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Trade policy uncertainty is once again swirling on Wall Street after President Donald Trump confirmed that he will impose a 25% tariff on car imports. The tariffs will go into effect on April 3 and cover imported finished cars and car parts, including from major trading partners Mexico and Canada. Car parts may have slightly longer before tariffs are levied, with the White House setting the date as no later than May 3.
After the announcement of these tariffs, auto stocks are trading sharply lower today. The price action is not surprising as foreign automakers import finished cars worth billions of dollars every year into the U.S. and these vehicles would now be subject to a 25% tariff which Trump emphasized is “permanent.” U.S.-based automakers like Ford (F) and General Motors (GM) also build some of their cars in Canada and Mexico. The North American automotive industry is among the most integrated globally, and some parts can cross borders multiple times before a vehicle is finished and assembled.
Unlike its legacy peers, Tesla (TSLA) is a more vertically integrated company and makes many of its parts in-house. During its Q3 2020 earnings call, Tesla CEO Elon Musk famously said, “Tesla is absolutely vertically integrated compared to other auto companies or basically most any company.” He added, “We have a massive amount of internal manufacturing technology that we built ourselves. We literally make the machine.”
Tesla will be perhaps the least impacted by Trump’s auto tariffs as the company produces the bulk of its parts in the U.S. While Musk said that the impact from these tariffs will be “significant,” it will be nowhere close to the impacts felt by other automakers.
Trump did say that Musk, who happens to be one of his key advisors, did not weigh in on the auto tariffs “because he may have a conflict.”
What Do Trump’s Tariffs Mean for Tesla?
One argument could be that since Tesla is much less reliant on imports as compared to other automakers, it will be less impacted by the tariffs and will therefore be a relative winner. We can draw an analogy with the EV price war that Tesla started with its price cuts. The Elon Musk-run company boasted of industry-leading margins and could afford to cut prices. For smaller companies, the price war expedited their demise and in some cases, caused them to go bankrupt.
The U.S. is Tesla’s largest market and it the company is likely to have a relative advantage over other automakers once the tariffs take effect.
However, there is another side of the story in which Tesla might find itself trapped in the crossfire amid retaliation from other countries.
Other Countries Might Retaliate Against TSLA
There are already signs of countries targeting Tesla for Trump’s tariffs, and Canada has frozen all rebates for Tesla while excluding the company from any future rebates. The company was also recently removed from the Vancouver Auto Show over safety concerns.
Tesla facing retaliation for Trump’s tariffs is not surprising given how closely Musk has associated himself with Trump, just as the brand Tesla is so interwoven with Musk. Plus, these trade actions are perhaps coming at one of the worst times since Tesla’s sales have already sagged in Europe and China.
Tesla’s sales in China fell to a two-year low in February and its shipments were less than a tenth of BYD’s (BYDDY), which looks on track to grab the title of the largest battery electric vehicle (BEV) seller from Tesla this year. Tesla’s sales in Europe have also nosedived and fell 42.6% year-over-year in the first two months of the year. While some customers might be holding back their purchases for the long-promised low-cost vehicle and Model Y refresh, Musk’s politics seems to have warned off some potential buyers. We’ll get more insights into Tesla’s shipments when the company releases its Q1 delivery data early next month, but things are not looking bright for the EV giant.
Overall, Tesla would stand to lose less from the tariffs compared to other auto companies. However, I would still not add more shares to my position now given the multiple headwinds that the company is facing.
On the date of publication, Mohit Oberoi had a position in: TSLA , F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
