25% tariff on auto imports: Impact on Indian component makers unfolds

In the wee hours of March 27, the global automotive industry was awakened by the rude shock of 25% tariffs on vehicles imported to the US by the Trump administration 2.0. As per the factsheet issued by the White House, the 25% tariff will be applied to imported passenger vehicles (sedans, SUVs, crossovers, minivans, cargo vans) and light trucks, as well as key automobile parts (engines, transmissions, powertrain parts, and electrical components), with processes to expand tariffs on additional parts if necessary.
 
While the impact of 25% tariffs on Indian original equipment manufacturers is likely to be miniscule, domestic auto component manufacturers are staring at a significant impact on their operating margins with 25% tariffs. As per rating agency Crisil, the 25% tariff will compress the operating margins of auto component manufacturers by 125-150 basis points from the current 12-12.5%.
 
Notably, analysts observe that auto component manufacturers who have manufacturing facilities in the USA are likely to remain shielded from the tariffs. As per Subhabrata Sengupta, Partner, Avalon Consulting, most Indian exporters will have an opportunity to transition toward local production.
 
“Major Indian component manufacturers with a presence in the U.S. should be able to localize production to mitigate the impact. Additionally, given the structure of global auto supply chains, an immediate and complete halt to supply is unlikely. In our assessment, most Indian exporters will have an opportunity to transition toward local production,” says Sengupta. 
 
Sengupta, however, observes that a most significant could be the ripple effect on India’s exports to other markets, particularly Mexico, if Mexican auto exports to the US gets adversely effected. “The impact on Indian companies operating in the U.S. and Canada also warrants close monitoring,” notes Sengupta. 
 
In FY24, the exports from domestic auto component manufacturers to the US stood at approximately $6.79 billion. Amongst auto component manufacturers, Samvardhana Motherson, Sona Comstar, and Bharat Forge have significant export volumes to the US. Samvardhana Motherson, the country’s largest auto component manufacturer, on Thursday said that the tariff is unlikely to have any impact on the company’s financials. 
 
“The U.S. Government via Executive Orders announced tariffs on imported products from various countries globally, including automotive components, which may be subject to modifications from time to time.  A significant part of the products supplied by the Company and/or its subsidiaries to its various customers in the U.S are either manufactured in the U.S. or are United States-Mexico-Canada Agreement (“USMCA”) compliant and therefore as per our present assessment the said Executive Orders may not have any material impact on the financials of the Company. However, impact (if any) going forward depends on various inclusion(s)/ exclusion(s) of product(s), component(s), territories(s), tariff(s) etc., forming part of said Executive Orders, as may be notified or amended,” SAMIL said in an exchange filing. 
 
According to Mrunmayee Jogalekar, Auto and FMCG Research Analyst, Asit C Mehta Investment Interrmediates Ltd, for the Indian auto components industry, the US remains a key export market, contributing 27% to total exports in FY24. “Tariffs are expected on key components such as engine, transmission, powertrain, and electrical parts. This could have a greater impact on companies like Sona Comstar (~43% revenue from North America) and Samvardhana Motherson (~18% revenue contribution). However, most other component manufacturers have a well-diversified export presence, which could mitigate the overall impact,” says Jogalekar. 
 
Notably, Harshal Patel, research associate at Emkay Global Financial Services, says that the impact of tariffs on the auto component manufacturers will be approximately 2%. 
 
“Auto components are the major exposure to the US. At the reciprocal level, the tariff that should be imposed, or would be imposed, would be anywhere between 10 to 15%; even at the 25% level that was announced, that is a hit. But there again, it's the relative story that comes into play. Because China is already facing 21% tariffs on its auto component exposure to the US. The auto component manufacturers of Mexico and Canada, at present, are not being tariffed… But eventually, if those imports into the US are also tariffed, we could still be better off. Even at 25%, we may be better off depending on the modalities of the tariffs in Mexico, Canada. Mexico, Canada, China together make up nearly two-thirds of auto component imports into the US. We are just 2%. If the three largest suppliers are being tariffed heavily, and we are tariffed less heavily or less strictly, we would be better off on a cost basis,” says Patel. 
Queries sent to ACMA (Auto Component Manufacturers Association) remained unanswered at the time of the press.