GM Tumbles After Trump Slaps Tariffs On Mexican Imports

GM Tumbles After Trump Slaps Tariffs On Mexican Imports
June 3, 2019

 

Last Thursday, US President Donald Trump announced a 5% import duty on all Mexican goods, effective June 10th, if the country does not take proactive measures to prevent its residents from crossing over to the US as it liquidates the US-Canada-Mexico deal finalized recently. Furthermore, Trump has mentioned that the import duty will be increased to 10% on July 1st, with a 5% monthly hike after that until it reaches 25%.

The decision to slap import duties are widely seen as an attempt to put an economic partner under pressure by leveraging business ties, a tactic which the US is currently applying on China as well. Earlier this month, following a disagreement over a trade agreement with China, the White House slapped a 25% import duty on $200 billion worth of goods. Following Trump’s announcement, the shares of global automakers, including Ford Motor Co., Volkswagen AG, and Toyota Motor Corp. was beaten, resulting in an erosion of $17 billion in market capitalization.

Mexico is the predominant supplier of auto-parts and vehicles to the US, which implies tariffs would considerably increase overall expenses of almost all the major automakers. As discussed below, the import duty is expected to affect the performance more of General Motors Company (NYSE: GM) than Ford Motor Co or Fiat Chrysler. On Friday, the stock closed at $33.34, down $4.25 or 1.48% from the prior close.

According to a research note by Deutsche Bank, GM imports nearly 29% of its auto parts from Mexico, compared with 17% and 24% by Ford and FCA.

Regarding the impact of tariffs on the cost of vehicles, Seiichi Miura, an analyst at Mitsubishi UFJ Morgan Stanley, said “Tariffs will mean higher price tags on cars for sale in the U.S., and that will hit sales. While the impact will differ for each carmaker, all of them have moved into Mexico.”

In Mexico, GM manufactures include Chevrolet Blazer SUV, several variants of Chevrolet Silverado, and also GMC Sierra Crew Cab pickups, GMC Terrain, Chevrolet Trax, and Chevrolet Equinox.

Of the 585,581 Silverado pickups sold last year in the US, 236,146 were imported from Mexico, as per data provided by Deutsche Bank. Likewise, 219,554 Sierra pickups were sold by GM last year, and 78,209 of those were manufactured in Mexico.

Jessica Caldwell, Edmunds’ executive director of industry analysis, opined that the overall profitability of GM would be affected by the decision to slap import duties.

Jessica Caldwell said, “Profits from vehicles like the Silverado keep GM’s lights on, and if you start to put that at risk, it could be disastrous considering they’re already in cost-cutting mode.”

There is an increasing demand for Blazer SUVs in the US, and the inventory levels are low. Therefore, according to Michelle Krebs, executive analyst with Cox Automotive’s Autotrader, Trump’s announcement is perceived as a blow to GM.

On the effect of tariffs on GM, Krebs said: “There will be an impact on GM because they’re quite vulnerable.”

Krebs also mentioned that the profitability of Silverado would be affected. He said, “They’re building the Silverado there. That’s their cash cow. That’s probably more concerning.”

Krebs is also not sure what GM will decide: to absorb the rise in costs as it happened in case of steel and aluminum tariffs last year or increase prices of all the vehicles in order to prevent the price of a vehicle affecting the sales of another. Notably, earlier this month, the US announced that it would remove tariffs on steel and aluminum from Mexico and Canada, ceasing a yearlong deadlock that resulted in losses worth billions for Detroit manufacturers and crippled small suppliers.

Regarding the production of the crossover SUV Blazer, Kristin Dziczek, vice president of industry, labor, and economics for the Center for Automotive Research in Ann Arbor, said: “The Blazer is the least of our worries. It’s a political hot button, but the Blazer is only 50,000 units a year. We’re looking at 600,000 units in pickups built in Mexico, so there’s no comparison in terms of the impact of this tariff on GM.”

Considering Trump’s behavior in the past, Dziczek opined that the most challenging task is whether the announced import duties are simply a threat or would become a reality.

Regarding the approval of reworked NAFTA deal, Dziczek said: “Will the new NAFTA agreement pass with this hanging over it? Congress has to consider that (threat). It makes it very difficult to ratify the new NAFTA, so that’s even more uncertainty over the cost to the auto industry. What the auto industry craves is certainty. Right now, we see a lot of investment sitting on the sidelines.”

GM is already facing a lot of opposition for its decision to shut down five factories in the US in 2019. Still, Dziczek believes that GM will be hesitant to move the production of Blazer to the US.

On the question of shifting production to the US, Dziczek said: “A move to the US is a move to a higher-cost region, and that has implications for productivity, for jobs, for wages, for everything. With market growth slowing, the companies are not looking to duplicate capacity, so asking them to duplicate facilities puts them in financial strain.”

If the import duty is implemented, analysts anticipate that automobile manufacturers and suppliers will have to spend an additional $23 billion, an amount Deutsche Bank analyst Emmanuel Rosner believes “could cripple the industry.”

Commenting on the margins and possibility of an increase in the cost of vehicles, Janet Lewis, an analyst at Macquarie Securities, said: “Margins are so thin in the US market right now that there’s no way that any automaker is not going to pass on these tariffs to their customers.”

The decision to slap import duty on Mexican goods is anticipated to have a negative effect on the stock of General Motors in the days to come.

Technically, the stock is trading below its 50-day moving average. The MACD indicator has a negative reading. The next major support for the stock is expected only at 31 levels. As a result, we can expect the stock to move down in the short-term.

gm - technical analysis - 3rd June 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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