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Auto Industry vs. Trade War: A bumpy ride awaits automakers after the new round of tariffs

One industry that remained on the receiving end at every stage of the tariff war between the US and China has been the automotive sector. If the governments go ahead with their latest plans with regard to bilateral trade, industry leaders like General Motors (NYSE: GM) and Ford Motor (NYSE: F) will be forced to revisit their strategies.

Going forward, American companies that export vehicles to China will have to deal with higher costs as a result of the latest round of tariffs imposed by Beijing. In the tit-for-tat tax hike announced last week, automobiles are also included.

Exit-China Call

China has proposed new tariffs worth $75 billion, days after the US government revised the duties levied on Chinese products. For automakers, however, the main cause for concern would be President Trump’s appeal to move their operations from China to other regions.

Also read: Fiat Chrysler Q2 profit rises despite lower revenues

Trump’s call comes at a time when the companies are required to focus more on Chinese production to meet demand in the local market, or else they will end up paying additional duty on vehicles shipped to the Asian country.

Concern for All

Ford Motor and Tesla (Nasdaq: TSLA) will be among the worst affected once the new tariffs are implemented. Globally, their European counterparts like Daimler and BMW, having production facilities in the US, will also feel the heat. General Motors has big plans for China as it is the company’s only major market outside the US, after exiting Europe.

Also see: General Motors Q2 2019 Earnings Call Transcript

In all likelihood, the standoff between the largest economies is unlikely to end in the near future, which means the only option left for the vehicle manufacturers is to find ways to limit its impact on their operations, both at home and in China.

Price Escalation

But, it is not as simple as it seems, for the Chinese market accounts for a major chunk of the carmakers’ quarterly revenues. In other words, the companies will be forced to compromise on margins by absorbing the additional Chinese duty, or else customers will dump imported vehicles due to the high prices.  

Related: What Tesla executives discussed at Q2 earnings call

For example, Ford recorded a 48% growth in China sales in the second quarter, while it witnessed declines in all the other markets except the US. Currently, Tesla is making hectic preparations to start production at its ambitious Gigafactory, betting on the Chinese market to drive future growth.

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