• Roland Berger analyzed consequences of proposed protectionist measures in the United States
• Manufacturing costs would rise by 3,300 dollars per vehicle on average
• Falling margins and lower sales: US market likely to become loss making for almost all manufacturers – including American OEMs
• Consequence: Medium and long term job losses among both manufacturers and suppliers in the US

Munich, March 8, 2017

If the new American administration implements the substantial border tax on vehicle imports to the US that it proposes, the consequences would be the exact opposite of the intended effect: American consumers would have to bear additional costs, manufacturers' profit margins would shrink, their sales would fall. The result would be a drop in income for automotive OEMs and suppliers alike. Ultimately it could destroy a lot of jobs in the American market. This is the key finding of the latest Roland Berger study, New US tax/tariff proposals and their impact on the US automotive industry. Experts from Roland Berger analyzed the potential consequences of the border adjustment tax for the entire auto industry in the US as well as European and Asian importers.

"The border tax proposal will be a zero-sum game at best," says Wolfgang Bernhart, Partner at Roland Berger. "For automotive manufacturers, the more likely outcome will be intense margin pressure and reduced vehicle sales – possibly resulting in further job losses." If the tax is actually introduced it would add significant costs for cars manufactured in the US – averaging 3,300 dollars per vehicle. "Even models made by American OEMs would be hit by an average cost increase of 1,500 dollars owing to the large proportion of foreign part content," says Bernhart. Asian vehicles would see costs rise by 2,000 dollars, European models would experience a 5,300 dollar hit, and costs for pure play importers would be as much as 6,400 dollars per vehicle higher.

The American market: Loss making for almost all OEMs

The Roland Berger experts calculated the scale of the border tax's consequences for the auto industry on the basis of 2015 business figures. And what they found is: "The added manufacturing costs would turn the US market into a loss maker for almost all OEMs," says Wolfgang Bernhart. "Even American manufacturers would lose so much of their profit in their important domestic market as to turn their business loss making globally." That said, moving production from abroad to the US does not solve the cost problem: quite apart from the high costs of rebuilding production capacities, the production of small and mid-size cars is already not economically viable in the United States today.

Even the hope that planned cuts in income tax in the US could make end customers more inclined to buy a car is in itself deceptive: the higher cost of the vehicles would erase any tax benefits for the average US household almost completely. The Roland Berger experts concluded in their study that the overall impact of the border adjustment tax on the auto industry is likely to be negative: weaker vehicle sales, lower margins and eventually even fewer jobs than today, with suppliers being the first to have to cull the workforce, followed medium to long term by automakers themselves.

Fear of major job losses in the US

The proposed protectionist measures would therefore achieve exactly the opposite of the desired effect and thus reverse all the positive developments of recent years: "After years of battling through hard times, auto production in the US is currently back at the record levels of the early 2000s," says Bernhart. "All of the big OEMs are producing the majority of their vehicles for the North American market in the United States, where they have invested a lot more than they have in Mexico or Canada." However, in some cases – small cars in particular – companies simply cannot break even by manufacturing vehicles in the US and so offshoring production to countries like Mexico is unavoidable.

The number of jobs in the American auto industry has been climbing too after the 2009 economic crisis. The loss of some 600,000 jobs in the nine years prior (2000-2009) has little to do with Mexican offshoring: only about 100,000 new jobs were created in Mexico in that period. The main reason for those job reductions is believed to lie in a structural shift in the automaking business, as Roland Berger expert Bernhart points: "As in other countries and industry sectors, jobs are being lost in the American automotive industry owing to the rise in automation and the concurrent increase in productivity. The proposed border tax is not going to change a thing about that – quite the opposite: it will heap additional costs on US companies and consumers alike. The result will be lower vehicle sales, reduced income and fewer jobs in the local automotive industry."

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