Automakers, suppliers pause but also prepare in face of tariff unknowns

The 30-day delay on 25 percent U.S. tariffs on Canadian and Mexican imports came as a relief to automakers and suppliers who fear they could lead to higher costs and idled factories.

But the threat of tariffs still looms, and the future of North American free trade remains as murky as it has been since the passage of the North American Free Trade Agreement in 1992. As a result, automakers and suppliers are pumping the brakes on major spending decisions until they get a better sense of how the trade rules will settle out.

"Given the level of uncertainty, there's a tendency to avoid making large capital decisions that could be swung easily one way or another by a policy change," said Isaac Chan, a partner in consultant Roland Berger's automotive practice.

It's unclear when companies will get the clarity they seek.

President Donald Trump on Feb. 3 agreed to postpone 25 percent tariffs on goods from Canada and Mexico after reaching last-minute deals on border policy and fentanyl trafficking with each country. Trump had signed executive orders on Feb. 1 directing federal agencies to enforce tariffs starting Feb. 4.

Auto industry manufacturers, particularly suppliers who have more limited capital than automakers, warned the tariffs would upend the highly complex supply chain they rely on and lead to higher costs on new vehicles and parts. Many suppliers, especially smaller companies, said they would have to pass higher expenses caused by tariffs to customers. Otherwise, they would have to idle production, creating parts shortages.

Despite the reprieve, the possibility of large tariffs starting in March weighs on the industry. Companies are spending considerable time and resources analyzing trade and tariff scenarios for the coming weeks, months and years.

"You're not focused on making cars or doing what you were doing a month ago," said Mike Skordeles, head of U.S. economics at Truist Advisory Services. "You're focused on supply chain issues and tariffs, and it's a big distraction."

Uncertainty around trade policy "will make it near impossible for automotive companies to make actual investment decisions," analysts at Bernstein Research said in a Feb. 5 research note. And that uncertainty is likely to weigh down the auto sector globally, said Mikael Bratt, CEO of safety systems supplier Autoliv.

"This uncertainty makes it challenging to predict how business conditions in general and automotive markets in particular will develop in 2025," Bratt said on a Jan. 31 earnings call.

Toyota Motor Corp., meanwhile, aims to shorten product lead times as much as possible to more quickly react to policy changes. The automaker is simulating trade scenarios and will "make announcements about changes in what we do only when we are sure what is likely to happen," Toyota CFO Yoichi Miyazaki said Feb. 5

Other automakers and suppliers are taking similar approaches, analysts said. Companies are examining supply chains, looking for alternative sources that would not be subject to tariffs, said Brian Irwin, managing director with consultant Alvarez & Marsal's automotive and industrials group.

It's important for companies to use the next weeks to make plans for a wide range of scenarios. Those start with a tariff-free environment and end with universal, 25 percent tariffs on Canadian and Mexican imports in effect for an extended period of time on top of 25 percent tariffs on all imported steel and aluminum, Irwin said. But companies should not make final decisions on moving production, re-sourcing parts or other major moves until they have a firm idea of what's going to happen, he said.

"To pull the trigger on anything that would be a material change to your supply chain would be a challenge and maybe not in your best interest," Irwin said.

The question is not only whether North American tariffs begin in March but also how long they would last and if there would be any exemptions.

There is about a 60 percent chance 25 percent tariffs would last just one or two weeks if implemented, S&P Global Mobility estimated in a Feb. 4 report. That would result in lost production because of supply issues and border gridlock, but sales would likely be regained in "short order," the report said.

Extended and more disruptive scenarios are possible, though. S&P Global assumes a 30 percent probability of tariffs remaining in place for up to eight weeks, as well as a 10 percent chance of a "'tariff winter" in which they stick around for the long term.

"In a tariff winter we would expect to see re-sourcing occur," S&P Global wrote. "North American light-vehicle sales could decline by 10 percent for several years with a long-term decline in competitiveness."

But companies might find it difficult to find new sources for many parts. For example, wiring for vehicles in North America is almost entirely based in Mexico, according to Wolfe Research.

"If you start building that from scratch, it might be extremely complicated and extremely expensive," said Emmanuel Rosner, an analyst at Wolfe Research, during a Feb. 4 webinar.

Seating suppliers such as Lear Corp. rely on Mexican imports for components including seat trims and covers, Lear Chief Financial Officer Jason Cardew said on a Feb. 6 call with analysts.

"Anything that's labor intensive in North America in seating is made in Mexico," he said.

Even in a no-tariff scenario, significant uncertainty would remain. The U.S., Canada and Mexico are set to review the United States-Mexico-Canada Agreement in 2026, and the countries could seek major changes to the deal, which replaced NAFTA in 2020.

At the same time, the Trump administration is pursuing an overhaul of federal emissions standards and electric vehicle incentives that will also factor into auto companies' decision making.

Automaker executives' existing strategies are based on a federal framework that is likely to change, Daniel Roeska, a senior analyst at Bernstein Research, told Automotive News. It could be some time before they have enough confidence and certainty to plan longer-term initiatives, such as software and autonomy.

"There are really big questions out there, which I don't think the OEMs can reasonably answer and say this is the environment that we can plan on," Roeska said. "You've seen that time and time again, that industries that do not have planning certainty on the key assumptions, they simply don't invest."

Lindsay VanHulle contributed to this report.