Trump Tariffs Are Souring Longstanding Auto-Industry Ties


Fights are emerging across the auto industry over who should bear the costs of tariffs, leading to new stress along the supply chain.

Earlier this year, Pierburg US LLC, a manufacturer of parts used in the best-selling Ford F-150 pickup truck and Jeep Wrangler sport-utility vehicle, sued one of its suppliers over tariffs imposed this year by the Trump administration. The two sides have been in business for at least 20 years.

Pierburg alleged that the supplier’s refusal to ship electric motors from China to Pierburg’s factory in South Carolina unless it paid the 25% tariff cost in full was “extortion.” A failure to deliver the parts could shut down multiple auto factories and “plunge the automotive industry into complete chaos,” Pierburg said in court filings.

Jeff Aznavorian, president of Clips & Clamps, wrote to about 15 customers proposing a cost-sharing arrangement for future contracts. A few agreed.

Jeff Aznavorian, president of Clips & Clamps, wrote to about 15 customers proposing a cost-sharing arrangement for future contracts. A few agreed.


Photo:

Rachel Woolf for The Wall Street Journal

The supplier dismissed Pierburg’s claims as “hyperbolic rhetoric,” arguing in filings that it was under no contractual obligation to ship parts at the pre-tariff price, because of the “unexpected nature and monumental effect of the current trade war.”

The automotive supply chain is a complex, global network of interdependent businesses ranging from small, family-owned manufacturers based in the U.S. heartland to large publicly traded overseas auto parts companies—all working in unison to keep cars rolling off the assembly line.

The Trump administration’s tariffs have led to higher steel and aluminum prices, and made it more expensive to import Chinese-made car parts such as electric motors and display screens widely used in U.S.-built cars. Tariff-related costs are raising expenses and squeezing profits for big and small auto-industry players, and driving some companies to fight their partners over who pays.

“It’s rattled the whole industry, which tends to think in six-to-seven year timelines and doesn’t handle short-term surprises well,” said Joern Buss, a partner focused on the auto industry at consultant Oliver Wyman.

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A judge denied Pierburg’s request to force shipment from the supplier, a unit of Hong Kong-based

Johnson Electric Holdings
Ltd.

Pierburg, a division of Germany’s

Rheinmetall
AG

, is paying the tariff under duress as it considers its legal options, a person familiar with the case said. Court documents show it has requested a jury trial. The companies declined to comment.

A typical vehicle is made up of roughly 30,000 individual parts, and car companies on average work with hundreds of suppliers at once for each model line, either buying components directly or contracting them out further down the chain. Thousands of individual contracts outline in detail parts orders, delivery dates and prices, and many of them are locked in place months and even years in advance.

“There’s this notion that these costs efficiently flow through the supply chain and are visited upon customers with a nice, neat label saying ‘Trump tariffs’,” said John Trentacosta, an attorney at Foley & Lardner in Detroit who represents suppliers. “It doesn’t really happen that way in the automotive supply chain. It’s getting stuck somewhere along the way.”

White House officials didn’t respond to requests for comment.

Sorting out the cost of tariffs is difficult because some parts cross the U.S. border multiple times before being installed in a car, blurring the lines of what is “domestic” content. And although much of the steel used in car manufacturing is American-made, the auto industry is still paying more because a new 25% tariff imposed in June on imports prompted domestic steelmakers to increase prices by an equivalent amount.

A free-trade deal for North America struck in October between the U.S., Canada and Mexico is likely to add more complexity, requiring auto makers to build a greater portion of a vehicle’s content in North America and with higher-wage workers to avoid trade tariffs. Analysts say the new rules will force car companies and suppliers to reconfigure supply chains, likely increasing costs.

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Over the summer, some auto makers pre-emptively sent out letters through their legal departments, warning suppliers that the tariffs shouldn’t be a pretext for renegotiating price agreements, say executives and attorneys who were contacted. Some companies are now asking tariff-relief provisions be inserted into new supply agreements going forward, a request nearly unheard of before this summer, say attorneys.

In July,

Toyota Motor
Corp.’s

purchasing chief, Robert Young, told a room full of supplier executives they shouldn’t count on the Japanese car maker to help absorb the higher tariff-related costs.

Toyota is dealing with its own cost-increase concerns, particularly on the nearly two million tons of steel it purchases a year in the U.S. and car parts it sources to China, Mr. Young said in an interview. He estimated that the new tariffs will cost Toyota $100 million this fiscal year and likely even more in the following year.

“We’re not going to have a blanket statement to say we agree to absorb 100% of the costs,” Mr. Young said in an interview. “It’s not an open checkbook.”

The average operating profit in the auto parts manufacturing business is already slim–about 7%, according to the Original Equipment Suppliers Association—so extra costs can hit earnings hard. Car companies, facing cooling U.S. demand for cars and trucks after a multiyear growth streak, are also reluctant to pass costs on to car buyers by raising prices.

Ford Motor Co. CEO Jim Hackett said in September that tariff-related costs would shave about $1 billion from the company’s bottom line this year.

General Motors
Co.

also dialed back its full-year profit guidance in July, citing rising commodity costs related to new steel and aluminum tariffs.

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Some smaller parts suppliers have resorted to pleading with customers for help.

This summer, Jeff Aznavorian, president of Clips & Clamps Industries, a small Detroit-area parts maker with about 57 employees, sent one-page letters to about 15 customers proposing a cost-sharing arrangement for future contracts. Clips & Clamps was on pace to turn a profit this year, but rising materials costs have wiped out its margin.

Two customers agreed. A few politely declined. One buyer from Canada wrote back, expressing sympathy. “They basically said: ‘I’m sorry your government is doing this to you, but what do you expect me to do about it?’” Mr. Aznavorian said.

Other negotiations have been testier.

Peterson American Corp., North America’s largest privately owned maker of springs used in car engines, was recently told by one of its steel vendors that the company would withhold shipment of the wire coils it delivers to its factories unless the manufacturer agreed to pay the tariff costs.

Faced with the ultimatum, Peterson President Dan Sceli knew he had little choice but to concede. The trucks supply half a dozen Peterson factories in the U.S. and Canada, and any delivery delays could disrupt vehicle production.

“If I shut down a car plant, that would cost us on the order of $100,000 a minute,” said Mr. Sceli, who also chairs the Motor & Equipment Manufacturers Association. “It’s not an option.”

After consulting with lawyers, Mr. Sceli said he agreed to pay “under duress,” but intends on challenging the price increase and is looking at his legal options.

“We’ve had a couple other suppliers threaten to hold trucks,” he said. “It’s happening all over the industry.”

Write to Chester Dawson at chester.dawson@wsj.com and Mike Colias at Mike.Colias@wsj.com



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