Bad News for Detroit's Big 3

Sometimes being an investor is a scary thing – an event could take place at any time that could hurt the profitability of your investment. I'm long Ford (NYSE: F  ) and General Motors (NYSE: GM  ) so I've been keeping a close eye on the Trans-Pacific Partnership trade negotiations that could have drastic effects on their profits – while benefiting Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . I'll break it down and show you how it could negatively affect Detroit automaker revenues by over $1.3 billion dollars – and why I'll still keep my positions in Ford and GM.

Tariffs
During the trade talks the U.S. government agreed to gradually abolish all tariffs in place on Japanese vehicles entering the nation. Removing the tariffs will aid the Japanese while doing nothing to help Detroit's comeback. Japanese vehicles previously had a 2.5% tariff on cars brought in, and 25% on trucks. In an industry with margins often in the single digits, 2.5% is a huge difference – and 25% is drastic.

Detroit cries foul
As you can imagine, Detroit is none too happy with this development. Ford, GM and Chrysler are using their voices, lobbyists, and any possible leverage to ask the government to reconsider. Just as they had begun to repair the awful image resulting from years of terrible management and awful vehicles, this hurdle could slow financial progress. I admit, there are a lot of variables to take into account, but let's break it down in a simple manner and see what effect removing these tariffs would have.

A study released by the Center for Automotive Research said that erasing the 2.5% tariff on cars would cause the Japanese to increase their vehicle exports to the U.S. by over 100,000 units. On the other hand of the equation, a study partially underwritten by Ford, showed that Detroit vehicle production would fall by about 65,000 units. To put that in perspective, that's slightly less than sales of Ford's popular Escape for the first quarter. The study claims that the decline in production would cause 2,600 American factory jobs to be lost. After a trickle-down effect it would cause lost jobs for Detroit's auto suppliers to reach as much as 9,000 – not good. 

Lost revenue
To get us an idea of what this could do to Detroit automakers bottom lines, let's roughly estimate what a loss of 65,000 in vehicle sales could look like. Let's say 65,000 of Ford's popular Fusion sales disappeared due to the tariff removal. At a manufacturer's suggested retail price of $21,900, let's knock off a couple thousand for the difference between wholesale and dealer prices. That totals up to about $1.3 billion in top line revenues. Now if we take into account Ford's margin per vehicle – for simplicity's sake we'll say 8% – that would represent a net income loss slightly over $100 million dollars. That number isn't earth-shattering, but it's not chump change, either. Ford and GM would both love to have that amount taken off their respective Europe losses this next conference call. You also have to keep in mind the 25% drop in the truck tariffs could have a much larger impact in the bottom-line figure.

All is not lost
While this is definitely a topic of interest to Ford and GM investors, don't let the big headlines – like this one – scare you away. The tariffs won't just be chopped off immediately, rather they will be gradually declined "over the longest possible period of time". While I can't guess the timeline they'll negotiate, it looks to be far enough into the future that this won't have as big an impact as Detroit is crying foul about. As investors we should be glad that Detroit is screaming and over-exaggerating because that shows management doing its best to use its leverage. We should be more worried if trade negotiations like this take place and Detroit is silent.

In addition to that, the impact won't be felt by just one automaker, as in my example, but spread between all automakers. Just because the tariff removal will benefit the Japanese, it doesn't guarantee that their vehicles will sell any better. If Ford and GM's recent successes in quality and popularity of vehicles continues, investors have nothing to worry about.

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  • Report this Comment On April 17, 2013, at 4:46 PM, Hngnthweb wrote:

    If you do this not only will it kil the big three but the Japanese will close their factories her and take them back to Japan. This is foolishness.

  • Report this Comment On April 17, 2013, at 4:48 PM, Hngnthweb wrote:

    How is that Obama allegence working out for you union folks?

  • Report this Comment On April 17, 2013, at 4:53 PM, yaovk wrote:

    What's wrong with Obama administration? I am really disappointed.

  • Report this Comment On April 17, 2013, at 4:55 PM, btc909 wrote:

    I thought America was a free country, Tariffs go against that. I don't miss my made in Mexico or Canada "American branded" vehicles.

  • Report this Comment On April 17, 2013, at 5:07 PM, zack991 wrote:

    If American car company's made better cars they would have nothing to worry about. What is funny is these Japanese car company's products are more American made then the big 3 like to admit and these Japanese cars on average cost more to buy then the BiG 3 cars. Also the excuse this will make Japanese vehicles being made back overseas is unfounded, the cost saving they would get by keeping their factory's here with the billions they have already invested in US plants would be a complete lost. It will cost them so much more to move them back to Japan.

  • Report this Comment On April 17, 2013, at 5:08 PM, ez8631 wrote:

    maybe if Detroit wasn't asking such ridiculous prices for new vehicles we'd be able to actually buy them. and what's with this nonsense of putting 2014 vehicles on dealers lots already??? we're only 3 months into 2013... what a joke Detroit has become!

  • Report this Comment On April 17, 2013, at 5:12 PM, hmsthehood wrote:

    That's fine but what did we get out of it?

    This is only half the story. Or at least I hope it is.

    The biggest problem with trading with Japan is (last I remember) we take their product but they don't take ours. GM, Ford and Chrysler will be impacted by this directly but does it open a new market up for them?

  • Report this Comment On April 17, 2013, at 5:39 PM, TMFTwoCoins wrote:

    @hmsthehood

    It hasn't been released (that i've seen ) what Detroit gains out of the negotiations. I'm sure there is something, and I'm sure they'll be extremely slow to point it out.

    But you're exactly right, Detroit has no reason to believe Japan will follow through and take our products as believed in the past. It's been a difficult situation in the past, and is one we have to keep an eye on still.

  • Report this Comment On April 17, 2013, at 5:46 PM, DrGastro wrote:

    This may be a good move. Perhaps Japan will in turn lower the tariffs on US models resulting an increase in our exports. Either way, I hope we will get some of Japanese models here that are only available in Japan and Europe. Enough of the mundane Camrys, Accords, etc.

  • Report this Comment On April 17, 2013, at 5:49 PM, TMFTwoCoins wrote:

    @DrGastro

    I hope you're right about the doors opening for us in Japan. Although, like I told someone else, I believe we were led to believe that would happen before and it never materialized.

    Time will tell.

  • Report this Comment On April 17, 2013, at 6:12 PM, dwduke wrote:

    I doubt Japan will reciprocate in kind on American exports. The American auto industry is still trying to get traction after the 2008 downturn. Profits will not be large and more downsizing is in the future, I think, to try to compensate for the lack of gaining market share. The unions will stifle this and add even more grease under the wheels of the American auto industry. Not good.

  • Report this Comment On April 17, 2013, at 6:34 PM, ryand1981 wrote:

    Looking at the sole financial implications fails to identify the root cause needing fixed. Tariffs stifle innovation. Instead of forcing companies to increase their comparative advantages and force natural innovations, tariffs allow for inefficiency production to continue. Instead of looking at the downfalls for a company to face increased competition, let's look at this as motivation to improve production. Think about it, our best solutions to date regarding fuel efficiency came not as the result of global responsibility or the drive to improve, but because the threat of increased fuel economy loomed on the horizon.

  • Report this Comment On April 17, 2013, at 6:38 PM, Paulson545 wrote:

    If the Union Auto Workers didn't build junk they wouldn't have to worry about cars coming from Japan.

  • Report this Comment On April 17, 2013, at 6:43 PM, TMFTwoCoins wrote:

    @ryand1981

    That's definitely a valid argument, and has held true in the past. What's the old saying? America always does the right thing when it's tried everything else.

    I'm hoping this causes Ford/GM to take a deeper look at improving or maintaining quality while reducing operating costs -- negating the loss of tariffs.

  • Report this Comment On April 17, 2013, at 7:48 PM, Justarandomnerd wrote:

    American car brands need to face the fact that Japanese cars are far superior than the ones built in the US. The Japanese started their business just like the Koreans, specially Hyundai, copying and builting cars based on the American standards. Now, decades later, they are heavily stealing sales from American brands. Ford is a cheap company, GM is somewhat cheap and Dodge has forgotten how to build cars. Our only hopes are Cadillac and Lincoln.

  • Report this Comment On April 17, 2013, at 7:56 PM, 426RoadRunner426 wrote:

    Odumbo is at it again. I just wish I had a chance to do to him what he's been doing to this country and its (working) people.

  • Report this Comment On April 17, 2013, at 8:08 PM, eddie2042 wrote:

    Just how far is North Korea from Japan ???

  • Report this Comment On April 17, 2013, at 8:24 PM, babyleg wrote:

    Big 3...it's simple. Build cars that people want with the quality and reliability we expect and it will not matter what tariffs are eliminated. There are some domestic cars and trucks that I would buy, but vastly many I would avoid. I own a Honda Acord and a Chevrolet Suburban, two vehicles completely opposite. One sips fuel the other, well you know. Point is I like American trucks but I love foreign cars....

  • Report this Comment On April 17, 2013, at 8:41 PM, justTiredofItAll wrote:

    @ yaovk ...this appears coming from the GOP than Obama, like a further move to weaken the Unions..

  • Report this Comment On April 17, 2013, at 9:25 PM, mjw9326 wrote:

    The bad news is they make, for the most part, overpriced junk. I have bought Fords twice and bought a Chevrolet brand new as well. All I got for my troubles were cars that had problem after problem.

    Funny how all the japanese cars I have owned as well as the Hyundai i have never gave me problems.

    I am through paying for your crap, many of the parts for which are made overseas. Sayanora Big Three. I am through subsidizing your Inferior cars.

    By the way, I used to be in the rental car business and saw how poorly Chryslers were made as well.

  • Report this Comment On April 17, 2013, at 9:49 PM, Spanky848 wrote:

    I've owned two Japanese vehicles and had nothing but problems. I have no interest in owning another one but now I'm afraid I won't be able to afford an American.

  • Report this Comment On April 17, 2013, at 10:26 PM, Unitypeace wrote:

    We have a 76.3 billion dollar trade deficit with Japan alone and the tariff shouldn't have been dropped until getting much closer to a balance. Still trying to crush wages................BUY AMERICAN.

  • Report this Comment On April 17, 2013, at 11:01 PM, 2oldn2tired wrote:

    You buy that Japan made car. Is that japanese worker going to pay any U.S. taxes? Is he going to support your parents, grand parents, social security check? Is he going to keep your schools open, pay your policemen, firemen? Is he going to buy anything at all that will benefit you, directly or indirectly? American autoworkers do. Every worker on the assembly line requires 9 other workers to keep him supplied and the money they earn is spent here, in your communities. Send your money to Japan and see how much you benefit from that. Japan buys less product from us than Belgium! We are fools.

  • Report this Comment On April 17, 2013, at 11:21 PM, 2oldn2tired wrote:

    I'm reall sick and tired of all the negative comments about American car quality. My son has had two Chevrolets, a 2000 Cavalier and a 2003 Impala. Both cars have over 200,000 miles on them and have been driven daily to work and back by he and his wife. Neither car has been repaired except for things you expect to wear out.

    What about the run away Toyotas? The policeman and his family all killed? What about the recalls on Lexus, Hondas etc. Are these to be overlooked? The first Kias they sent here were so bad that they almost lost their business.

  • Report this Comment On April 17, 2013, at 11:32 PM, bugmenot wrote:

    Detroit was destroyed by organized labor. There can be no debate about this simple fact. Car makers moving to the South are still profitable. The people of Detroit embraced Democrats and organized labor. They now are fighting the result - high unemployment getting higher! When you elect people who hate employers, the employers get the message. LEAVE! Democrats sent the jobs away!

  • Report this Comment On April 17, 2013, at 11:39 PM, lawoof wrote:

    I just finished renting a Ford C-Max for a week. I was expecting an Altima but it wasnt available and thought it was ugly at first. Like the saying goes, dont judge a book by its cover. Its the best car Ive driven. Comfortable, quiet, smooth, great handling, superb fit and finish, quality materials, gas mileage, all unexpected. Only negative is the screen and figuring out how to program everything and get it to work. Would buy it in a second. Congratulations to Ford on another hit.

  • Report this Comment On April 18, 2013, at 4:25 AM, danielleaders wrote:

    Does that mean they are going to remove their tariffs on our vehicles going into Japan ?

  • Report this Comment On April 18, 2013, at 7:06 AM, wings12 wrote:

    Toyota imported over 600,000 vehicles in 2012 alone!!! Here comes many more imports from Japan.....

    Toyota imports most of their car models into the USA. Toyota imports the RAV4, Prius, Prius C, Prius V, Yaris, FJ Cruiser, Land Cruiser, 4Runner, & Matrix. All Lexus (Toyota) models are imported IS, GS, ES, LS, PX, GX, LX. All Scion (Toyota) models tC, xB, xD, iQ, FR-S.Toyota also imports Tacoma's from Mexico (but they also build them in Texas) and they also import some Corolla's into the USA.

  • Report this Comment On April 18, 2013, at 7:09 AM, wings12 wrote:

    I have a friend that is a itizen of Japan going to school in the USA. I talked to her about the automotive industry in Japan and she said that the Japanese buy Japanese cars and not imports because they take pride in Japanese products and they want to support their economy.

    Americans show little pride and don't care to support the American economy, they just complain when they cannot find a job.......

  • Report this Comment On April 18, 2013, at 7:10 AM, wings12 wrote:

    Get ready for more recalls...... Toyota has recalled the modst vehicles in 3 of the past 4 years in the USA. In 2011 they were 2nd to Honda. So far they lead 2013 too with 2 million vehicles recalled!

    Recalled vehicles in 2012 in the USA

    Toyota 5.3 million vehicles

    Honda 3.4 million vehicles

    GM 1.5 million vehicles

    Ford 1.4 million vehicles

    Chrysler 1.3 million vehicles

    Subaru 962k vehicles

    Hyundia/Kia 500k vehicles

    Nissan 215k vehicles

    Recalled vehicles in 2011 in the USA

    Honda 3.9 million vehicles

    Toyota 3.5 million vehicles

    Ford 3.3 million vehicles

    Chrysler 773k vehicles

    GM 456k vehicles

    Recalled vehicles in 2010 in the USA

    Toyota 6.6 million vehicles

    GM 2.8 million vehicles

    Honda 2.4 million vehicles

    Nissan 1.9 million vehicles

    Chrysler 1.1 million vehicles

    Ford 563k vehicles

    Recalled vehicles in 2009 in the USA

    Toyota 4.87 million vehicles

    Ford 4.52 million vehicles

    GM 2.97 million vehicles

    Honda 450k vehicles

  • Report this Comment On April 18, 2013, at 7:11 AM, wings12 wrote:

    Actually Toyota has recalled more vehicles in the USA since 2009 than Ford, GM, and Chrysler COMBINED!!!!

    That is Toyota quality!

  • Report this Comment On April 18, 2013, at 7:41 AM, eye4I wrote:

    Toyota, may have recalled more vehicle, simply because, unlike Ford, and chrysler, they don't hide their deficiencies! They stand up to correct their mistakes.

  • Report this Comment On April 18, 2013, at 7:45 AM, eye4I wrote:

    I bought a new 2010 Toyota Yaris, for $12,500, with 0% financing

    Show me an american vehicle that can get the same mileage, with a higher rating for durability, and safety from an american builder, that comes with an equal or lower price. And my mileage is HIGHER than the EPA rating.

    Funny how the Yaris is the ONLY Toyota made 100% in Japan, and it has not had even one recall !!

  • Report this Comment On April 18, 2013, at 7:51 AM, wings12 wrote:

    Toyota has only recently started recalling their vehicles. They have been hiding their recalls for many years now. Toyota said a few years ago that they would be more open after they hid their sudden unintended acceleration problem. Toyota agreed to pay more than 1 BILLION dollars in damages!

  • Report this Comment On April 18, 2013, at 7:55 AM, wings12 wrote:

    The Toyota Yaris only gets 37 mpg's highway. The Chevy Sonic and Ford Fiesta both have better fuel economy and the Sonic is made in the USA. Any vehicle can get better fuel economy than the EPA rating if you drive it well.

    The Toyota Yaris is NOT the only Toyota made 100% in Japan. All Prius models, all Scion models, all but one Lexus model, and the FJ Cruiser are made in Japan and the all have had recalls.

  • Report this Comment On April 18, 2013, at 8:30 AM, ponchoman49 wrote:

    Toyota most certainly hides there defects. My friend used to own a Tacoma pickup that has turned out to be the biggest POS ever made with probems ranging from head gasket failure to suspension componets failing and the worst part was the frame rusted so bad the truck failed inspection. Toyota quickly bought the truck back from him and nothing was ever said or heard again. A perfect swept under the carpet major problem. Jusdging by all the rotted out frames I see behind all our Toyota stealerships I would say that this an epidemic problem that NHTSA needs to forse Toyota into yet another major recall like they had to do with there defective accelerator pedals and the unintended acceleration issues so many had with the defective drive by wire units found in so many Toyotas.

    I have no problem with us taking away the Tarrifs on Japanese vehicles as long as Japan does the same thing with importing American vehicles. LOL yeah right they are much too arrogant for that to ever happen.

  • Report this Comment On April 18, 2013, at 8:44 AM, wings12 wrote:

    Ponchoman - Toyota has already issued a large recall for the Tundra and Tacoma frames rusting out. Google "Tundra frame rot". There are pictures showing Toyota Tundras that broke in HALF because of the frame rusting out.

    It is a good thing your friends truck didn't break in half while he was driving it. That could have caused serious injuries and/or death!

  • Report this Comment On April 18, 2013, at 9:11 AM, msteinb1 wrote:

    Wake up, people...

    Final 2012 Polk Data Just In: Ford Focus Is Best-Selling Vehicle Nameplate Worldwide – Ford Takes Three of Top 10

    http://media.ford.com/article_print.cfm?article_id=37904

  • Report this Comment On April 18, 2013, at 9:16 AM, TC302 wrote:

    I am tired of people talking crap about American cars. I am a proud owner of a 2011 Jeep Grand Cherokee Overland with the HEMI V8. I love this vehicle its a pleasure to drive the fit and finish is Superb.my wife has a Chrysler Pacifica touring which has never ever given us any problems of any nature what so ever. We are now looking at a new Cadillac for her. you people on the outside looking in have no idea how far the Big 3 has come. The Ford Focus for example sells more units than anything made in japan or korea. Haver you noticed the recalls from toyota and honda?!?

    So before you complain about quality the quality of the Big 3 do your da#n homework.

    I am college educated have a great career and I am from Detroit and damn proud of it!! And NO. I do not work for the Big 3 just how proud I am of how far they have come along.

    Go Tigers!!

  • Report this Comment On April 18, 2013, at 9:33 AM, TMFTwoCoins wrote:

    A lot of people still live in the past and don't realize that the newer Ford and GM vehicles are vastly improved in quality and features.

    Fine by me, by the time they realize and try to invest, I'll have made my large returns for being in early.

    I drove a Toyota Celica for 9 years, and had few problems. I decided to switch back and give Ford a chance and I don't regret it for a second. I have a mustang, but I'd challenge any skeptic to go drive a new Fusion, it's a nice ride.

  • Report this Comment On April 18, 2013, at 9:43 AM, poellas wrote:

    This is foolish, they do not let us sell the same amount of cars in Japan what we allow them to sell here,

  • Report this Comment On April 18, 2013, at 11:13 AM, jfelano wrote:

    I was under the impression that all Honda's and Toyota's were built here in the United States..............................?

  • Report this Comment On April 18, 2013, at 11:18 AM, cityperson wrote:

    Bye, Bye unions, your great president Obama and some of his gang in Washington just put another knife in you backs by removing the auto tariffs slowly. Your backs should feel sore by now, by the slow turning knife.

  • Report this Comment On April 18, 2013, at 11:24 AM, jfelano wrote:

    Ford, GM and Chrysler do not HIDE their defects. Your living in a pipe dream.

    Who tried to hide defects in the floor mats and gas pedals? Yep Toyota did.

    Toyota has more recalls since 2009 than Ford, GM and Chrysler combined.

  • Report this Comment On April 18, 2013, at 3:29 PM, 1FootIn wrote:

    In the end, there are no American cars in Japan and that needs to change. It's been that way for to many years with no resolution. I think America is very accommodating to Japan, allowing them to build their plants here especially when we can't do the same in Japan.

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