The tariffs President Donald Trump plans to impose on imported steel and aluminum mean one thing for the automotive industry: Higher material prices will be passed down to the supply chain until they reach a party that can afford to absorb them.
Who that will be is something that will be argued for the rest of the year, according to people in the supplier industry.
"You're going to see a lot of negotiation to figure out who's going to pay for the increases," said Carla Bailo, CEO of the Center for Automotive Research in
Ann Arbor, Michigan.
Last week's announcement from Trump, more than a month ahead of an April deadline for rendering his decision, found suppliers, trade groups, consultants and automakers wondering how the 25 percent tariff on steel and 10 percent tariff on aluminum will be applied, how they will be levied and who — if anyone — might be exempted.
The industry has a long history of absorbing temporary price spikes in steel, oil, natural gas, coal and interest rates, even though there is no established procedure for sorting out unexpected supply chain expenses.
Ford Motor Company evidenced some vulnerability on controlling material costs even before last week's development. In January, Ford reported a thinner-than-expected fourth-quarter 2017 with an operating margin of 5 percent, blaming rising commodity prices, particularly for metals.
Mark Reuss, General Motors' head of global product development, purchasing and supply chain, said last week that the industry has done well at protecting itself from commodity price fluctuations. However, he added, "We've got to be ready to defend and be disciplined around how we buy and how we develop and engineer."
Bailo predicted there will be an immediate scramble by suppliers to find alternative sources for steel and aluminum to keep production moving. Manufacturers typically have some inventory of raw material in stock, so companies should have some time to make arrangements, she said.
Another issue will be whether U.S. mills have capacity available to accommodate new customers, especially for some specialty products that mostly come from overseas. "Some of the U.S. aluminum capacity no longer exists," she said, "and even if it does exist, it will take a while to get production going."
Suppliers with a global footprint for their product might have the option of relocating it to a plant in another country. Short of that, they will face exposure to the added tariff expense.
Automakers and suppliers try to buffer themselves from cost surprises by buying materials with long-term pricing contracts. Additionally, contracts between parts makers and automotive companies typically contain a ripcord that lets a supplier ask the car company for a price adjustment in the event of material price spikes.
Those clauses are usually intended to cover natural disasters, not political events.
"It's going to be a case-by-case negotiation with the customer," Bailo said. "There's no guarantee how it will be resolved. We'll see automakers trying to help their supply chains, but there is not a lot of extra margin in the system to pay for this."
If all else fails, the added metal costs will find their way into the sticker price of new vehicles. “There isn't much tolerance for higher prices there either,” Bailo added.
"We're already seeing new-car sales declining," she said. "Consumers are sensitive to vehicle prices and automakers have worked very hard to make their prices competitive.
"There really isn't a lot of wiggle room in the system right now."
Chappell, Lindsay. (2018). “Who will get stuck with tariff bill?” Retrieved from http://www.autonews.com/article/20180305/OEM01/180309697/auto-suppliers-tariff-supply-chain.