Tariffs have come into the spotlight recently with countries around the world worried about the impact that the new US tariffs will have on global economies. The automotive industry has had its fair share of economic disruption over recent years from the pandemic and energy crisis to materials shortages and the war in Ukraine. The tariffs are yet another macro event that will require those within the industry to adapt strategies in order to survive and thrive in today’s complex marketplace. Here, we take a look at how tariffs will impact the automotive industry and discuss what leasing companies need to consider to remain competitive and maintain customer affordability.
Increased vehicle acquisition costs
Tariffs drive up production and import costs, which will have a knock-on effect throughout the entire supply chain, eventually reaching and impacting the end customer. Imported vehicles and components for manufacturing them will have a direct cost implication on the cost of a new car.
Leasing companies tend to purchase vehicles in bulk, meaning that even a modest tariff will lead to a substantial cost. These costs are typically passed on to customers through an increased monthly lease payment. As a result, this could reduce the attractiveness of leasing compared to purchasing a vehicle outright.
In the case of the United States, tariffs imposed on imported vehicles, particularly from Europe and Asia, can make these models significantly more expensive. The US has also implemented tariffs on steel and aluminum, which are key materials in car manufacturing. Consequently it will raise production costs even for domestically built vehicles. Additionally, ongoing trade tensions with China have resulted in tariffs on critical automotive components, such as batteries and semiconductors, further exacerbating costs for leasing firms reliant on imports.
Residual value uncertainty
The leasing sector is currently suffering with fluctuating residual values (RVs) due to various macroeconomic factors including vehicle shortages, EV adoption, changing technology, and evolving consumer preferences. In an already complex RV forecasting environment, tariffs will further disrupt the projections because of altering supply and demand dynamics, which leads to uncertainty in resale values. For instance, if tariffs lead to an oversupply of locally manufactured vehicles, the resale value of imported vehicles may decline more rapidly than expected, potentially resulting in financial losses for leasing companies.
Shift in vehicle preferences
With tariffs increasing the price of imported vehicles, there may be a shift in consumer preferences towards domestically manufactured cars, which may not be subject to the same trade restrictions. However, the shift may require leasing companies to adjust their fleet composition, investing in brands and models that align with changing market demand.
In the US for example, automakers with significant domestic production facilities, such as Ford and General Motors, may gain a competitive advantage over brands that rely heavily on imports. Leasing companies may prioritise these manufacturers in their portfolios to ensure more cost-effective options to customers.
Impact on EV adoption
Many electric vehicles (EVs) rely on imported components such as batteries. Tariffs on these components will increase the overall manufacturing cost and contribute to a higher overall build cost. Again, this will lead to the consumer having to pay more for the same car pre-tariffs. The impact of this on EVs will drive up lease costs and slow down adoption. This will be particularly relevant in markets where government incentives are not sufficient enough to counterbalance the increased costs, making leasing a less viable option for EV customers.
As an example, US tariffs on Chinese-made lithium-ion batteries and other key EV components could make leasing an electric vehicle more expensive. It could also affect the expansion of EV leasing plans for brands such as Tesla, which sources many of its components from Asia.
Supply chain disruptions and delivery delays
As manufacturers battle the cost implications associated with the tariffs, it could lead to supply chain disruptions resulting in delayed vehicle deliveries. Longer wait times for new vehicles can frustrate customers and disrupt fleet management strategies, making it difficult for leasing companies to meet contractual obligations. Following the previous vehicle shortages, this is not a situation the automotive industry will want to repeat.
How leasing companies can mitigate risks
Tariffs pose a multifaceted challenge to the automotive industry and the entire supply chain. For leasing companies, rising vehicle acquisition costs, uncertain residual values, changing consumer preferences, and disrupted supply chains could create yet another challenging marketplace to navigate.
The US tariffs have significantly influenced market dynamics, making imports more expensive while providing an advantage to domestic manufacturers.
Leasing companies must remain agile, leveraging strategic adjustments to maintain competitiveness while ensuring affordability for customers. As trade policies continue to evolve, the long-term resilience of the leasing industry will depend on its ability to adapt to these economic pressures.
5 strategies to mitigate risks:
- Negotiate bulk purchase discounts to offset tariff-related price increases.
- Shift procurement strategies towards domestic manufacturers or brands with less exposure to tariffs.
- Adjust lease structures by increasing down payments or lengthening lease terms to distribute costs more effectively.
- Explore alternative financing models such as subscription services or flexible leasing agreements to attract customers wary of rising costs.
- Access real-time data to understand market changes that will influence decisions and strategies.
JATO currently works with over 300 leasing companies globally, and our data is used daily by over 1,000 fleet managers. We are eager to help you leverage our reliable and comprehensive data to drive your business forward too. Get in touch to speak with an expert.