Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible response—specifically with regard to tariffs—and the potential effects on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts, and reassess our guidance accordingly (see our research here: www.spglobal.com/ratings).

Why It Matters For The North American Auto Sector

A sustained 25% tariff on imports from Mexico and Canada proposed by President Trump could derail the North American auto industry. Such tariffs would slash billions from automakers' profits, triggering ripple effects across the broader supply chain due to potential production disruption and driving up costs for the end consumer. In addition, all else equal, the proposed tariffs on steel and aluminum would also increase costs for the auto industry as it comprised 15% of net shipments of iron and steel in 2024. History suggests that the costs of tariffs have largely been borne by U.S. consumers. In past instances of new tariffs, almost all of the additional cost was passed through in the first year. We believe most company ratings would be unaffected if the tariffs were short-lived, but we expect the uncertainty around U.S. tariff policy to be ongoing.

In this article we provide a framework for the ratings review of our North American auto coverage given the exposure to tariffs after incorporating potential mitigating actions against current ratings headroom.

For example, we estimate a 20% tariff on U.S. light vehicle (LV) imports from the EU and the U.K. and a 25% tariff on imports from Mexico and Canada could cost affected European and U.S. carmakers, on an average around 10%-25% of their annual EBITDA in a worst-case scenario before taking into account any strategic responses by original equipment manufacturers (OEMs; for more details see Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports). Trade barriers with Mexico and Canada are the biggest risk for mass-market carmakers like GM, and Ford, and Stellantis as they 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. As a result, over the last few decades, auto suppliers have moved production to its lower cost neighbor Mexico from the U.S. It is estimated that $84 billion of auto parts were imported from Mexico in 2024 (from Panjiva).

Last-minute negotiations resulted in a one-month reprieve for both North American trading partners. The resulting uncertainty has the macro effect of complicating longer-term decision making for not just automakers and their suppliers but also households. As such, it puts downward pressure demand more generally, and--ultimately--growth.

In our review, we defined the following risk categories:

High risk:   indicates the potential for a negative outlook revision or downgrade due to limited ability to offset the impact of extended tariffs. These companies may have lower cushion on their downgrade triggers even before tariff consideration, and cannot sustain high impact contingencies.

Moderate risk:   indicates reasonable cushion on credit metrics near-term to avoid an immediate negative rating action, due to lesser exposure to tariffs (especially for suppliers), or some ability to mitigate the impact through cost actions or greater financial flexibility given strong liquidity and free cash flows.

Low risk:   indicates substantial cushion on credit metrics or less exposure to the proposed tariffs.

Scenario Assumptions

In our scenario analysis framework, we have assumed the following:

• The U.S. imposes a 25% tariff on all imported goods from Canada and Mexico starting in March 2025 through the end of the year. Canada retaliates with a 25% tariff on all U.S. imports. Mexico imposes a 25% tariff on all nonmanufacturing U.S. imports.
• The tariffs decline to 10% at the beginning of 2026, when the renegotiation of the U.S.-Mexico-Canada Agreement (USMCA) is likely to begin.
• USMCA is ratified in the middle of 2026, at which point tariffs between the U.S., Canada, and Mexico would return to the near-zero regime established under the trade agreement.
• Tariffs to China remain in place through 2025-2026.
• Uncertainty around tariffs does not fully disappear even if an agreement is reached in USMCA. Therefore, the estimated effects of the tariffs are not automatically unwound.
• Tariffs have not yet been formally announced on the eurozone, but this risk still looms over Europe, so we consider those effects as well.
• Effective March 12, the U.S. imposes a minimum 25% tariff on all steel imports and aluminum.
• U.S. light vehicle volumes drop up to 5% versus our current conservative base-case (15.8 million units in 2025) with a stronger recovery in 2026.

Table 1

Automaker Profits At Risk But Rating Impact Will Vary

Currently, General Motors Co. (GM)produces eight models in Mexico (notably Silverado, Sierra, Equinox, Terrain, and Blazer) with a higher exposure to tariffs on assembled products from Mexico relative to Ford Motor Co., which produces three models in the country (Bronco, Maverick, and Mustang Mach E). We believe both automakers will face higher costs due to the significant amount of reliance on the parts supply chain.

Ford sources nearly all its transmissions and more than half of its engines from the U.S. However, it relies on the Mexican supply chain for components such as wire harnesses, seating, and axles.

In the event of an extended tariff scenario in line with our assumptions above, we assume moderate risk to our ratings on both automakers given the potential for material incremental headwinds to their earnings and cash flows. We do not expect to take immediate rating actions once all planned tariffs are effective as we already incorporate a meaningful cushion for industry volatility in our financial risk assessments. This is consistent with our view during other large disruptive events such as the UAW strike, which led to several weeks of lost production.

We believe a few weeks of tariffs will be manageable for both without any material impact to profitability based on our assessment of the current production rate, flow of products in transit, and inventory. The scenario still presents a meaningful distraction for both management teams amid looming industry risks such as pricing pressure, eroding consumer affordability, and portfolio transition risks.

If implementation of these tariffs appear likely beyond a few weeks, we will further review our base-case scenario for downside to our industry volume estimates, and specific mitigating actions that are likely and fine-tune our assumptions accordingly. Mitigating actions for automakers in general include incremental cost reduction efforts, eligibility for duty drawbacks, the strength of the supply chain, inventory build-up, and eventually the willingness to pass through costs to the consumer to share this burden. Potential tariffs on the eurozone will have a limited impact on GM, Ford and Tesla due to no material reliance on imports from the region.

We do not assume companies will deploy material capital toward relocating production given the complexity and higher costs involved in managing longer-term product cycles against shorter duration political cycles. For instance, GM recently announced it could avoid short-term impacts between 30% and 50% of the additional costs through tactical shifts without deploying any capital.

A scenario in which these tariffs persist could further reduce the narrowing headroom for the current rating on Ford against further underperformance through 2026 as indicated in our last rating action (see "Ford Motor Co. And Subsidiary Outlook Revised To Negative On Weaker-Than-Expected Profitability Prospects; Ratings Affirmed"). This is somewhat offset by Ford's lower exposure to production in the region. For GM, given the considerable ratings cushion, potential tariffs are unlikely to have a material effect on our base case in the near-term because the company has a good track record of mitigating external challenges and our current base-case (excluding tariffs) has more upside than downside.

Tesla Inc. faces low risk and has substantial ratings cushion, given its lack of production footprint in Mexico albeit with some reliance for parts.

Diving Deeper Into The North American Supply Chain

Most suppliers have significant production in Mexico and to some extent in Canada. It is challenging to determine their exact levels of tariff exposure because of significant differences in the way companies report sales figures. However, the following table shows our estimates for sale exposure to the North America(in a few cases we include revenue from South America where the company does not break it out but this is relatively small).

Chart 1

We think suppliers of wiring, seating, axles, metal parts, and other electronics would be producing a substantial percentage of their products in Mexico. For example, Aptiv plc has indicated they import around $4.6 billion of goods from Mexico (around 64% of its 2024 revenue in North America) given the great labor intensity involved with manufacturing wire harnesses. Lear Corp. had about $2.9 billion of imports into the U.S. from Mexico in 2024 (roughly 30% of its 2024 revenue in North America), and we assume Adient has significant production for its cutting and sewing business as well as metal structures.

There are some suppliers with a more favorable manufacturing footprint, with much of their production in Mexico supplying auto plants within Mexico. For example, while more than 50% of Nemak's sales are in North America, the majority of its plants that supply the U.S. original equipment manufacturer (OEM) plants are in the U.S. and only 12% is exported from Mexico. Metalsa also has high exposure to North America but only 25%-30% of sales are exported to the U.S. from Mexico. BorgWarner Inc. has greater international diversity and has indicated only about 55% of their modest $875 million parts imported to the U.S. come from Mexico or Canada. Autokiniton US Holdings Inc. also has most of their plants in the U.S.

Ultimately, we do not think suppliers could or would support such a large tariff without passing the tariff on to OEMs. Many smaller tier 2 and 3 suppliers would most certainly face financial distress without some degree of pass through. For this reason and given the comments from suppliers, we think any tariff would be expeditiously passed on to OEMs, limiting the profit drag on suppliers after the first couple months. In addition – there could pressure from higher costs for components imported from China, though with the exception of semiconductors, the majority of parts are produced and sourced within North America.

The Biggest Concerns Are Longer Term

The key longer-term concern for the industry would be the secondary effects from tariffs if they became permanent. We think these issues would only become significant if the tariffs were to remain in place for an extended period of time (several months) or more permanently.

Lower volumes

Volumes are vital for suppliers and a decrease would reduce profits. Tariffs could increase prices of new vehicles by thousands of dollars, which sit at an average of $49,740 as of December 2024 according to Kelley Blue Book. This in turn could reduce demand for vehicles. The number of vehicles sold in the U.S. has already fallen because of higher prices and interest rates to 15.5-16 million currently from 17 million pre-pandemic.

We assume U.S. light vehicle volumes could drop up to 5% versus our current conservative base-case (15.8 million units in 2025) with a stronger recovery in 2026. We also expect higher prices and lower volume could be greater for the Detroit 3 (GM, Ford, and Stellantis) given their greater exposure to auto production in Mexico. Most North American suppliers that we rate tend of have greater exposure to the Detroit 3 in terms of volumes, so lower volume could be more significant for these suppliers. In addition, to the extent higher prices push consumers into smaller, cheaper vehicles, this would exacerbate the content and margin impact given the weaker product mix for suppliers.

Supply chain issues

The supply chain has mostly recovered from the severe issues that stemmed from the COVID-19 pandemic, mostly from the result of semiconductor shortages. We would expect large tariffs on Mexico and Canada could lead to production shortages and stoppages as suppliers negotiate the pass-through of tariffs to OEMs, or due to bottlenecks in border processing, given the sheer quantity of goods that could be subject to newly applied tariffs.

We think smaller tier 2 and 3 suppliers may have significant issues navigating the tariffs and will need support from their customers to continue production. In addition, some parts cross the border several times and might create further cost, logistical, and tariff accounting issues.

Retaliatory tariffs are also a risk. For instance, American Axle sources most of its direct materials for its Mexican manufacturing from the U.S., exposing it to tariffs on imported American goods imposed by Mexico.

Production volatility

We believe volatility in OEM production could return as OEMs with production in Mexico would likely look to increase production of certain models in the U.S and perhaps reduce production in Mexico. This could bring back the supply chain volatility that reduced visibility for suppliers after the pandemic. We think this would cause a drag on profits as suppliers struggle to optimize plant production and its labor force.

Working capital

Tariffs on billions of dollars of products will increase working capital (due to costs from potentially holding higher inventory for an extended period at elevated tariff-burdened prices) and reduce the free cash flow for most of our rated issuers, a key credit metric for such a capital-intensive industry. Issuers with weaker free cash flow or liquidity are particularly sensitive to this risk.

Capital spending

Given the billions of installed capacity in Mexico and the massive differential in labor costs compared with the U.S. (we estimate 5x-10x higher cost), we would not expect suppliers to quickly relocate production back to the U.S. For instance, per Aptiv's estimates, tariffs would have to be at 55% of locally

produced wire harness's value to justify moving wire harness assembly to the U.S. from Mexico. However, companies could move some production if the tariffs become more permanent. To the extent OEMs move production to the U.S., some parts production may move as well.

Beyond higher operating costs in the U.S., the moves would also be capital intensive and require significant investments in automation to increase productivity. In addition, suppliers may look to move some production to low-cost countries not impacted by the tariffs like Southeast Asia and Central America. However, such moves may prompt further tariffs on those countries from the Trump administration.

Any incremental capital spending and tooling could reduce free cash flow and hurt credit metrics over the next couple years. However, we think suppliers will be very careful in spending given all the industry volatility coming from the tariffs. Furthermore, over the past few years, weaker production volumes, inflationary pressures, and significant electrification investments have eroded suppliers' profitability and credit metrics cushion. This will make it difficult or impossible for suppliers with thinner free cash flow generation to make significant relocation investments without some ratings downside risk.

Impact Of Higher Commodity Costs

The U.S. imports only about 25% of its steel needs. Imports from Mexico and Canada account for around 40% of U.S. steel imports (U.S. Census Bureau). However, around half of aluminum is imported with over half of the imported aluminum used by the U.S. coming from Canada (U.S. Department of Commerce).

For OEMs Ford, GM, and Tesla, we don't expect the impact of higher commodity tariffs (especially steel) will be material in our 2025 estimates as these companies source a significant amount of both commodities from the U.S. and have fixed pricing on such purchases over the short term. For instance, we believe Ford sources 90% of steel domestically (10% from Canada), and they do not expect a major impact from aluminum tariffs. However, higher commodity prices longer term could add pressure for OEMs to increase prices. Most suppliers have pass-through for steel and aluminum built into their contracts, which limits the impact to profits over time.

Risk Map For North American Auto Suppliers

In the table below, we summarize our risk assessment for suppliers based on the same scenario assumptions above for OEMs. The impact for suppliers is more based on the secondary effects of lower volumes and production volatility. We recognize many of these secondary effects on volumes and supply chain, especially related to production volatility, are similar to what the suppliers experienced after the COVID-19 pandemic, which most large suppliers we rate managed well.

Table 2

High risk indicates the potential for a negative outlook or downgrade if the 25% tariffs remain, causing the ensuing lower production, production volatility, and increased working capital. Many of the high-risk companies have strong businesses and will likely be able to navigate the impact as they did through the COVID-19 pandemic and the ensuing supply chain issues in the couple years that followed.

The main concern for most of these companies is the limited downside cushion on their credit metrics. For lower rated companies like Cooper-Standard Holdings Inc., Superior Industries International Inc., and Tenneco Inc., the bigger concern is that tariffs meaningfully reduce free cash flow and liquidity. Adient PLC, Lear, and Magna International are large and well-managed companies with conservative credit metrics, but given the limited cushion on their metrics, the risk of a negative rating action (negative outlook or downgrade) is higher.

American Axle & Manufacturing Holdings Inc. has substantial exposure to Mexico (35%-40% of revenue). It's primarily exposed to secondary tariff risks given that most of these sales are to OEMs within Mexico, which then export to the U.S. The potential Dowlais transaction will add significant debt to the capital structure and lower free cash flow generation materially until it achieves synergies by 2028. The tariffs could make it more difficult to recover its free cash flow by lowering the company's profitability, which could make it more difficult to reinvest in the business and successfully accomplish its restructuring objectives.

Although Cooper Standard's margins have slowly recovered over the past few years, it still doesn't generate meaningful free cash flow. Potential tariffs could derail its recovery trajectory and put its positive outlook in jeopardy. Free cash flow generation could turn negative if substantial supply chain and production volatility persists. At this time, the company maintains a decent amount of liquidity cushion, which would mean liquidity is less likely to become constrained in the near term.

Superior Industries exposure to tariffs is high because the company's North American operations are largely based in Mexico, which represented 55% of its 2023 revenues. While we would expect the company to pass on tariffs to customers, lower volumes and production volatility could lead to persistently negative free cash flows and reduced liquidity. While the majority of Autokiniton's manufacturing sites reside in the U.S., we assess its risk as high due to the company's already limited cushion to our downside triggers.

Moderate risk indicates greater cushion on credit metrics, smaller exposure to tariffs, or greater financial flexibility given strong free cash flows. For example, Aptiv is very exposed to tariffs and its leverage was elevated following an accelerated share repurchase, but the company has already deleverage, and margins and free cash flow generation are much stronger than most other suppliers. Metalsa has significant exposure to North America and the Detroit 3 but has a significant cushion on its leverage metric. Leverage has still remains around 1.5x or below, while its downside trigger is 3.0x. Nemak has material exposure to North America as well. While the outlook is negative, it still has decent cushion on its leverage metric (roughly 2.4x) relative to the downside trigger of leverage close to 3x.

Low risk indicates substantial cushion on credit metrics or less exposure to the proposed tariffs. For example, BorgWarner has greater international diversification and significant cushion on its credit metrics. It also imports a much smaller percentage of good into the U.S. ($875 million in 2024 with 50% from Mexico, 10% from Canada, and 5% from China).

Aftermarket suppliers

For most aftermarket suppliers (also included in the risk table above), we think the risk is more manageable. Aftermarket suppliers tend to produce more in the U.S. or import from abroad. Increasing tariffs on China would be a drag for some suppliers such as RC Buyer Inc., Power Stop LLC, and Holley Inc.. However, so far the tariff increase is only an additional 10%, which is unlikely to have a material credit impact. A few aftermarket suppliers have greater production in Mexico like First Brands Group LLC, RealTruck Inc., and especially Burgess Point, so the tariffs could initially hurt them more. Still, we think aftermarket suppliers overall have a greater ability to increase prices quickly to consumers, which would limit the impact on their margins.

The greater risk is that higher prices lead to lower demand and volumes for more discretionary products like custom wheels, lift kits, floor mats, and truck bed covers. The companies more exposed to these discretionary trends are Holley, Power Stop, RC Buyer, and RealTruck. Burgess Point Purchaser Corp., First Brands, Clarios Global L.P., and Goodyear Tire & Rubber Co. (The) produce more nondiscretionary or semi-discretionary products so the impact to volumes would likely be more muted despite higher prices. However, companies with no free cash flow generation like Burgess could be at risk if tariffs make it harder for the company to improve profitability such that its liquidity becomes drained over time.

Auto Dealers

For the dealers we rate, a sustained 25% tariff could reduce volumes of new vehicles. However, the companies could increase their volumes of used vehicles and we think the age of vehicles may increase even more, which would support the very high margin parts and service business at dealers.

There could be some volatility in the parts supply chain that results in higher prices, but we believe dealer would pass any potential cost increases on to consumers. As far as gross profit per unit (GPUs) for new vehicles, its difficult to say whether dealers could capture greater margins. However, we don't think the ability to overcharge over MSRP would be so large as it was during the pandemic given dealers' more comfortable vehicle inventories. Most dealers have significant cushion in their metrics, so we do not expect the tariffs to result in any rating actions. One exception could be Velocity Vehicle Group, because of its exposure to cross-border transport volumes through the Mexican border and shipments from China through the Port of Los Angeles.

Related Research

• Announced Steel And Aluminum Tariffs Would Mean Little Change For U.S. GDP And Prices, Bigger Risks For Downstream Users, Feb. 12, 2025
• Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 10, 2025
• Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• Economic Research: How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
• A 25% Tariff Would Create New Trade Challenges For Mexican Corporations, Feb. 3, 2025
• Industry Credit Outlook 2025: Autos, Jan. 14, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024