Trade Battle Dims GM’s Outlook

A looming tariff war between the U.S. and key trade partners sends commodity prices higher for General Motors in the second quarter, dimming the automaker’s outlook for 2019 and heightening economic uncertainty as President Donald Trump plays hardball to level the international playing field.

However, GM Chairman and CEO Mary Barra says the automaker remains in favor of modernizing the North American Free Trade Agreement between the U.S., Canada and Mexico.

“General Motors, we generally are free traders,” Barra tells investors and Wall Street analysts during a conference call to discuss the automaker’s $2.4 billion profit in the April-June period, a result down 2.8% from the same period last year.

“We believe it is important to modernize NAFTA, but we think it is important for the auto industry to have the right NAFTA agreement,” she says. “What we’ve been focused on is providing input to the people in the administration and across countries to make sure they understand the complexities of the supply chain, the length of investments that we make, so things can be done in a logical fashion.”

GM also drew down its full-year expectations to $6 per share from between $6.30 and $6.60 per share previously. The news hammered shares of GM stocks, as well as those of Fiat Chrysler Automobiles which also reported commodity headwinds in the quarter.

Blaming NAFTA for a trade imbalance with Mexico, the Trump Admin. wants to impose a 25% tariff on automobiles and parts coming to the U.S. from Canada and Mexico and seeks to sharply raise the American-sourced content of imported vehicles.

But the White House also recently ended a suspension of tariffs on steel and aluminum from Argentina, Brazil, Australia and the European Union, as well as Mexico and Canada, and threatened China with $500 billion in tariffs on goods it exports to the U.S. It cited national security concerns.

GM says prices of aluminum, steel and other commodity inputs to its operations such as resins and diesel fuel would affect the automaker’s financial performance this year by $1 billion, which is $500 million higher than previously expected.

“We just can’t pull enough levers in the second half to offset that,” says GM Chief Financial Officer Chuck Stevens.

Stevens also confesses on the call that trade rhetoric between Washington and Beijing risks souring relations and could result in a potential boycott of U.S. goods by the Chinese similar to how China turned against South Korean imports earlier this year after it installed a U.S.-made missile system.

GM boasts a strong presence in China with long standing partnerships with local automakers. GM’s unit in China delivered a record $1.2 billion of equity income in the first half of the year on 1.84 million vehicle sales.

“What’s not built into our plan in the second half of the year is if things could change relative to that overall China relationship and sentiment vis-a-vis American companies,” Stevens says. “That’s a pretty significant uncertainty, depending on where some of these other trade discussions go.”

Morgan Stanley analyst Adam Jonas agrees anti-U.S. sentiments could be economically painful for U.S. companies.

“That’s the hardest to define, but single greatest risk facing GM brands in China,” he says on the call.

Stevens says GM has not witnessed signs of negative sentiment.

“We have not seen any of that yet,” he says. “Obviously we are very cognizant of what happened between the Chinese and the Koreans and have thought through those potential implications.”

Neither Barra nor Stevens would elaborate on strategies GM may employ regarding changes in U.S. trade policies.

“There are almost an infinite number of things that could happen, so I’m not going to hypothesize,” Barra says.

Barra also confirms on the call GM’s plan to deploy autonomous vehicles to a ride-sharing environment in 2019 and reiterates expectations to invest $1 billion into its GM Cruise self-driving R&D unit to meet that target.

The former Cruise Automation group continues its rapid growth with headcount up to 800 scientists and engineers from 40 when GM bought the startup in 2016. The valuation of GM Cruise has grown to $11.5 billion from just over the $1 billion price GM paid for it two years ago.

Barra also says of former FCA CEO Sergio Marchionne, who pursued a tie-up with GM and passed away Wednesday at age 66 after a sudden illness, “He will be remembered for his many, many accomplishments in the industry.”