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Auto Stocks Have a Lot to Lose Under Trump

President-elect Trump will improve manufacturing, but it's going to take some real effort

President-elect Donald Trump set the tone for 2017, and it’s still his in-your-face Twitter Inc (NYSE:TWTR) diplomacy that provides instant heat for his intended targets.

Over the past week he set his sights on the auto industry — General Motors Company (NYSE:GM) in particular — with a tweet that read, “Make in U.S.A. or pay big border tax!”

The threat was in regard to the company importing some of its Chevy Cruze compact cars from a plant in Mexico for sale in the U.S. However, GM quickly released a statement pointing out that the majority of its Cruze cars are made in a factory in Lordstown, Ohio. Only the hatchback versions of the car are manufactured in Mexico because the Lordstown factory is not equipped to build it.

The fact of the matter is that the demand for small compact cars in general is down considerably, and margins are nowhere near that of pickup trucks and sports utility vehicles. In only the second year of its current version, the Cruze saw its sales tumble 20%, prompting GM to announce 1,250 job furloughs to begin on Jan. 23.

I suspect from a political view Trump was hoping to get GM to reverse its decision on the furloughs before his inauguration.

However, it was Ford Motor Company (NYSE:F) that seemed to blink at Trump’s threats. Just hours after the tweet, the company announced that it would be scrapping a plan to build a $1.6 billion small car factory in Mexico that Trump had previously targeted. Instead, Ford will invest $700 million in a Michigan-based plant slated to churn out autonomous vehicles and electric cars.

Company executives said the Mexico plant cancellation was due to slumping demand for compact cars and optimism over the president-elect’s “pro-growth” strategies. CEO Mark Fields said there was no negotiation with the Trump administration.

As a result, I came into last Wednesday’s session ready to play taps for the auto industry, whose fabled boom has now seen seven consecutive years of an unprecedented improvement in sales.

It’s a mind-boggling achievement that belies the broader economic malaise that’s haunted the nation over the same period of time. It’s true there have been extenuating circumstances — such as sub-prime loans, aging automobiles and low interest rates — but perhaps the party is just getting started.

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Auto sales indeed reached an all-time high in 2016, with December setting a monthly record. One thing is for sure, though: the “peak car sales” theory and subsequent crash look like folly now.

But let’s circle back to Trump’s main reason for his Twitter snipe: American jobs and trade. Trade was the big economic issue of the 2016 presidential campaign that propelled Trump to the White House. Thus far, he has taken on countries and companies that many feel have conspired to enrich themselves at the expense of the American worker.

Trump has vowed to renegotiate the North American Free Trade Agreement, more commonly known as Nafta, which was implemented in January 1994.

The agreement has allowed auto manufactures to move production to Mexico without facing tariffs, but with the president-elect now proposing a 35% tax on goods made by companies that shift manufacturing abroad, the auto industry has a lot to lose.

Of course, there are additional issues for the industry, which would be placed between the proverbial rock and a hard place if forced to choose to only build in America. Consider this: Ford’s new electric vehicle plant is only expected to create 700 jobs. That tells me that a lot of robots or computers are going to be “hired.”

In the end, I do believe Trump’s efforts will improve manufacturing, but it’s going to take a combination of carrot-and-stick.

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