The recent implementation of a 25% tariff on imported vehicles and auto parts by President Donald Trump is significantly impacting local car dealerships across the United States. These tariffs are causing notable shifts in vehicle pricing, consumer behavior, and dealership operations. The recently implemented tariffs create a complex landscape for local car dealerships, characterized by rising vehicle prices, shifts in consumer preferences, and operational challenges that require strategic adjustments to navigate effectively. This article will summarize those complex effects and consider what dealerships can do to remain informed and competitive in this new industry environment.
How Tariffs Are Reshaping the Auto Industry
Increased Vehicle Prices
Dealerships are facing higher costs for both imported vehicles and domestic models that rely on foreign parts. Estimates say new car prices are set to rise anywhere from 2-10%, depending on the model, origin, and composition of a particular vehicle.
Shift Toward Used Cars
As new car prices escalate, consumers are increasingly turning to used vehicles as a more affordable alternative. This trend benefits used-car dealers, who are experiencing heightened demand. However, this surge may eventually lead to increased prices in the used car market as well. The overall supply of used cars is in question as leasing rates have dropped in recent years meaning the number of two- to three-year-old vehicles on the roads is less than in years past.
Key Operational Challenges for Dealerships
Local dealerships are grappling with several operational challenges due to the tariffs, including:
- Inventory Management: Dealers may face delays in receiving vehicles and parts, leading to potential shortages of popular models, or models that had historically poor turns being pulled off local dealership floors.
- Pricing Strategies: Dealerships must decide whether to absorb the increased costs or pass them on to consumers, which could affect sales volume and customer satisfaction.
- Consumer Financing: Higher vehicle prices may lead to larger loan amounts, impacting consumers’ financing options and potentially deterring purchases.
Market Uncertainty
The tariffs introduce uncertainty into the automotive market, affecting production schedules and sales forecasts. Disruptions in production due to increased costs of imported parts and vehicles lead to adjustments in manufacturing plans and reduced output. Some experts forecast up to 30% fewer cars being made in North America. Thus, dealerships face challenges in predicting future sales as fluctuating vehicle production, pricing, and demand may result in lower sales volumes. Inventory management may pose new complexities, with reduced discounts and incentives making it harder to move existing stock. Additionally, the tariffs complicate supply chains, and may cause delays, making effective planning and forecasting more difficult.
Broader Industry Implications
The tariffs will likely impact the cost of cars built in American factories by thousands of dollars. That’s because there is no such thing as an all-American car. All 10.2 million cars built in US factories last year were built with a significant number of imported parts, mainly from Canada and Mexico.
After a surge in car-buying, auto sales can be expected to drop while new and used car prices increase, and some models will be eliminated, mimicking COVID supply constraints.
Automakers are more likely to cut back on production while they wait to see whether the President’s tariffs will remain or be scaled back in the future. With decreased production, declining inventory, and a lower supply, dealerships may have to raise their prices in the coming months.
We realize this is a complicated and ever-changing issue for our dealership clients. If you need further guidance or have any questions, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
