Moneycontrol Pro Panorama | US tariffs on autos put industry on edge

-

Dear Reader,

US President Donald Trump’s 25 percent import duty on automobiles and auto parts has sent the global auto industry into a tizzy, upsetting all guidance and forecasts of revenue and earnings growth for auto companies.

Come April 2, duties will be levied with no exception. Who gains and who loses with these tariffs is hard to tell at this point, given the complexity of global auto supply chains. Post-liberalisation, the 1990s witnessed manufacturing efficiencies and just-in-time deliveries as key drivers to be globally competitive, with every auto and component company aiming to be a global manufacturer. If Japanese, European and American vehicles made it on Indian roads, India’s cars from Mahindra & Mahindra or Tata or two-wheelers from Bajaj Auto or Hero MotoCorp and trucks from Ashok Leyland were exported to various countries. This is an era where auto parts criss-cross borders several times before the finished vehicle is finally made and shipped out of factories.

Talking of India’s auto sector, a handful of companies are bound to be dented severely. Topping the list is Tata Motors’ Jaguar Land Rover which has nearly a quarter or more of its cars exported to the US. A broad-brush estimate across brokerages indicates that India’s component makers are more at risk with companies such as Bharat Forge and Sona BLW, sans manufacturing units in the region, deriving 30-40 percent of their revenue from the US. Our MC Pro Research article indicates that about 29 percent of India’s auto parts exports are to the US. Read here for details of which Indian firms may veer off the highway due to tariffs.

Little wonder that Indian investors betting on the auto sector, which was so far in the fast lane, are spooked. The Nifty Auto index has hit the skids, falling 22 per cent from its peak in September, twice the decline in the Nifty 50 index.

There could be more headwinds, too. Reciprocal tariffs are yet to come into play and will be announced by the US on April 2. Auto sector analysts estimate that if one accounts for tariff matching, other local taxes and currency impact, Trump’s reciprocal tariffs could be upwards of 11 percent for India. This will further weaken the Indian auto industry’s competitiveness.

However, as stated earlier in this column, things are far from clear yet. Media reports citing the Global Trade Research Initiative’s less pessimistic stance offer some solace. It states that India's passenger car exports to the US are insignificant, standing at just $8.9 million in 2024, compared to the country's total global car exports of $6.98 billion, implying less than 1 percent exposure to the region.

Furthermore, the import tariffs apply to all countries, not just India, whose auto industry has proven efficiencies both in terms of quality and delivery timelines, so competitiveness vis-a-vis other countries should remain the same.

Also, Trump’s actions might backfire, given that its home-grown companies too import components. A Reuters report states that General Motors and Ford Motor assemble 48 percent and 18 percent of their cars sold in the US outside the country, respectively, according to investment research firm Bernstein. And if duties on auto parts do happen, the firm estimates the actual domestic content of Ford’s home-made vehicles at just 30 percent!

For now, the end game is not in sight. Each country will play its cards in response to Trump’s tariff announcements. In the near term, given that the US imports in the auto sector are significantly high, vehicles may get costlier in that country, amplifying worries of inflation. There would be the risk of shocks to auto and component firms as the impact of duties unfolds and the manner and quantum of impact that they would like to absorb or pass on to the end-user.

Simply put, the road ahead for the auto industry promises to be full of twists and turns, hair-raising bends, and giant potholes. Navigating it will be a challenge.

Investing insights from our research team

Should this auto ancillary find a place in your long-term portfolio?

ION Exchange: Will the two-pronged strategy work?

Sky Gold: Will the glowing performance continue?

What else are we reading?

L&T's unprecedented move in global energy

How SEBI's FPI disclosure rules will impact foreign flows

What's the main worry in India's economic outlook?

Data at a Glance | When was the last time policy uncertainty was so high?

Dr Copper's being served a bitter tariff pill

Data at a Glance: States’ growth ambitions clash with rising debt

Chart of the Day | India’s Digital Boom: What’s powering the rise of data centres?

Neogen Chemicals at a crucial juncture despite the fire accident

Can COMAC disrupt the Boeing-Airbus duopoly in global aviation?

The philosophy behind Trump’s Dark Enlightenment (republished from the FT)

Looking beyond Tesla versus BYD to tackle congestion

The ugly aftermath of West Bengal’s ‘Dalit emancipation’

Markets

India shines on foreign investors' radar this week with $1.4 billion of inflow, highest across Asian markets

Tech and Startups

India's IT services firms see over 60% of new deals slashed in tenure, signaling industry shift

Technical Picks: TATAPOWER, LIC, CGCL, HUL