When Henry Ford invented the Model T and sold it at a lower price, as long as it was black, all the parts that went into the car were manufactured by Ford, most of it at is Rouge complex in Detroit. The system was left alone for decades and then slowly the big 3 companies Ford, GM, and Chrysler decided that they would rather spend their money on selling the finished cars rather than the parts that went into into it. The parts divisions were sold to investors but they had guaranteed customers as the big 3. A few independents companies managed to get a foothold and soon the Big 3 sold off their shares and the parts companies were independent. The big 3 could squeeze costs from the parts companies and the system evolved to what it was.

President Trump was elected for the second time and his signature economic piece is manufacturing in the US through the use of tariffs. The premise to is impose a tariff on every country as an incentive for the companies doing business is the US to manufacture in the US and sell tariff free. On one hand it has validity, if tariffs and other incentives are changed, then the process could produce more manufacturing in the US. On the other hand, over the decades of driving down costs, companies have operations in lower wage companies, tariffs does not fundamentally alter that lower costs. In addition, the tax system or incentive structure has not been changed. The other obstacle is countries that import into the US have developed feeder systems that will be affected. Is it wise to place obstacles to friends of your country?

In an article by River Akira Davis, Jin Yu Young, Melissa Eddy, and Hisako Ueno of the New York Times News Service, the economies of car making countries of Japan, South Korea and Germany are being affected by the tariffs imposed by President Trump. In all the countries, the cars that are imported to the US, have supplier companies. The Japan’s auto parts sector employs over 600,000 people South Korea has 330,000 employees and Germany supplier sector is a third of the more than 700,000 people in the automotive sector.

Besides tariffs the other aspect that the automotive industry is being changed with electric vehicles which need fewer parts. Supplier companies often have razor thin margins, so they do not have the levers to adjust to tariffs. The shift to EVs plus the rising competition from Chinese competitors is causing companies to consolidate. Tariffs are an accelerator to the process.

President Trump at the moment to impose tariffs, although it could be struck down because it was done under emergency powers, then Congress would have to vote for it. Similar to many what seems to be good policies, the Trump administration agreed to provide a partial, 2-year reprieve for auto part tariffs for companies that finish assembling in the US. This reprieve helps both foreign and domestic manufacturers.

The irony is for manufacturers to offset the effect of tariffs is the new operations in the US are filled with robotics and AI mechanisms or fewer manufacturing jobs.

Linking to dividend paying stocks, governments have the ability to change their policies when they have a majority and that can be a good thing. However, that often means companies have to adjust to new rules and ideally they are looking for consistency. The policies that are meant to help often have unintended consequences which typically means adjustments are needed. Companies employ lobbyists to try to ensure the effects of the unintended consequences are low to them.

There are more questions than answers, till the next time – to raising questions.