In the following, we discuss how additional U.S. import tariffs on LVs imported from Europe, the U.K., Mexico, and Canada could affect the earnings of European and U.S. carmakers, as well as Toyota Motor Corp. (Toyota) and Hyundai Motor Co. (Hyundai-Kia). The scope, magnitude, and timing of new tariffs are uncertain and are therefore not part of our base-case scenarios for the issuers we cover in this article.

Our estimates represent the maximum possible EBITDA at risk from the tariffs before taking into account any strategic responses by OEMs. The figures do not represent a prediction of actual market outcomes but an estimate of the hypothetical tariff burden at pre-tariff import volumes and pricing. This burden would have to be passed through to customers, reduced by countermeasures, or absorbed by lower profits.

We also discuss potential OEM responses and mitigating actions. Based on these, we expect the actual effect will be materially lower than the maximum EBITDA exposure. We do not incorporate the effect of tariffs on imports from China as this region is less material for most automakers in terms of U.S. imports.

Why it matters

Donald Trump's re-election will likely intensify the headwinds the global auto industry will face in an already challenging 2025.

What we think and why

Based on Mr. Trump's announcements during his election campaign, we understand that the president-elect could implement far-reaching changes in the following three areas:

• Review of the Inflation Reduction Act and, more specifically, the partial or total removal of the nonrefundable tax credit of $7,500 that supports the sale or leasing of qualifying new battery electric vehicles (BEVs) and plug-in hybrid models.
• Introduction of additional tariffs on imports of foreign goods, with higher duties on imports from China. This could include a significant increase in import duties on LVs--which are currently subject to a 2.5% base tariff (excluding light trucks, which are subject to a 25% levy)--and it could raise the 100% tariff introduced by the Biden administration on imported Chinese electric vehicles (EVs).
• Revision of the conditions that underpin the free trade agreement with Mexico and Canada, which is due for review in mid-2026. We cannot rule out that the U.S. will make unilateral changes before the scheduled review. On Nov. 25, 2024, Trump announced that he would impose a 25% tariff on imports from Canada and Mexico, which could have an incremental negative effect on the auto industry, which already faces pricing pressure from sluggish demand growth, into 2025.

The automakers in our sample fall into one of three groups that are based on the maximum share of EBITDA that could be at risk in the case of a 20% tariff on LV imports from the EU and the U.K., and a 25% tariff on LV imports from Mexico and Canada.

• EBITDA at risk below or at 10% of our projected S&P Global Ratings-adjusted EBITDA for 2025: BMW AG, Ford Motor Co. (Ford), Mercedes-Benz Group AG (Mercedes), and Hyundai-Kia.
• EBITDA at risk above 10% and below 20% of our projected adjusted EBITDA for 2025: Volkswagen AG (VW) and Toyota Motor Corp. (Toyota).
• EBITDA at risk above 20% of our projected adjusted EBITDA for 2025: General Motors Co. (GM), Stellantis N.V., Volvo Car AB (Volvo Cars), and Jaguar Land Rover Automotive PLC (JLR).

If the tariffs materialize as outlined, the rating impact would depend on the current rating headroom and the success of mitigation strategies. For instance, even if EBITDA at risk is in the lower risk category, the rating cushion might already be low due to other reasons. In all cases, we believe the stand-alone effect of higher tariffs would not be sufficient to cause a downgrade, also because of the offsetting measures we expect OEMs to take. Yet rating transitions could occur where the tariffs compound other headwinds for 2025, such as weakening pricing in key markets, sluggish demand, potentially tighter margins due to stricter CO2 emission targets in the EU, and intense competition from China.

Trade Barriers With Mexico And Canada Are The Biggest Risk For Mass-Market Carmakers

As was the case in previous years, Toyota and Hyundai-Kia will likely remain among the top 3 importers of finished LVs into the U.S. in 2025.  We expect total U.S. import volumes will exceed 10% of the two companies' global sales (see chart 1). Although this results in tariff exposure, Japan and South Korea account for most of the two companies' import volumes. Our scenario does not include tariffs on shipments from these markets as we focus on production countries that have been at the center of the political debate.

Chart 1

Compared with other European OEMs, Stellantis' exposure to imports from Europe is low.  Yet the company would be affected by duties on imports from Mexico, where it produces several vehicle types, particularly RAM and Jeep models, as well as duties on Canadian imports. VW's exports to the U.S. are low at about 7% of its global sales. Yet its imports from Europe include a meaningful share of its premium/luxury Audi and Porsche models, which increases the overall EBITDA exposure. VW ships a limited set of VW models (Jetta, Taos, Tayron) and the Audi Q5 from Mexico.

German premium OEMs BMW and Mercedes have relatively low tariff exposures, as U.S. imports account for 7%-8% of their global sales.  Among European OEMs smaller premium/luxury players, Volvo Cars and JLR have the highest volume exposure to U.S. imports relative to their global sales. Volvo Cars produces its S60 sedan and the newly launched large BEV SUV EX90 in the U.S., while JLR manufactures most of its vehicles in the UK and Slovakia.

U.S. automakers Ford and GM maintain meaningful production footprints in Mexico.  This is due to lower labor costs, favorable trade agreements--especially the U.S.-Mexico-Canada Agreement (USMCA)--and the proximity to the U.S. market. Currently, GM produces eight models in Mexico (notably Silverado, Sierra, Equinox, Terrain, and Blazer), whereas Ford's only produces three models in the country (Bronco, Maverick, and Mustang Mach E).

EBITDA Exposure Is Driven By Volume, Mix, And Regional Footprints

Based on the aforementioned trade volumes, projected model mix, and wholesale pricing, we estimate the tariffs could put about 17% of affected European and U.S. carmakers' EBITDA at risk.  In this scenario, Volvo Cars and JLR could see more than 20% of their EBITDA at risk over the short term (see chart 2). Conversely, BMW's and Mercedes' EBITDA at risk would be at or below 10%. Stellantis' EBITDA is almost completely shielded from European tariffs but exposed to a deterioration of the trade relationship between the U.S., Mexico, and Canada. VW has exposure to EU and Mexican imports. These percentages are also influenced by the current level of profitability and operating leverage factored into our 2025 base-case projections for each OEM without the tariff.

Chart 2

The effects from potential tariffs on EU imports will be negligible for U.S. automakers, but there is meaningful risk related to Mexico and Canada.  In the case of Ford, models imported from Europe--including Fiesta, Focus, and Mustang Mach-E--account for less vehicle volumes in the U.S than the company's larger trucks and sport utility vehicles (SUVs). GM exited the European market in 2017. The higher percentage of EBITDA at risk in the case of Ford and GM is related to the two companies' production in Mexico. GM's contribution margins will likely be more affected by the tariffs than Ford's, given its production mix in Mexico comprises profitable pick-up trucks, such as Silverado and Sierra, as well as the new Equinox model. It also produces a limited number of models in Canada.

The effect of the tariffs on Toyota and Hyundai-Kia seems manageable.  We estimate about 10% of EBITDA will be at risk for Toyota and below 2% for Hyundai-Kia, given that they import only a few models from Mexico (Toyota produces the Tacoma and Hyundai-Kia the K4 and Tucson models in the country). Toyota's main risk stems from the production of its RAV4 model and some Lexus models in Canada. If a potential 20% tariff was applied to imports from Japan and South Korea, however, another up to 9% of EBITDA could be at risk for Toyota and up to 19% for Hyundai-Kia.

We expect OEMs would bear a meaningful share of a tariff increase, but we think mitigating measures will reduce the effect materially.  We discuss possible mitigating measures below. In addition, the time it would take for EBITDA effects related to Mexican and Canadian imports to materialize would depend on the U.S.--will it act unilaterally already in 2025 or will it seek to achieve concessions as part of the scheduled USMCA review in mid-2026. In the latter case, any earnings impact would materialize only from second-half 2026, thus giving companies more time to prepare.

Tariffs on vehicle parts shipments could add pressure.  Our estimations do not include the effects of potential tariffs on vehicle parts shipments. Based on our analysis of global trade data, we assume that the effect on parts shipments from Mexico would be the most severe. Tariffs on parts would worsen the cost structure of OEMs' U.S. production and reduce any benefits for domestically made vehicles from a potentially higher overall level of pricing after the imposition of tariffs.

Tariffs Could Compound Other Downside Risks For Ratings

The effect of a 20% tariff on European imports on European carmakers' combined EBITDA would be less pronounced than it had been during Mr. Trump's first term in office.  In 2019, we estimated that the potential earnings loss from a 25% tariff on LV and vehicle parts imports from Europe would amount to about 15% of the combined EBITDA of VW, BMW, Mercedes, FCA, Volvo Cars, and JLR. Excluding the effects of potentially deteriorating trade relations between the U.S., Mexico, and Canada, the combined EBITDA effect of a 20% tariff would be about 8% for all six European OEMs in our current scenario. Apart from the fact that our current estimates exclude tariffs on vehicle parts imports--given the lack of clarity on the future scope of tariffs in this regard--and the difference in assumed tariff levels for European imports (20%, compared with 25% in 2019), the lower effect mainly results from a higher combined EBITDA base (an estimated €84 billion for 2025 versus €61 billion in 2019). Increased localization also plays a role in some cases.

The prospect of possible trade barriers between the U.S., Mexico, and Canada, compounds downside risks.  As a result, we estimate about 16% of European carmakers' total EBITDA is at risk. If the sample also includes Ford and GM, the figure is about 17%.

On its own, a moderate EBITDA shortfall relative to our base case is unlikely to eliminate rating headroom.  However, the new tariffs would hit the car industry at a time when carmakers, in particular in Europe, are already grappling with several challenges. This, together with other factors, could increase downside pressure.

Company-Specific Considerations

BMW AG (A/Stable/A-1)

The company faces increasing competitive challenges in the Chinese premium market and subdued demand in the very profitable higher-end premium/luxury end of the market. In 2024, BMW has also grappled with additional costs and delivery constraints related to a large braking system recall. We view the company as comparatively well placed to contain the financial effect of stricter 2025 EU CO2 emission standards. Its comparatively small exposure to U.S. tariffs means that our tariff scenario would dent rating headroom, but downside risks seem more manageable compared with peers.

Ford Motor Co. (BBB-/Stable/A-3)

Third-quarter results and guidance (total company EBIT for 2024 narrowed to the low end of the prior range) indicate a smaller ratings cushion to absorb further potential underperformance through 2025 and higher costs related to potential tariffs. We forecast EBITDA margins will decline below 8% in 2024, before improving marginally during 2025 and 2026. This is still roughly in line with the median for automaker peers that are rated at 'BBB', 'BBB-', and 'BB+'. Our current stable outlook on the rating on Ford hinges on our expectation that the company's cost improvements over the next 12-18 months will more than offset higher labor-related costs, increased product refresh costs, any incremental losses related to Ford's Model e segment, and rising pricing pressure amid slowing macroeconomic conditions.

General Motors Co. (BBB/Stable/--)

Earnings through third-quarter 2024 indicate strong cost management and stable pricing across the company's internal combustion engine vehicle portfolio. Based on the company's market share and pricing trends, the progress on its $2 billion fixed-cost reduction program, and the ongoing ramp-up of its Ultium platform-based EVs, upside potential continues to outweigh downside potential in our forecasts. Given the considerable ratings cushion, potential tariffs are unlikely to have a material effect on our base case because the company has a good track record of mitigating external challenges.

Hyundai Motor Co. (A-/Stable/--)

Based on our current base case, we expect the company will be able to sustain EBITDA margins above 10%. This is thanks to its competitive product offerings across hybrid cars and BEVs, coupled with favorable geographic mix improvements that have supported Hyundai's margin expansion over the past few years. The U.S. now accounts for about 25% of the company's global wholesale volume, meaning potential tariffs constitute a risk. Hyundai could manage tariffs that are only imposed on imports from Mexico and Canada, given its limited exposure. If potential tariffs are extended to imports from South Korea--despite the existing bilateral free trade agreement between the U.S. and South Korea--downside risks to the company's earnings could increase. That said, we consider Hyundai will be able to mitigate downside risks to some degree, which could help maintain EBITDA margins above 10%.

Jaguar Land Rover Automotive PLC (BBB-/Positive/--)

Similar to Volvo Cars, JLR's EBITDA at risk is high (about 24% of its adjusted EBITDA for the financial year ending March 31, 2026) because the company's U.S. sales are sourced entirely from Europe. Its future model line-up, which will focus on BEVs, will continue to carry the same risks, with production to be focused in the U.K. Challenges in China could also weigh on JLR's operational performance, considering that the premium market in the region has reduced this year. Similar to other OEMs, JLR will have to compete with local players in the BEV market. In fact, competition could be even more intense for JLR than for peers, given the lack of BEV models in the company's current line-up.

Mercedes-Benz Group AG (A/Stable/A-1)

Mercedes' challenges are similar to those BMW faces in China. Yet we consider Mercedes' margins will be more at risk from stricter EU CO2 emission standards in 2025. At the same time, the company has been less successful in increasing its BEV market position in China. This means that additional tariffs would affect the company at a time of reduced rating headroom.

Stellantis N.V. (BBB+/Negative/A-2)

The negative outlook reflects the company's challenges in North America (inventory clean-up, the positioning of its model line-up, and pricing) and more competitive pressure in Europe. Tariffs on imports from Mexico and Canada could further weigh on Stellantis' profitability and cash flows, and precipitate downside pressure.

Toyota Motor Corp. (A+/Stable/A-1+)

We expect Toyota's profitability and free operating cash flow will benefit from sales of highly competitive hybrid electric vehicles and remain solid, despite the challenging business environment. However, Toyota's sales and profits are declining in China, increasing pressure on market shares and profitability. If potential tariffs on imports into the U.S. were extended to Japan, Toyota's rating headroom would reduce. That said, the tariff hike on only imports from Mexico and Canada would be well manageable.

Volkswagen A.G. (BBB+/Stable/A-2)

A key challenge for the rating on VW will be the company's ability to right-size its European cost structure to safeguard its medium-term competitiveness with Chinese OEMs and other peers. The success of its software and E/E partnerships with Rivian and Xpeng is also crucial to boost the customer appeal of its BEVs. This is particularly the case in China, where VW faces stiff competition from local players and is experiencing a steady decline in market share. If VW fails to address these challenges, U.S. tariffs could reinforce downside pressure stemming from the company's difficulties with executing the core elements of its strategy.

Volvo Car AB (BB+/Stable/--)

Volvo Cars stands out among automakers since it has the highest percentage of EBITDA at risk (about 30% of its adjusted EBITDA). This is because the company only produces the S60 sedan and the EX90--a newly launched large BEV model--in its South Carolina plant. The expected sales volume of the EX90, however, is relatively low, considering its price point. Until year-end 2025, Volvo Cars will produce the SUV-B EV only in China.

OEMs' Success With Tariff Mitigation Will Matter For Ratings

We expect OEMs would develop strategic tools to reduce the effects of tariffs on credit metrics. The successful implementation of these tools can bolster OEMs' rating headroom.

BMW, Mercedes, and Ford could apply for tariff relief.  Among European OEMs, BMW and Mercedes are major exporters of cars from the U.S. because they use the U.S. as a global production hub for many of their SUVs. BMW's production in the U.S. currently includes its X3–X7 and XM models, while Mercedes produces, for example, its GLE, GLS, EQE SUV, EQS SUV, and GLE Coupe car models, as well as its Sprinter vans, in the country. The two OEMs could significantly reduce any effects from potential tariffs if they were able to capitalize on their exports and reached an agreement with the incoming U.S. administration for partial tariff relief (see chart 3). For example, if the U.S. administration were to focus on the net import balance of vehicles, these companies would benefit from their roughly neutral position. Ford also has an approximately neutral net export position.

Chart 3

We expect OEMs will pass part of the cost increase to customers.  We think carmakers will find it difficult to pass on the full effects of higher tariffs to customers by increasing prices. Prices of new vehicles in the U.S. have started to decline since early 2024, reflecting a combination of muted demand and increasing supply (see chart 4). That said, we think carmakers should be able to achieve some pass-through, including through selected tactical measures for specific models or in specific segments. Ultimately, the ability to pass through the tariff impact depends on the price elasticity of demand. We expect OEMs will carefully manage pricing changes against the potential loss of volume. Partial pass-through through pricing would also benefit OEMs' locally produced models if key market players in the U.S. used the protection from tariffs to strengthen pricing discipline, while maintaining a tight supply.

Chart 4

We think OEMs could optimize the tariff burden via transfer pricing between the parent company and importing subsidiaries.  This can provide relief by reducing the calculation basis for the tariff to be paid. Even though exchange rate forecasts are difficult in the currently volatile environment, a stronger U.S. dollar could constitute another mitigating factor, which would benefit the contribution margins of imported cars.

On-Shoring Can Partly Ease The Tariff Burden

OEMs have some leeway to increase the output of their U.S. plants if they improve capacity utilization and increase working hours temporarily.  We assess the degree of possible short-term flexibility for relocating production (or increasing output of domestically produced models) by the sum of unused regular capacity and the overtime premium (shift to maximum capacity) for each OEM in 2025, as published by S&P Global Mobility and as illustrated in chart 5. Given the size of carmakers' U.S. plants and capacity utilization rates of as low as 47% for Stellantis, expected available surplus capacities of 800,000–1,000,000 at Ford and GM in 2025 (based on S&P Global Mobility's forecasts), and another potential capacity increase from overtime, Ford, GM, and Stellantis could, theoretically, on-shore their entire import volume. Expected 2025 surplus capacity will likely be tighter for VW, and below expected import volumes for Mercedes and BMW. That said, headline capacity is not necessarily available to start the production of every model or powertrain. The extent to which OEMs can harness this opportunity will depend on how quickly they are able to repurpose tooling and set up local sourcing for additional models. Therefore, the figures only provide a high-level indication of short-term flexibility. We expect the relocation potential will be considerably smaller, yet still meaningful.

Chart 5

On-shoring from Mexico--which would mainly affect Stellantis, GM, Ford, and VW--would come at a cost.  Other than higher labor costs, automakers would also have to manage the complex transition of their established supply chains in Mexico. This would partly reduce the benefit of circumventing the tariff. Additionally, it implies that higher tariffs have some adverse margin effect, irrespective of whether companies relocate production. Moreover, we expect the advantages of relocation will be heavily influenced by decisions about potential tariffs on parts.

Existing investment plans by BMW, VW, Ford, and--to a lesser extent--GM aim for further meaningful capacity additions by 2027.  Moreover, potential tariffs could incentivize incremental capacity expansions in the U.S. that exceed existing plans. For example, we think tariffs could lead VW to consider localizing the production for Audi--as the premium brand does not currently have any plants in the U.S.--and add urgency to potential capacity upgrades for BMW, Mercedes, and Volvo Cars. Yet this would take time. Additionally, it would necessitate an increase in capital expenditure, and margins could suffer if production is relocated from Mexico or other lower-cost locations.

Related Research

• Trump's Tariffs Could Hurt EU Carmakers--Not The Economy, March 26, 2019