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The U.S. auto industry has been experiencing a bull run for the last few years. Sales in 2016 are likely to be 17.5 million autos, in line with the figure recorded in the previous year. The trend is likely to continue into 2017, before dropping to the 16 million range.
However, political events and market instability could lead to an early decline. President-elect Donald Trump’s policies on imports and economic relations with other countries are expected to impact the industry significantly.
One China Policy
The U.S. auto industry may face challenges in the world’s second largest economy due to political reasons. Trump’s out-of-protocol decision to acknowledge communication from the President of Taiwan goes against the “One China Policy”. This may hurt the U.S.-China trade relations. Trump asserted that the U.S. is not bound by the policy that categorizes Taiwan under “one China”. This is likely to impact the friendly relations that have lasted for decades.
While China is not expected to create any military pressure on the U.S., recently the nation’s official newspaper China Daily revealed a state planning official’s claim that the country will soon fine a U.S. automaker for monopolistic behavior and price fixing. However, no particular company has been named by the official. While the article stated that nothing improper should be read into the matter, shares of General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) were hit by the announcement. However, no official statement regarding the matter has been released by the government so far.
Moreover, the U.S. and China may face other trade problems if Trump puts tariffs of up to 45% on Chinese imports, as per his previous announcements. Shares of Tesla Motors, Inc. (TSLA - Free Report) and PACCAR Inc (PCAR - Free Report) also fell roughly 0.6% and 0.5% to close at $197.58 and $65.37, respectively, on Dec 15.
Production Problems
During his campaign, Trump had claimed to prevent outsourcing of manufacturing from the U.S. A number of domestic automakers plan to move the production of smaller cars to Mexico for cheap labor. They claim the production of small cars is not profitable in the U.S., unlike the SUVs which are sold for a higher price. The production can easily be shifted under The North American Free Trade Agreement (“NAFTA”) but if Trump decides to call off the agreement, it may cause problems for automakers. His final policy on the increase of taxes on cars produced in Mexico and changes to NAFTA are expected to impact the auto industry significantly.
Trump stated that he will not let car makers shift production facilities from the U.S. to Mexico as this will lead to a transfer of available jobs from U.S. to Mexico. Automakers, however, find it unprofitable to continue production of small cars in the country. Meanwhile, U.S. producers such as Ford and General Motors along with heavy equipment makers like Caterpillar Inc. (CAT - Free Report) and many of their suppliers have invested billions of dollars assuming the continuation of relatively open trade of U.S. with Mexico, China and other countries.
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Should Automakers Fear a Trump Presidency?
The U.S. auto industry has been experiencing a bull run for the last few years. Sales in 2016 are likely to be 17.5 million autos, in line with the figure recorded in the previous year. The trend is likely to continue into 2017, before dropping to the 16 million range.
However, political events and market instability could lead to an early decline. President-elect Donald Trump’s policies on imports and economic relations with other countries are expected to impact the industry significantly.
One China Policy
The U.S. auto industry may face challenges in the world’s second largest economy due to political reasons. Trump’s out-of-protocol decision to acknowledge communication from the President of Taiwan goes against the “One China Policy”. This may hurt the U.S.-China trade relations. Trump asserted that the U.S. is not bound by the policy that categorizes Taiwan under “one China”. This is likely to impact the friendly relations that have lasted for decades.
While China is not expected to create any military pressure on the U.S., recently the nation’s official newspaper China Daily revealed a state planning official’s claim that the country will soon fine a U.S. automaker for monopolistic behavior and price fixing. However, no particular company has been named by the official. While the article stated that nothing improper should be read into the matter, shares of General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) were hit by the announcement. However, no official statement regarding the matter has been released by the government so far.
Moreover, the U.S. and China may face other trade problems if Trump puts tariffs of up to 45% on Chinese imports, as per his previous announcements. Shares of Tesla Motors, Inc. (TSLA - Free Report) and PACCAR Inc (PCAR - Free Report) also fell roughly 0.6% and 0.5% to close at $197.58 and $65.37, respectively, on Dec 15.
Production Problems
During his campaign, Trump had claimed to prevent outsourcing of manufacturing from the U.S. A number of domestic automakers plan to move the production of smaller cars to Mexico for cheap labor. They claim the production of small cars is not profitable in the U.S., unlike the SUVs which are sold for a higher price. The production can easily be shifted under The North American Free Trade Agreement (“NAFTA”) but if Trump decides to call off the agreement, it may cause problems for automakers. His final policy on the increase of taxes on cars produced in Mexico and changes to NAFTA are expected to impact the auto industry significantly.
Trump stated that he will not let car makers shift production facilities from the U.S. to Mexico as this will lead to a transfer of available jobs from U.S. to Mexico. Automakers, however, find it unprofitable to continue production of small cars in the country. Meanwhile, U.S. producers such as Ford and General Motors along with heavy equipment makers like Caterpillar Inc. (CAT - Free Report) and many of their suppliers have invested billions of dollars assuming the continuation of relatively open trade of U.S. with Mexico, China and other countries.
Auto-Tires-Trucks Sector 5YR % Return
Auto-Tires-Trucks Sector 5YR % Return
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>