Tariffs, the American Automobile Industry, and Tesla

 AMERICAN AUTOMOBILE INDUSTRY


Tariffs on imported cars should help American car companies. But it is more complicated.


Tariffs on "Mexico" will hit American car companies and their suppliers particular hard. Trump has threatened to raise tariffs on Canadian car imports in order to "permanently shut down the automobile manufacturing business in Canada." Most of the imported cars from Canada are made by American car manufactures. 


Almost half the cars sold in the United States are imports. About 23% of cars sold in America come from Mexico; another 10% come from Canada. Most of them are assembled by American car companies. 


About $100 billion in parts and subassemblies cross the border and will have to pay the tariff, in addition to the tariff on completed cars that are imported. Price of cars in America will go up and possibly car sales will go down. American car manufacturers are in poor financial shape and cannot afford to absorb the cost increases.


One way to avoid paying the tariffs on cars in America is to buy a Honda. Hondas are assembled in America; Hondas also have the highest percentage of American-made parts than any other car. This only applies to gas-powered cars. This does not apply to Acura. 


One example is ZF, a major manufacturer of transmissions. ZF has plants in the U.S., Mexico and Canada. A major part of its transmissions are made in Mexico. They is sent to the U.S. The transmissions are then shipped back to Mexico to be installed in most of the American cars produced there.


American auto executives must be in shock (or very scared).  The average cost of cars will go up at least $2,700, and more for big pickups and big SUVs (Barclay’s Bank). Barclay’s Bank analysts also estimate that tariffs “could wipe out…all profits” of the three American car companies. Or worse. Profits are a major source of investment capital. If this happens, it implies that the Big Three American car companies will not have the cash flow to invest in EVs. That means eventual extinction.


Taxing big pickups and big SUVs plus higher gas prices plus tariffs on steel and aluminum strike at the heart of the American way of life. 


TESLA


The United States effectively bans Chinese EVs. This is good for Tesla. Despite this, Tesla sales are down in the U.S. and Tesla is losing EV market share in the United States, as in Europe and China.


EVs are especially vulnerable to the tariffs on China since a high percent of EV car batteries are made in China. Batteries account for about 40% of production costs.


Tesla has huge plants in the U.S., China, and Germany. The company does not export cars produced in China to the U.S. but it does export cars to Canada and Europe.


Surprisingly, the company that could be hurt the most is Tesla, not directly by tariffs but by being identified with Trump's tariffs.


Tesla had troubles even before Musk's role in the government. Globally, Tesla sales in 2024 were flat, compared to a 40% increase in 2022 and a 38% increase in 2023. Teslas are becoming less competitive as Chinese cars offer more models and lower prices, wizzy electronics, "infotainment" and driver-assisting features. Tesla does not need a global political backlash on top of its weakening global market sales and market share. 


Data from the China Passenger Car Association showed that Tesla’s February sales, which includes exports and domestic sales from the Chinese plant, dropped 49% year-over-year. Shipments from Tesla's Chinese plant are the lowest since 2022. I doubt if any patriotic Chinese will now buy a Tesla. 


Already, Tesla sales in Europe are going down. In January, Tesla's sales in Europe fell 45% - 76% in Germany while overall EV sales were up. Another big drop in February. The European press has reported a great deal of anger at Trump and Musk and organized protests and business boycotts aimed at Tesla.


Tesla’s sales fell in Europe for the second consecutive month. The company sold 17,000 electric vehicles in the region in February—a 40% decline from one year earlier. The drop came despite a 26% rise in EV sales over the same period. Mr Musk’s support for hard-right parties, including the Alternative for Germany, has alienated some European consumers.



Sales in the U.S are going from spectacular growth to no growth. In 2024, EV sales in the U.S were up 7% but sales of Teslas were down 1%. Sales would have been even lower if not for a surge in sales after Trump’s election, and reduced prices. Profits are down over 50%. U.S. sales were down 11% in January.


Things might get worse because the political backlash aimed at Musk might reduce American sales and profits more; someone in marketing must know that a large part of Tesla’s target market are liberal, higher-income, and environmentally aware. And I doubt if there will be many new Teslas in federal government parking lots or family farms or in the driveways of veterans.


Tesla’s stock price rose after Trump’s election and is now getting clobbered. As of March 10, Tesla is the worst performing stock in the S&P 500 this year; it has since partly recovered. But the P/E ratio is still very high, about 130 times 2024 earnings per share (EPS). Any fall in earnings per share will lead to another large decline in Tesla's stock price. In the worse case scenario, Tesla's investment in its huge plants in China and Germany could be financial disasters.


Elon Musk is proud that all Teslas sold in America are assembled in America. But 40% of its car batteries are from China. The company also buys parts from Mexico and Canada. 


There could be retaliation against American companies in China and elsewhere. In the extreme, the Chinese government could seriously weaken Tesla sales in China and exports to other countries. Currently, the Chinese government considers Musk a "friend" and a possible pro-Chinese voice in the administration. But as tariffs climb and rounds of "reciprocal" tariffs kick in, the China government might reconsider.


If the Chinese government banned Teslas in China in retaliation to the U.S. effectively banning Chinese EVs, China could probably destroy Tesla as a company.


Although sales are falling in the U.S, what will keep Tesla afloat is that the U.S. government effectively bans imported Chinese EVs. And tariffs on American EVs produced in Mexico should also help, although they are much less of a competitive threat than Chinese EVs would be.


China is a bigger EV market than the U.S, about 13 million compared to about 1.6 million in the U.S. in 2024. EV sales in China in 2024 were half of all car sales, compared to 10% in the U.S. 


Tesla's sales in China, as a percent of all EV sales in China, are going down rapidly as Tesla now competes with dozens of Chinese and European EV producers.


In the first quarter of 2025, sales were down 13% and operating profits down 71%. Much of Tesla's profits are carbon credits it sells to American car companies. Trump has announced he would like to eliminate this program.

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