Trump’s Tariffs Will Make Fixing Your Car More Expensive
(Bloomberg) -- Hopkins Manufacturing Corp. may shift its China supplier network to factories in Taiwan. Multi Parts has stopped hiring new employees. AutoZone Inc. and O’Reilly Automotive Inc. plan to raise prices.
Businesses in the replacement auto-parts industry -- from component makers to local mechanic shops -- are scrambling to cope with President Donald Trump’s tariffs on imported Chinese materials and goods. Steep levies have already boosted costs of some products made with steel and aluminum, and more duties could affect hundreds of other items these companies develop, make and sell -- including tires and rear-view mirrors, windshields and windshield wipers.
Springfield, Missouri-based O’Reilly hasn’t seen “a big impact” yet, but a couple of its suppliers have added a “fractional” part of the tariffs onto costs and a few more will do so early in the fourth quarter, Chief Executive Officer Greg Johnson said during the company’s second-quarter earnings call. So far “we have been able to pass that along” to customers, he added. These include do-it-yourself vehicle owners and service technicians shopping at O’Reilly’s more than 5,000 stores.
Investors and analysts are asking how the tariffs will affect sales and profits. Dozens of businesses including Daimler AG, Hyundai Motor Co. and General Motors Co. have said they already see or anticipate higher prices driving up manufacturing costs or reducing earnings.
AutoZone is identifying products that could soon cause problems for the Memphis, Tennessee-based company, which has more than 5,500 stores and reported $10.9 billion in revenue last year. Prices of components made with steel, such as rotors and other brake parts, will certainly have to rise, spokesman Ray Pohlman said.
“You can’t get the things we sell from very many places,” he said. “You can’t just buy it on any street corner.”
While the tariff threat is broad, it actually may affect less than 15 percent of retailers’ inventory, according to Wedbush Securities Inc. analyst Seth Basham: Auto-parts stores source about 50 percent to 60 percent of their products from China, but only about 20 percent to 25 percent of these are included in the latest round of tariffs, he said. These duties cover a wide variety of imports with a total value of more than $200 billion and won’t take effect until after a comment period ends Sept. 6.
“We think they should be able to pass through the extra costs without too big of a hit to their earnings,” Basham said.
Some parts suppliers are less sanguine. Brian Cohn, president of Jupiter, Florida-based Multi Parts, said the company’s typical flow of orders has already slowed, and higher prices on materials have led him to stop hiring new workers. Multi Parts’ facilities in Shanghai, Hong Kong and Belarus manufacture brake and wheel cylinders, wheel hubs, valve-timing solenoids and other components. Customers include parts distributors and other manufacturers of auto-repair products.
Brad Kraft, chief executive officer at Hopkins Manufacturing, said his company imports many goods from China, and new tariffs already in place have driven up prices on about 350 items made with steel and aluminum. If the proposed tariffs on the additional $200 billion are enacted, prices will rise on at least 3,000 more of its products, which include tires, oil and fuel filters and components for towing systems.
Hopkins, based in Emporia, Kansas, has two manufacturing facilities -- in Juarez, Mexico, and Los Angeles -- and an office in Ningbo, China, that coordinates logistics with about 45 supplier factories in the country. Kraft says he’s considering using suppliers in Taiwan instead. Sourcing products from Taiwan is typically more expensive, but it now looks like a cheaper alternative, he said.
Re-sourcing products is time-consuming and expensive, however. Companies will need to feel certain that tariffs will stick before they make such changes, according to Aaron Lowe, a spokesman for the Auto Care Association, an industry trade group.
One risk of prolonged price hikes is that car owners may put off maintenance, reducing sales of replacement parts. This also could increase the number of unsafe vehicles on the road, Cohn noted.
“The typical auto after-market consumer already has a bit of a pinch on their pocketbook,” he said. “So people will likely just choose to go without repairs for a while.”
Despite the potential for lost business, Chris Lynch, owner of Wetmore Tire and Auto in Ferndale, Michigan, says he plans to pass along to customers any price increases on the low-end tires and brakes he imports from China.
“They are going to have to pay that extra cost in the end,” he said, “because we’re not going to eat it, that’s for sure.”
©2018 Bloomberg L.P.