Trump has 3 months to avoid sending the auto industry into a downturn

Advertisement
Trump has 3 months to avoid sending the auto industry into a downturn

Donald Trump

Mark Wilson/Getty Images

Trump has three months to make this deal.

Advertisement
  • All three major US automakers have lowered their full-year profit forecasts for 2018.
  • Trump's trade wars and tariffs are hurting the business both in the US and China, the world's two biggest markets.
  • The auto industry has been predicting a downturn, but GM, Ford, and FCA might have sent a unified signal to Trump that if changes aren't made fast, the slide could arrive ahead of schedule.

Wednesday wasn't a good day for the US auto industry. It began with the tragic news that Fiat Chrysler Automobiles CEO Sergio Marchionne had died after complications from surgery, and it ended with Morgan Stanley analyst Adam Jonas asking Ford CEO Jim Hackett if Hackett thought he'd be keeping his job.

In between, General Motors, Ford, and FCA all lowered their full-year profit forecasts while reporting second-quarter results, and Ford missed on Wall Street's earnings expectations. (Hackett, by the way, told Jonas he wasn't going anywhere.)

GM in part blamed the Trump administration's tariffs on aluminum and steel for contributing to an unexpected $1 billion headwind for 2018. Ford also had to deal with more expensive steel due to tariffs, as well as a fire at a supplier that curtailed pickup-truck production and a panic-inducing meltdown of the carmaker's China operations. Hackett also revealed that Ford needs to spend $11 billion over the next three to five years to fix its business.

Everybody's stock slid, with Ford now perilously close to falling into single digits.

Advertisement

To put this all in perspective, the Big Three all made money in the quarter, the US auto sales market has been booming for three years, unemployment is very low in the United States, and gas is still relatively cheap. There are always problems in the car business, but for the most part, the business has been pretty good.

But Trump has done everything he can think of to create new problems. The tariffs, which have had an immediate negative impact on Detroit's costs, are just the tip of an ugly iceberg.

Hatred for American cars in China?

China Buick

Wikimedia Commons

A Buick Regal in China.

Discussing second-quarter results with Wall Street analysts, GM executives were asked if the mounting trade war between the US and China is engendering anti-American sentiment in the Middle Kingdom, the world's largest vehicle market and where GM is looking for future growth.

"We haven't seen any of that yet," CFO Chuck Stevens said. But he evoked the specter of Japanese and South Korean difficulties with the issue in China - somewhat damaged those countries' ability to sell cars to Chinese consumers.

Advertisement

In the context of trade hostilities with China, Ford is now facing a wholesale restructuring of its business in the region after a swoon in sales, with predictions that duties and tariffs could cost the automaker upwards of $300 million in 2018.

FCA, meanwhile, saw a collapse in Maserati sales in China thanks to the uncertain sales and import market that the trade war has induced.

If anybody thought that the industry could ride out 2018 without feeling any pain from Trump's moves, they were wrong. The pain has arrived swiftly.

Far-reaching consequences

US Auto Sales Graphic

Business Insider

And it could have far-reaching consequences. Nobody in the Trump administration has thought this through, and now that they've started a trade war, they can't lose it. While Detroit's big three are all in relatively good financial shape after years of strong sales, they aren't immune to difficulties - the business is extremely capital-intensive in the best of times and harrowingly so when a positive environment swings negative.

Advertisement

With the US sales cycle extended well past a logical downturn point - an annual selling pace of near-or-above 17 million vehicles has persisted since 2015 - Detroit has been waiting for tougher times to arrive. They might have held off until 2019, given that profitable pickups and SUVs have been moving off dealers' lots, transaction prices have been historically high, and the financial arms of both GM and Ford have performed favorably as credit has kept flowing in the economy.

Until Trump's trade wars and tariffs hit, the biggest worry was a big jump in gas prices. That hasn't happened, and with Detroit assisting Trump in rolling back fuel-economy standards that were locked in late in the Obama administration and also relishing a corporate tax cut, the carmakers thought the trade stuff was all for show.

But it wasn't, and now big trouble has arrived for the US market - the world's most competitive - and the China market, where another $10 million in yearly sales could develop over the next decade.

Trump knows nothing about the global auto industry

Ford Kentucky Truck Plant

Ford

A Ford pickup-truck factory.

Trump has shown since the 2016 campaign that he knows literally nothing about the 21st-century car business. That ignorance has now been compounded by his trade-and-economics team's dismal understanding of how the $2 trillion global auto industry has been organized since the 1990s and after the financial crisis.

Advertisement

The industry is more fragile than commonly thought. The late Sergio Marchionne put it well when he often explained that weak discipline, bad execution, and poor leadership are quickly punished.

He wasn't alone.

"It's a very tough business," Ford Chairman Bill Ford once told me with grim clarity. But Marchionne and Ford were talking about an industry that's under tremendous pressure when everything is going just fine.

Throw in some massive unknowns, and the punishment becomes more severe, and what was tough can become impossible.

"We just can't pull enough levers," Stevens said when asked how GM was going to deal with additional steel costs in the second half of 2018.

Advertisement

But Trump can pull a big lever

Donald Trump in a Mack Truck

MediaPunch

Trump can pull a big lever.

The guy with the big lever is, of course, in the White House. It's time for somebody to tell him that while this thing with the car business might not seem too bad, it's far worse than it looks. The inevitable US sales downturn, mild or severe, could take shape over the next quarter, undermining Detroit's already deteriorating profit outlook.

Survival spending will creep in as everyone fights to maintain market share. The balance sheets, now fat with cash, will get slimmer, damaging the automakers' ability to avoid layoffs when the slide picks up speed. Investment will go into exile. Stock prices will tank.

If we're at the beginning of some bad times, Trump could forestall a sub-recession in the auto sector by calling off the trade war and renouncing the tariffs. But he needs to act fast. The big three have presented him with an excuse on a golden platter by sending a united signal through lower second-half profit forecasts.

Will he accept the gift? Unlikely. But if he does, there's a three-month window before we hit the fourth quarter and negative momentum will be all but impossible to stop.

Advertisement

Get the latest Ford stock price here.

{{}}