Tariffs compound problems for carmakers

Shares in listed car manufacturers have performing badly over the last year. There were obvious problems with demand for their petrol and diesel products and with the competition from Chinese makers and Tesla in battery cars. Mercedes shares are down 36%, BMW 40%, VW 30% and Stellantis 65%. The Japanese industry, with important plants in the UK, has seen Toyota fall 35% and Nissan 47%.

The US tariffs

The vehicle industries of Europe and the UK now face tariffs of 25% on exports to the US. This large increase will mean lower margins, more cost reductions, some price rises and lower sales volumes. Stocks of vehicles have been sent to the US ahead of the tariff imposition. Jaguar Land Rover is taking a month off making and sending more, to see what happens to sales volumes.

The European Union's (EU’s) two main export markets are the US and the UK. In 2024, the EU sold $39bn of cars to the US and $34bn to the UK. The UK sold 20% of its car exports to the US last year, a period where sales to the US grew well and sales to the EU contracted.

The EU, particularly Germany, is much more dependent on its car industry than the UK. The EU made 12. 2 million cars last year, with another 2.6 million commercial vehicles, bring the total to 14.8 million. UK output has now fallen to less than 800,000 cars a year, and the government has opting to cease all petrol and diesel car manufacturing by 2030, five years earlier than the EU.

The impact of net-zero policies

Both the EU and the UK wish to end use of the internal-combustion engine and switch to battery-powered vehicles. They accept they may need to move to hydrogen for trucks and some buses. The leading auto companies have encountered substantial consumer resistance in selling battery-powered cars. The places where it has been most successful relied on substantial subsidies, tax breaks and helpful regulation to make them more affordable.

Meanwhile, China has become the world's largest car market and largest producer of affordable battery cars. China saw the trend coming and made large investments in making batteries and electric cars. They also secured access to supplies of the important metals and rare-earth minerals to make the batteries.

The EU and UK industries are finding it expensive to design and build the new battery cars, to put in the new assembly lines for them, and to attract battery making capacity. The vehicle is built round the battery which is a big part of the total cost. The firms must also pace the write-off of all the fixed assets, plants and sunk capital in the petrol and diesel models being discontinued.

Changes to the UK’s Zero Emissions Vehicle Mandate

It is likely the UK government will exempt small volume producers of expensive specialist cars such as Aston Martin from the policy. They will also allow hybrid vehicles to be sold between 2030 and 2035. It will cut the tax per car levied on the sale of too many petrol or diesel vehicles from £15,0000 to £12,000.

The industry is constrained from making and selling the diesel and petrol cars people want to buy by the rising proportion of output that is required to be battery cars under this mandate. The carmakers see these modest changes as insufficient, leaving most of them to ration their sales of petrol cars if they cannot sell sufficient battery cars.

The industry is pressing hard for more financial incentive and support to persuade more people to buy the battery cars the government wants them to purchase. There is the danger for UK carmakers that the Chinese will push many more low-price or discounted battery cars into the UK market, given the tariffs on them into the US and EU.

The impact of the high tariffs

Last year brought falls in EU and UK car output, owing to customer reluctance. This year, lower exports to the US will hit cashflows on top of the green transition issues. Governments and the industry will blame the tariffs more as it is not their policy and represents a useful explanation for wider problems of the industry.

Stock markets have rightly marked down the prices of many automakers shares to reflect the likelihood of lower volumes of sales and reduced profitability. There are growing concerns about the pace of transition to battery vehicles given customer resistance. The industry must increase capital spend for transition at a time of falling margins and profits. It will need to borrow more to pay the bills.