US Tariff's Impact On Demand Could Be A Major Threat To Auto Components, Says JP Morgan

While “reciprocal” tariffs, or tariffs imposed by the US in response to tariffs from other countries, may not significantly affect the attractiveness of auto component exports, the bigger risk lies in how these tariffs could impact demand in the long run, according to JP Morgan.

In the short term, tariffs may cause supply chain disruptions and margin pressures. However, in the medium to long term, if tariffs remain in place, the situation could evolve into a larger concern: reduced demand. Higher prices due to tariffs could lead to lower vehicle sales, as consumers may be unwilling or unable to pay more for cars.

JP Morgan estimates that a 25% tariff could raise vehicle prices by 7%. While suppliers and OEMs may initially absorb some of this cost, over time, they will likely pass it on to consumers. This could reduce demand, with U.S. light vehicle sales expected to fall below the 16 million units per year seen post pandemic.

In the face of these challenges, Indian auto component manufacturers may need to adjust their strategies. If tariffs become a long-term fixture of the global trade landscape, companies that rely heavily on exports, like Bharat Forge and SONA BLW, may need to consider setting up production facilities in the US to mitigate tariff-related risks, the brokerage said in its note. However, this comes with its own set of challenges, such as the potential impact on return on capital employed and the added cost of setting up new operations.

Samvardhana Motherson International makes 18-20% of its revenue from the US and is better insulated due to its local presence. However, it faces tariff risks from Mexico and the EU, as well as back-end supply chain linkages in these regions. These factors may mitigate the impact of tariffs in the short term.

Apollo Tyres has negligible exposure to the US and is largely unaffected by tariff risks.

On the other hand, Bharat Forge and SONA BLW are heavily reliant on US exports and face more exposure. Higher tariffs could make their products less competitive in the US market, according to the brokerage. However, as their components are customised, finding alternative suppliers would be difficult, providing some short-term protection.