Ford Motor Company (F +0.76%) has been busy trying to turn its operations around. The company is struggling in China, struggling to keep warranty costs in check, and losing billions on its electric vehicle (EV) division. The last thing Ford needs right now is an incoming administration with a level of uncertainty that makes quantum computers anxious. Threats of tariffs on Canada and Mexico already threaten profits for automakers, but just how big a deal is this?
It's a big deal
As much as investors may want to brush aside the Trump administration's talk of pulling back support for the EV industry, additional tariffs are a very real possibility and a very real threat to profits. Late Monday last week, President Trump posted that he would issue an executive order to impose a 25% tariff on all products imported from Mexico and Canada.
This is bad news, and the reason is simple: Automakers simply don't have enough time. There isn't enough time to adjust to the tariffs, and automakers are stuck with the choice of either eating the additional costs, or passing the cost on to the consumer and risking losing market share.
If automakers choose to pass those additional costs onto customers, it would add roughly $3,000 to the average cost of a vehicle sold in the U.S. market, according to Wolfe Research. Baird analysts estimated that the damage could be even worse, adding roughly $10,000 to the cost of imported vehicles -- which would cut vehicle demand by roughly 900,000 units.
In fact, according to a Nov. 29 report by S&P Global, about 17% of EBIT profits are at risk if the Trump administration implements tariffs on Canada, the European Union, Mexico, and the United Kingdom. That is a massive chunk of profitability to simply ask investors to accept losing overnight.
NYSE: F
Key Data Points
"The economic impact on the auto industry (and suppliers) is set to be meaningful, likely driving a near-term sell-off in the stocks and making it difficult to invest in the space near-term (set against already-challenging sentiment)," Baird analyst Luke Junk wrote in a note to clients, according to MarketWatch.
That also doesn't add in the complexity of the political landscape, which could see retaliatory tariffs slapped back on U.S. goods that could sting automakers' bottom lines even more. Some of these automotive supply chains between Canada, the U.S., and Mexico have been in place for decades.
Buying opportunity?
Some investors might see this as a buying opportunity, especially since Ford's stock price is down 50% over the past three years. There's an enticing argument for income investors as Ford's 6% dividend yield is lucrative, and it's largely safe and consistent.
But currently, there are too many problems facing Ford in the near term as it works to improve quality and bring down warranty costs, figure out how to gain market share in an increasingly brutal China market, and lower costs while building scale for its EV business.
Potential tariffs and trade disruptions are a real threat to Ford and its investors, and they're just one more reason investors would likely be better off watching Ford's story play out from the sidelines in 2025.
