in the American heartland, import tariffs could jack up the average price by thousands of dollars. Tariffs on parts could cost Ford 6% of its revenue, according to an analysis from financial firm Bernstein.
The Journal continues by describing how GM is even worse situated and points out:
But after three decades of setting up supply chains and factory networks under free-trade rules, automakers now find themselves peering into a funhouse mirror of tariff scenarios: a 25% duty on vehicle imports, higher steel and aluminum costs, a 20% tariff on anything from China and a potentially catastrophic levy on auto components that is still being hashed out.
Observers inside and outside the industry believe that the tariffs could deal a heavy blow to the two storied giants of American car manufacturing. One U.S. auto-industry executive described three potential outcomes: “OK, bad and Chernobyl”…The tariffs on car parts alone would cost the U.S. industry around $26 billion, which translates to more than $3,000 per vehicle, Bank of America analyst John Murphy said. “The supply base is where there is the greatest risk of disruption to North American production,” he said in a research note on Wednesday.
And perversely, domestic auto parts companies would take it on the chin:
The auto-parts sector serving U.S. carmakers is massive and includes everything from global companies like Canada’s Magna and Germany’s Bosch to small mom-and-pop auto suppliers concentrated in states such as Michigan, Ohio and Indiana. The sector employs over 930,000 people and contributes 2.5% of the U.S. gross domestic product, according to MEMA, the vehicle suppliers industry group.
“Most of the supply base looks like us,” said Gary Grigowski, vice president of an 80-worker supplier of plastic components like switches, based in Michigan. “It’s a lot of smallish manufacturers in little towns like we are,” he said.
The piece includes examples of components that are not amenable to being made in the US:
Automakers commonly get many cheaper components—brake pads, seat upholstery, fasteners—from overseas. Such commodity items are difficult to make in the U.S. at a profit, executives say.
One example is wiring harnesses, the sheaths of wire and cables that distribute electricity through a car. They are painstaking to make and require a great deal of manual labor, which is why production of them has moved to Mexico, Central America and other lower-wage countries.
And how about upholstery? Tell me under what scenario that would ever be made domestically.
Some manufactures plan to effectively kill their suppliers (recall Bain saying above that many were in bad shape and would need, erm, assistance, including from their customers):
In a letter last week to a supplier, GM said that worsening market conditions as a result of higher costs doesn’t change a supplier’s responsibility to uphold a contract. GM has “no obligation” to pay a supplier increased prices on a contract as a result of tariffs, said the letter, seen by the Journal.
Expect Americans to have more motorbikes in their future.
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1 Even cheap Chinese EVs are pricey in Southeast Asia, and charging stations are an issue. From Bangkok Post in March:
While Southeast Asia’s upwardly mobile population may aspire to own EVs, the still-pricey cars are beyond the reach of many. Access to a reliable electricity source isn’t always a given and even if it were, EV charging infrastructure across many countries is spotty. And in some places like Vietnam, consumers prefer a brand more immediately familiar….
EV sales in Indonesia were just 43,188 units last year, more than the mere 125 in 2020 but still only a fraction of the around 860,000 passenger cars sold in total, according to industry association Gaikindo. At those levels, it’s hard to see how the government’s target of 2 million EVs on Indonesia’s roads by 2030 can be met.
“Maybe the rich are more aware about EVs but not everyday people,” said Hairayani, a school teacher based in Jakarta who like many Indonesians only goes by one name. “Plus there’s the price factor and the extra hassle of finding a charging station.” Hairayani said he doesn’t plan on moving away from his gas-powered car anytime soon.
In Thailand, where buyers benefit from a government subsidy of 100,000 baht per vehicle, EV sales dropped 9.3% to 66,732 units in 2024 from a year earlier, short of the Electric Vehicle Association of Thailand’s target of 80,000. Thailand has the highest level of household debt in Southeast Asia and many consumers are now subject to stricter bank loan approvals.
Things didn’t improve in January, when sales of battery-powered EVs slipped almost 8% year-on-year, Federation of Thai Industries data show.
The article also describes how Vietnamese EV makers are giving the Chinese a run for their money.
I still see hardly any on the road and have gotten one only 2x in my nearly two years of calling for rideshare transport. This impression is confirmed by Kpler:
Since EVs are still a nascent phenomenon in the region, with only a 0.6% share in the total passenger car fleet, the projected gasoline displacement in 2024 was 13 kbd, approximately less than 1% of demand. 2024 was a pivotal year for the big car markets in the region as EV sales skyrocketed. Malaysia, which has a passenger car fleet nearly equal to its population, saw EV sales soar by approximately 70%. A similar trend was observed in Vietnam, but Indonesia led the race with a 164% jump, according to estimates. Although this growth is expected to continue, EVs are projected to account for just 6% of the regional passenger car fleet by the decade’s end due to the dominance of gasoline-powered vehicles and a substantial two-wheeler market.
2 From a new Financial Times story, The relentless innovation fuelling China’s ‘brutal’ car wars:
However sales in China, the world’s biggest EV market, are forecast to rise about 20 per cent to 12.5mn cars this year. As EVs start to outsell cars with internal combustion engines, 78 per cent of those sales are being soaked up by just 10 companies, including 27 per cent solely by BYD, according to HSBC data….
With a new car model released on average every two days in China, keeping pace with cutting-edge technology — such as assisted driving functions and the latest infotainment systems — has become crucial for survival as the market inevitably consolidates.
Ding said it had become “binary”, split between companies with “smart EV” capabilities and those without. She added that with the market for fuel-powered cars further deteriorating, the sector was entering a period of “the most brutal competition” in its history….
Foreign automakers’ market share hit a record low of 31 per cent in the first two months of 2025, a loss of one-third of the market since 2020.
UBS analyst Paul Gong said a $20bn average annual profit enjoyed by foreign carmakers in China over the past decade was at risk. If their market share fell to 20 per cent, they could be stranded with excess production capacity of 10mn units, he calculated.
Germany’s Volkswagen and Japan’s Toyota, two of the world’s largest car groups, are fighting back by investing heavily in local production and technology partnerships with Chinese companies. In recent weeks, BMW has announced tie-ups with Alibaba and Huawei, as foreign companies turn to Chinese-made software for a chance of survival.
3 From Reuters:
Last year, major Japanese carmakers exported almost 880,000 vehicles to the United States from Mexico, according to data from Mexico’s national statistics agency. While Toyota’s Tacoma pick-up was the most exported model, Nissan had the biggest share of any automaker, accounting for more than a third, with 327,000 vehicles, the data showed.
