U.S. automakers and parts suppliers were among the sectors hit hardest in early trading May 31 after President Donald Trump’s threat to impose a tariff of up to 25% on Mexican goods. General Motors Co. and Ford Motor Co. each fell more than 3%.
The latest blow in the trade disputes adds to a month that has trimmed 12% from the 24-member S&P Supercomposite Automobiles and Components Index, shaving about $20 billion in market value in May through May 30. It was on track to be the worst month for the sector since December’s 14% slump, although the May 31 declines could push the group beyond that.
“Given this Mexico news was a big surprise, the short-term move in stocks can be anticipated to be even more severe,” Evercore ISI analyst Chris McNally wrote in a note to clients, adding that the market had stopped worrying about the risks surrounding the North American Free Trade Agreement.
U.S. auto companies, ranging from carmakers to suppliers, have a significant exposure to Mexico, and this latest sudden maneuver — if ultimately implemented — may drag down the stocks an additional 5% to 10% if the “theme is present for the entire second half” of the year, Evercore’s McNally said.
Ultimately, such a tariff would raise the costs of almost all vehicles, analysts said. However, all carmakers may not be equally successful in passing down the costs to customers and may take a bigger hit to their profitability.
“Without a response from manufacturers or the supply base to shift production footprints, this would likely increase the price of vehicles for the consumer and negatively impact automaker/supplier margins,” Goldman Sachs analyst David Tamberrino wrote in a note.
We’re investing $24 million in our #FortWayne Assembly plant to increase production of the all-new @chevrolet Silverado 1500 and @GMC Sierra 1500. #USManufacturing https://t.co/tZkZuZqVaA pic.twitter.com/Vi2925rk7G— General Motors Manufacturing (@MFG_GM) May 30, 2019
GM is broadly expected to fare worse in this situation compared to peer Ford, given GM’s greater exposure to Mexico. According to RBC analyst Joseph Spak, about 28% of GM’s 2019 North American production is being done in Mexico, compared to about 10% of Ford’s. For Tesla Inc., about a quarter of the content for the Model 3 sedan comes from Mexico, Spak added.
Citi analyst Itay Michaeli said a 5% tariff could become a “several-hundred-million-dollar” hit to annual earnings for GM. GM shares fell as much as 4.5% on May 31, while Ford slipped as much as 3.4%.
The cost to protect GM and Ford debt against default in the credit default swaps market jumped to the highest levels since January.