Trump Metals Tariffs Will Cost Ford $1Billion in Proffits

[BlackTortoise + 103]

Steel and aluminum tariffs imposed by the Trump administration have cost Ford Motor Co about $1-billion in profits, its chief executive officer said, while Honda Motor Co said higher steel prices have brought “hundreds of millions of dollars” in new costs.

“The irony of which is we source most of that in the U.S. today anyway. If it goes on any longer, it will do more damage,”said CEO James Hackett. 

[Brian W + 78]

Tariffs only work unless you have a strong domestic producer. Our steel industry is a fraction of what it was decades ago, companies have no choice but to get their raw materials abroad.

[Vlad Kovalenko + 115]

How did he come to that $1 billion figure? The metal tariffs have only been in place for 6 months and they probably had at least 3 months of inventory on hand when the tariff was imposed. Steel and aluminum are only a small part of their COGS. Calling a nearly 20% annualized loss of profit a result of a 15% tariff on one part of your COGS that you say you mostly source from the US anyway is a little bit suspicious. 

[Brian W + 78]

It takes some time for tariffs  to work. Eventually manufacturers will see that its in their best interests to start making American stuff again, and that helps American works, builds industries back up and sustains them for the future, and improves our balance of trade at the same time.  

[Vlad Kovalenko + 115]

Ford sales have been falling since before the tariffs. Ford stopped making several car models because they weren't making enough profit and that was not due to tariffs.  Ford's problems are a combination of management, being on the downward slope of the sales cycle, and yeah probably tariffs have had some impact. It is easier to blame tariffs in an attempt to deflect attention away from management. 

[Jan van Eck + 7,558]

Let's remember what the real effect of the tariffs on steel are for Ford.  They do NOT put up the invoice price of their coiled steel material. What is happening is that the tariffs are acting as a barrier to the steel dumping that was going on, thus allowing domestic coiled-steel producers to raise their prices to a level where they could make some money and open up shuttered plants, to allow substitute product to flow into the domestic market from domestic mills.  

Ford was already sourcing some of its coiled steel from US producers, and I suspect (although Ford does not admit to it) quite a bit more from the steel plants located in Hamilton, Ontario, a traditional large-volume supplier of coiled steel to the auto market; historically, some 85% of those plants' outputs flowed directly to the US.  The Canadian product was attractive as Canadian producers work in the Canadian dollar, now trading at a huge discount to the US dollar.  Also, Canadian output did not incorporate the health-insurance costs found inside US product, as Canadian health-insurance is socialized, the budget charged off to the Provincial Government. In the short term, the auto builders simply pay the tariff.  They need that product. 

Where the tariff is allowing the domestic steel mill to raise prices to a level where it can re-invest, and open other mills (which has been happening), then it is a net benefit to American society.  The logical result for Ford is to raise prices to accommodate the raise in steel, which would not really be that much.  The suggestion that steel pricing for coiled sheet is killing Ford is a bit silly;  the real cost factors for auto consumers is all the very expensive add-ons that the auto builders put into their product, including 12-speaker stereo systems, back-up cameras, fancy electronic tire-pressure monitor systems, special alloy wheels, vast amounts of micro-processors, power this and that, leather everywhere, you get the picture.  Those Ford guys could build a car and sell it for half what they charge today, but it would not have heated seats and heated mirrors and power door locks.  Seems the customers don't much care, they buy that anyway. 

Finally, the long-time Ford profile was that Ford never made any money on their small cars.  Basically they were loss-leaders, and the money was made by Ford Credit in the finance. The big money is made in the pick-up trucks, perhaps $10,000 a truck, lots of margin in those products.  Ford is finally dumping their car lines and concentrating on the trucks, an entirely logical move for them.  Build what people are prepared to pay good money for.  That is the winning plan. 

Edited September 28, 2018 by Jan van Eck

[Dan Warnick + 6,100]

4 hours ago, Jan van Eck said:

Let's remember what the real effect of the tariffs on steel are for Ford.  They do NOT put up the invoice price of their coiled steel material. What is happening is that the tariffs are acting as a barrier to the steel dumping that was going on, thus allowing domestic coiled-steel producers to raise their prices to a level where they could make some money and open up shuttered plants, to allow substitute product to flow into the domestic market from domestic mills.  

Ford was already sourcing some of its coiled steel from US producers, and I suspect (although Ford does not admit to it) quite a bit more from the steel plants located in Hamilton, Ontario, a traditional large-volume supplier of coiled steel to the auto market; historically, some 85% of those plants' outputs flowed directly to the US.  The Canadian product was attractive as Canadian producers work in the Canadian dollar, now trading at a huge discount to the US dollar.  Also, Canadian output did not incorporate the health-insurance costs found inside US product, as Canadian health-insurance is socialized, the budget charged off to the Provincial Government. In the short term, the auto builders simply pay the tariff.  They need that product. 

Where the tariff is allowing the domestic steel mill to raise prices to a level where it can re-invest, and open other mills (which has been happening), then it is a net benefit to American society.  The logical result for Ford is to raise prices to accommodate the raise in steel, which would not really be that much.  The suggestion that steel pricing for coiled sheet is killing Ford is a bit silly;  the real cost factors for auto consumers is all the very expensive add-ons that the auto builders put into their product, including 12-speaker stereo systems, back-up cameras, fancy electronic tire-pressure monitor systems, special alloy wheels, vast amounts of micro-processors, power this and that, leather everywhere, you get the picture.  Those Ford guys could build a car and sell it for half what they charge today, but it would not have heated seats and heated mirrors and power door locks.  Seems the customers don't much care, they buy that anyway. 

Finally, the long-time Ford profile was that Ford never made any money on their small cars.  Basically they were loss-leaders, and the money was made by Ford Credit in the finance. The big money is made in the pick-up trucks, perhaps $10,000 a truck, lots of margin in those products.  Ford is finally dumping their car lines and concentrating on the trucks, an entirely logical move for them.  Build what people are prepared to pay good money for.  That is the winning plan. 

This goes back to what I said about Harley Davidson: They are blaming Trump's tariffs for their, repeat their, decision to move manufacturing to a locale that is cheaper for them (Thailand, which will export to Europe as well).  Trump's tariffs had little effect on the price of a Harley in the U.S. or for export.  Not paying existing EU tariffs is where they make more profits.  More profits, it bears repeating.  Harley used the tariffs as an excuse to their workers, their suppliers/vendors, and the communities where all of those people live, shop and send their kids to school (local economy and taxes).

Everything in your comment, and the comment of @Vlad Kovalenko is true (except the door locks!).  Ford credit, and I might add GMAC and its myriad branches are where the money has been at for quite a while, but they know they have mismanaged those businesses as well and they are about to take possible company-ending hits there if/when the next market/financial crisis comes along.

For any of our international readers, the message here is that Ford and other companies have made bad decisions and will have to pay the price for those decisions.  They, and many, many other U.S. companies (and a whole lot of foreign governments and companies) will cry in pain because the pacifier is being taken out of their greedy little mouths, but rest assured, Trumps tariffs are not to blame for their own mismanagement, and the theft of shareholder profits by the C-suites of America.  There is a lot of discussion on both sides of the Trump tariffs, but the question once again is:  Was anyone else doing anything, anything at all, about trade irregularities (currency manipulations, existing and ongoing foreign tariffs, unbalanced tax laws such as VAT, foreign import duties of 80%, 120%, 200% and even 300% in some countries, etc.) that are unfair to the U.S.?  Was anyone else doing anything about companies leaving the U.S. to reap unfathomable profits in other countries, for other countries?  Was anyone else doing anything to help U.S. workers?  The simple answer is NO.

[Jan van Eck + 7,558]

2 hours ago, Dan Warnick said:

 

Everything in your comment, and the comment of @Vlad Kovalenko is true (except the door locks!).  Ford credit, and I might add GMAC and its myriad branches are where the money has been at for quite a while, but they know they have mismanaged those businesses as well and they are about to take possible company-ending hits there if/when the next market/financial crisis comes along.

The situation at GMAC was even more incredible than anything that happened at Ford.  GMAC, and for non-US readers, that is "General Motors Acceptance Corporation," was the car-financing arm of General Motors.  If you wanted to buy a Chevrolet, you went to the dealer, picked out what you wanted, and paid for it by signing a contract with GMAC - so much a month, for 60 months. Since GM had built their cars and trucks to be so expensive that nobody paid cash, they had GMAC to finance your purchase.  It made for a painless auto sale.

Now along come the smart young managers out of the business-management schools and get the bright idea that GMAC should be a one-stop financing institution, not just for car loans.  And their next big financial product was home mortgages. Not only would you buy your car through GMAC, you would also buy the garage for that car, and the house attached to that garage - all with mortgages with GMAC.  It sounded really great, and those new Boy Scouts that GMAC hired made big bonuses. 

Along comes the financial crisis of 2008 and no Bank wants to lend money. The housing mortgage market goes into melt-down, and the traditional source of GMAC new money, warehouse lines of credit from Wall Street, evaporates. GMAC existing cash is tied up in house mortgages, many of which are now "non-performing," so no fresh cash there.  And that means that GMAC has no cash to loan out for car purchases. 

Meanwhile, the customers still arrive at the dealers, ready to buy, but nobody wants to finance them, and GMAC cannot finance, as they got wrapped up in illiquid home mortgages.  The result:  GM the auto builder cannot sell its product.  So GM collapses, the stock goes from $55 to 18 cents, and GM goes bankrupt.  Bye-bye. 

Everything is wiped out: shareholders, creditors, pensions, health-care plans, dealership contracts, inventory, manufacturing plants, everything.  Hundreds of billions in assets gone - all because the new guys at GMAC had those bright ideas to branch out past the car loan business.  If GMAC has stayed with its core business, car loans, it would be fine today, and GM would have continued nicely.  What this shows you is that a small handful of managers can wreck even the hugest companies.  - And you see this happening again today, with General Electric, a $60-billion-dollar company that cannot earn a profit and whose stock has sunk from $30 to $11 in three years.  In GE's case, due to only two managers.  Jack Welsh and Jeff Inmelt. Just lovely.

[John Foote + 1,135]

On 9/28/2018 at 2:26 AM, Jan van Eck said:

General Electric, a $60-billion-dollar company that cannot earn a profit and whose stock has sunk from $30 to $11 in three years.  In GE's case, due to only two managers.  Jack Welsh and Jeff Inmelt. Just lovely.

Oh my, someone who doesn't worship Jack the Ripper. Bless you.

Where I work, 90% of our product is exported, 60% to China. The reaction to Trump is a strategic initiative to resource, and go global. Currently 6% foreign content. Target is 75% within five years. This is a multi-billion dollar business.

[Dan Warnick + 6,100]

Headline on Bloomberg today:

 

Economics

Tariffs Have Cost 685 Americans Their Jobs So Far, Data Show

OMG!

https://www.bloomberg.com/news/articles/2018-10-04/tariffs-cost-685-americans-their-jobs-so-far-data-show?srnd=markets-vp