Trump’s tariffs drive up car prices, limit options for US buyers

Major carmakers can deal with President Donald Trump's tariffs on US car imports in a number of ways, but all lead to higher prices, fewer choices of models and limits on features for consumers, industry experts said.

Trump announced 25% tariffs on car and auto parts on Wednesday, sending global carmakers' shares down and raising fears of job losses in big car-exporting countries. He said the levies will ultimately boost production in the US, but analysts said the immediate effect will be on carmakers' choices that will hit consumers' wallets.

"Most car makers can't eat 25%, they just can't," said Andy Palmer, former CEO of Aston Martin.

"That means car makers will pass on as much of the cost of tariffs as they can", including by removing features to lower costs while also raising prices.

Carmakers may spread the costs between US-produced and imported models, cut back on features and, in some cases, stop selling affordable models aimed at first-time car buyers, as many of those are imported and less attractive if they carry a higher price tag.

The changes could price more Americans out of the market. S&P Global Mobility estimated on Thursday that tariffs will cause annual US vehicle sales to fall to a range of 14.5-million to 15-million in coming years from 16-million in 2024.

Cox Automotive estimated tariffs will add $3,000 (R54,807) to the cost of a US-made vehicle and $6,000 (R109,615) to vehicles made in Canada or Mexico without exemptions. While luxury sellers such as Bentley or Ferrari said they will pass on costs, major carmakers' typical margins of 6% to 8% leave little wiggle room.

Affordable models most likely to be affected include the Honda CR-V, Chevy Trax, Subaru Forester, Chevy Equinox and Honda HR-V, said Erin Keating, executive analyst at Cox.

"Car makers know they have certain vehicles in their portfolio that can tolerate lower profit margins," Keating said. "Some vehicles may prove to be too expensive, and most of those are affordable models manufactured outside the US."

After 10% of the car-buying population was priced out of the market during the coronavirus pandemic, affordability continues to remain high on consumers' minds, Keating said.

"Would tariffs bite into another 10% of people who would be priced out?" she said. "Potentially."

US car dealers have plenty of inventory - about 90 days worth - but prices could start to rise after that. In recent weeks, Eric Mann, sales manager at the Szott M-59 Jeep dealership in White Lake, Michigan, noticed more customers purchasing out of fear of higher prices.

Loretta Acosta, 55, of Macomb, Michigan, was checking out a Jeep Grand Cherokee at the Szott dealership on Thursday and said it "might stink" if car prices rise because of tariffs. "But I do feel like sometimes stuff stinks, and you got to put up with it for the betterment of the country," Acosta said.

'Everyone hurts'

European and Asian car makers, deprived of the largest car importing market, could cut production. If carmakers stop shipping a model to the US, that would translate into lower production at the factories. Lower volumes mean higher costs per vehicle, "which ultimately will be passed on to consumers" in those markets, Palmer said.

On Thursday Jeron Reed, 46, of Warren, Michigan, went to Matick Chevrolet in Redford, west of Detroit, to finalise a lease on a 2025 Equinox EV because of the tariff threat.

"What I'm hearing is within the next few weeks  prices are probably going to jump, and they're already high," Reed said.

Some companies selling US-made cars with a high percentage of tariff-exempt parts could raise prices to boost profits but keep them low enough to take market share from tariff-affected rivals.

Longer-term, major carmakers would have to decide whether to ride out tariffs on a bet they won't last, or spend two to three years moving production and supply chains under the expectations tariffs would last beyond Trump's presidency, said Mark Wakefield, global automotive market lead at consultancy AlixPartners.

"Those ones could be big winners in three or four years if the tariffs stay," Wakefield said. "Or they could be losers if it somehow unwinds and they're stuck with higher costs."

Newer carmakers such a Ineos Automotive do not have that luxury.

The France-based manufacturer started selling its off-road Grenadier model in the US early last year at an average price of about $85,000 (R1,552,869), said CEO Lynn Calder. Ineos has since sold 8,000 vehicles in the US, or 60% of its total.

"I don't think it's possible to pass a price increase in the range of 25% onto a consumer," she said. "But equally, it's also very clear we can't absorb it all."

She said Ineos will split the burden between the company, its dealers and consumers, a hybrid solution where "everyone hurts".