Why Tariffs Are Becoming Unsustainable For Automakers

Key Concepts

• Tariffs: Taxes imposed on imported goods, significantly impacting automotive costs.
• Automotive Margins: The profitability of automakers, currently under pressure from tariffs.
• US Manufacturing Capacity: Current limitations preventing immediate shifts in production to mitigate tariff effects.
• Vehicle Pricing Trends: Rising average vehicle prices, potentially transitioning new cars into a luxury good category.
• Supply Chain Disruptions: Tariffs causing disruptions in the automotive supply chain, particularly for parts sourced from Canada and Mexico.

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The Unsustainable Impact of Tariffs on Automakers

The automotive industry is facing escalating costs due to tariffs, a situation one of the largest dealership groups deemed “unsustainable” during a February 18th earnings call. The core issue is that automakers will be forced to either increase vehicle prices or reduce features to absorb these costs, with price increases being the more likely outcome. The expectation is that automakers “are not going to sit back and lose billions and billions of dollars,” as stated implicitly in the earnings call discussion.

Toyota as a Case Study: Financial Impact of Tariffs

Toyota, the world’s largest automaker, provides a concrete example of the tariff impact. Despite a strong 2025, with US sales increasing by 8% – its best performance since 2017 – and its Lexus brand achieving record sales globally, the company experienced a significant financial setback. US tariffs cost Toyota ¥1.2 trillion (approximately $8 billion) during the first nine months of its 2026 fiscal year, resulting in a 25% decline in profits.

While approximately half of the vehicles Toyota sells in the US are manufactured domestically across its 11 factories, key models like most Lexus vehicles (excluding the crossover) and the popular Tacoma pickup truck are produced elsewhere. The Tacoma, notably the best-selling midsize truck in the US, is manufactured in Mexico. Current trade regulations impose a 25% tariff on foreign-made parts used in vehicles assembled in Canada or Mexico, and a 15% duty on cars and parts imported directly from Japan.

Mitigation Strategies and Capacity Constraints

Auto industry forecaster Sam Fiorani suggests that Toyota could offset tariff costs by investing in US suppliers. However, relocating production of the Tacoma to the US is currently not feasible due to full capacity at all of Toyota’s US manufacturing facilities. Toyota is actively investing in US manufacturing, demonstrated by the opening of a $14 billion battery plant in North Carolina in November 2025, a $900 million pledge for hybrid vehicle production, and a planned $10 billion investment over the next five years.

Despite these investments, Toyota currently projects a full-year profit margin of approximately 7.6%, which would likely exceed 10% without the burden of tariffs. Toyota has directly communicated that the 25% tariff on goods from Canada and Mexico is “highly disruptive and cannot be sustained,” warning of inevitable price increases and reduced consumer choice.

Broader Industry Impact and Price Trends

The impact of tariffs extends beyond Toyota, costing US-based automakers billions of dollars as well. The average price of a new vehicle in the US is already approaching $50,000. Sonic Automotive reported an average retail sale price of $62,000 in the fourth quarter, an all-time high. This trend is leading analysts, like Mike Wayland, to suggest that new cars are becoming a luxury good.

Delayed Price Response and Future Outlook

Interestingly, despite expectations, car prices have remained relatively stable over the past year. However, analysts anticipate a significant price increase in the coming months. As Dyke, from Sonic Automotive, stated, buyers “shouldn’t expect any relief.” The expectation is that the affordability issue, while not fully realized in 2025, will become increasingly apparent between May and August as new car prices have “nowhere to go but up.”