The clock is ticking.
As of this writing, tariffs of 25% on imported goods from Canada and Mexico are set to go into effect on Tuesday. President Donald Trump is banking on the idea that these tariffs will spur more U.S. manufacturing and stem what he claims is the flow of drugs and illegal entries into the country. But what’s certain for now is that the global automotive industry is bracing for the worst from all of this chaos.
We’re taking a look at the whole picture in today’s edition of Critical Materials, our morning roundup of industry and technology news. Also on deck today: a look at how the Chinese smartphone giant Xiaomi played by a different set of rules to get into the carmaking game.
30%: Bracing For The Worst From Tariffs
Photo by: Cadillac
The industry got a reprieve last month, and something like that could happen again today. For now, the car industry is bracing for the worst as the tightly integrated U.S.-Canada-Mexico supply chain potentially gets hit with huge price increases via these new tariffs.
Certainly, these tariffs would affect electric vehicles. Many of them are made in Mexico, including several of General Motors’ EV models and the Ford Mustang Mach-E. But the broader problem is that they would hit the entire industry at a very fragile time, when it’s reeling from higher interest rates and still trying to invest in a more electrified and software-driven future.
If you like the Chevy Equinox EV, for example, know that it was likely financed by profits from trucks like the Chevrolet Silverado. (The gas one, not the other one.) But as the Financial Times reports, more than 50% of them last year were built in Mexico or Canada, and with countless components from all over the world. If those trucks get more expensive—and the parts to make them do too, especially if they are hit with tariffs each time they cross the border—that’s tremendously bad for GM’s profits and its future plans.
Here’s a sobering look from the Associated Press:
If the president goes ahead with 25% taxes on imports from Canada and Mexico on Tuesday, he will disrupt more than $300 billion in annual U.S. automotive trade with its two neighbors, wreck supply chains that have been operating for decades and likely push up the already-forbidding price of new cars.
The tariffs pose an “existential’’ threat to North American auto production, said David Gantz, a fellow at Rice University’s Baker Institute for Public Policy. They will push up “the cost of everything that’s imported from Mexico or Canada that goes into a car assembled in the U.S.’’
Kelley Blue Book says Trump’s tariffs could raise the U.S. price of the average new car—already approaching $49,000—by $3,000 or more. The price of some full-size pickup trucks could shoot up by $10,000.
The economic pain would intensify if Canada and Mexico counterpunched with tariffs on American exports.
“The economic impact of a sustained 25% tariff on Canada and Mexico would be severe, with full tit-for-tat retaliation likely to push Canada and Mexico into a recession and the U.S. to a point of stagnant growth,’’ Andrew Foran of TD Economics wrote. Foran estimates that 25% tariffs would push down auto sales by 13.6% a year in Canada and 10.6% in the United States.
The most vulnerable automakers could well be Stellantis, Nissan and Volkswagen, but nobody is immune.
Needless to say, this throws pretty much all future plans into disarray in the auto business. And we likely won’t see anything close to “normal” until it is resolved.
60%: Suppliers Squeezed Out Too
We all know that if the EV tax credits go away, sales of new electric models will slow, although given global trends that is hardly the end of the electrified era. But that situation, plus interest rates and now tariffs, have auto industry suppliers—the companies that make the parts on your car—looking to enter slowdown mode in 2025.
Here’s Automotive News with more:
Major North American suppliers are reducing engineering and R&D spending and cutting thousands of jobs to support profit margins as they anticipate weak new-vehicle sales growth and electric vehicle sales uncertainty.
Lear Corp., for example, cut about 15,000 jobs worldwide in 2024, a figure it expects to match in 2025. “The actions we are taking will continue to improve efficiency in our operations,” said Lear Corp. CEO Ray Scott during a Feb. 6 conference call with investors.
The days of suppliers touting huge investments in engineering and retooling plants for EV parts production are over. Today, it’s become more fashionable for suppliers to find ways to save money in a highly uncertain market, and to prioritize free cash flow and shareholder returns.
Suppliers including Lear, Dana, Magna International and BorgWarner have detailed layoffs, factory closures and spending cuts in recent months. Companies have pointed to potentially weak new-vehicle sales growth, lower-than-expected EV production and high labor costs as reasons.
The auto industry was already facing a rocky transition period. But this phase of uncertainty and economic weirdness is the cherry on top of it all.
90%: Inside Xiaomi’s Rise In The EV World
Photo by: Xiaomi
Meanwhile, China’s auto industry, while far from invincible, is not slowing down.
Have you wondered how smartphone giant Xiaomi got an apparently world-class EV on the road so quickly, despite having zero past experience with cars? Or how the SU7 seems to be a Porsche-grade performance vehicle to boot? The Wall Street Journal has more on the rise of this company, which now has plans to sell cars outside of China over the next few years.
We wrote about Xiaomi and its celebrity founder Lei Jun last year, but the WSJ has more on how he gambled big on EVs with a new kind of business model:
Xiaomi’s rise could probably happen only in China. Chinese EV makers control nearly every aspect of manufacturing and can turn to domestic suppliers for most of their materials and parts. That makes their operations more efficient than those of non-Chinese car manufacturers, which depend on a global supply chain that is susceptible to delays, price fluctuations and logistical hiccups.
The local government of Beijing, eager for a hometown carmaking champion, pulled strings to fast-track the central-government approvals needed to launch Xiaomi’s carmaking, according to people familiar with the matter. Whatever Lei needed, he could readily find it in his country—including the thousands of construction workers needed to put up a plant the size of 135 football fields in 19 months.
[…] To keep the price down, Lei decided Xiaomi should make barely any profit on the cars to start and hope for future profits by selling car software and other services, according to people with knowledge of his strategy. Several suppliers said they felt squeezed, but the firms Lei was pressuring often owed their start, in part, to his investments or early support. Plus, association with Lei was a badge of honor that could open doors with other clients.
Drawing on its R&D team of tens and thousands of people and profits from the smartphone business, Xiaomi invested in production technology that could save money in the long run.
And they had big advantages with being able to start fresh, which meant adapting Tesla-style manufacturing from the get-go instead of learning how to do it later on like most so-called “traditional” automakers:
Foremost was an idea borrowed from Tesla. Xiaomi called it the hypercasting machine, which employs large-scale, high-pressure aluminum die-casting to create car frames. Automakers traditionally forge dozens of parts separately and weld them together. The Xiaomi machine, several stories high and two basketball courts long, creates a car frame as a single piece in 100 seconds, taking molten metal heated to 1,300 degrees Fahrenheit and dunking the shape into 45-degree water to harden it.
A perfect recipe for making Xiaomi into a nascent car powerhouse. Which begs the question…
100%: Will Tariffs Reset The U.S. Auto Industry, Or Just Put It Further Behind China?
Photo by: Chevrolet
China is offering unprecedented levels of support for its auto industry. Meanwhile in America, nobody can figure out how or where to build a Silverado truck anymore. What’s the ultimate outcome of all of this? Will it lead to a renaissance of domestic carmaking, or just lead to long-term decline? Let us know what you think in the comments.
