Profitable pickups may be in cross hairs of Trump border tax

There are many reasons for the steady success of the three major American automakers in recent years, but none are bigger than the surging sales of full-size pickup trucks.

General Motors, Ford Motor and Fiat Chrysler dominate the segment in the United States market, and they rely on pickups for a sizable portion of their earnings in North America as a whole.

But President Trump’s proposed border tax on imported vehicles could throw a wrench in the profit machine, particularly for G.M. and Fiat Chrysler, which build a large percentage of their pickups in Mexico.

At the same time, Ford — which makes all of its pickups in American factories — would most likely benefit at the expense of its rivals.

The Trump administration has pledged to levy tariffs of up to 35 percent on vehicles imported from Mexico and possibly elsewhere, primarily to prod automakers to increase production and jobs in the United States.

In response, all three of the Detroit companies have announced plans for new investments in their American operations. Ford went a step further by canceling plans to build a $1.6 billion plant in Mexico that had been criticized repeatedly by Mr. Trump.

Yet the possibility of tariffs on trucks overshadows the give-and-take so far between a new president determined to expand the American economy and automakers that count on pickups as a huge source of income.

“There is an awful lot at stake with a border tax on trucks,” said Michelle Krebs, an analyst with Autotrader.com, a car-buying site. “These are the cash cows for Detroit.”

Pickup sales have been an important component of the consistent growth of the American auto market, which last year set a record with nearly 17.5 million vehicles sold.

The combination of low gas prices and a need by businesses to replace older trucks has stimulated demand, especially for full-size pickups, more than 90 percent of which are made by the three Detroit companies.

In January, the three top-selling vehicles in the nation were pickups: the Ford F-150, G.M.’s Chevrolet Silverado, and Fiat Chrysler’s Ram model. The companies earn an estimated $8,000 to $10,000 in profit on each truck sold — compared with $3,000 on a passenger car — so Detroit’s financial fortunes inevitably rise and fall on the success of their truck products.

Yet for G.M. and Fiat Chrysler, much of that success is dependent on truck production in Mexico, where labor costs are significantly lower than in unionized factories in the United States.

Industry analysts estimate that one-third of G.M.’s annual pickup production comes from its sprawling assembly plant in Silao, Mexico. And while Fiat Chrysler is expanding its American output of trucks, it still relies on its factory in Saltillo, Mexico, for 30 to 40 percent of its pickups, the analysts say.

Ford, by contrast, makes its pickups at three plants in the United States.

Automakers do not reveal profit margins on particular vehicles. But companies pay workers less than $10 an hour in Mexico, versus the top union wage of $29 in American plants. That differential makes Mexican trucks more profitable for G.M. and Fiat Chrysler than those produced in the United States.

There are other costs associated with Mexican production, including shipping vehicles by rail or tractor-trailers to American dealerships. But lower labor rates still make Mexico an attractive production option for automakers.

A border tax would wipe out that cost advantage, and could prompt manufacturers to raise prices on Mexican-made vehicles.

“Automakers could possibly eat the cost of a 5 to 10 percent tariff, but not a tax of 20 or 30 percent,” said Ron Harbour, an automotive analyst with the consulting firm Oliver Wyman. “They would probably have to pass some of that on to consumers.”

Higher prices could cool demand for pickups made by G.M. and Fiat Chrysler. The companies could also try to make up the cost of a border tax by spreading price increases across the breadth of their product lineups.

While it is not uncommon to reallocate production among factories — for example, to make more high-margin trucks in American plants and shift less profitable small cars to Mexico — it is expensive and time-consuming to do so.

G.M. is also vulnerable to potential tariffs on imported parts for pickups made in its factories in Flint, Mich., and Fort Wayne, Ind.

About 38 percent of the parts for all G.M. pickups are made in the United States and Canada, and 55 percent are produced in Mexico, according to statistics compiled by the National Highway Traffic Safety Administration.

About 56 percent of the parts in Fiat Chrysler’s pickups are made in the United States and Canada, and 29 percent are produced in Mexico. At Ford, about 70 percent of its pickup components are made in the United States and Canada, and 15 percent come from Mexico.

For all three automakers, that mix of parts applies whether the truck is made in the United States or Mexico. It is not clear whether Mr. Trump’s vision of a border tax would apply to parts or only finished products.

One industry analyst, Colin Langan of UBS Securities, singled out G.M. in a recent research report for its vulnerability to a tariff on pickups.

“The border tax is a clear risk to G.M.’s full-size pickup trucks,” Mr. Langan wrote. “The timing is also challenging as G.M. plans to retool its pickup facilities ahead of the 2018 pickup launch.”

G.M. executives declined to talk about the impact of a tariff on the company’s pickups during a conference call with analysts last week on its 2016 earnings.

The company’s chief financial officer, Chuck Stevens, said it was premature to discuss the implications of a border tax. “There are a lot of moving parts,” he said. “We want to work with the administration to make sure what is best for the U.S. economy.”

G.M.’s chief executive, Mary Barra, stressed that about 80 percent of the products that the company sells in the United States are American-made.

As a member of Mr. Trump’s business advisory council, Ms. Barra said, she has outlined how difficult it is for an automaker to adjust production strategy on the fly. “I think that understanding has been well received,” she said of meeting with the president and his advisers.

Other vehicles made in Mexico, such as Ford’s Fusion sedan and G.M.’s Cadillac SRX sport utility vehicle, could also be affected by a border tax. But because of their popularity and profits, pickups are the most vulnerable products.

“A tariff on pickups would be a real challenge, especially for G.M.,” said Ms. Krebs of Autotrader. “Trucks are so important to their bottom line, and this is uncharted territory.”