Tariffs, trade policies, and global economic shifts are creating uncertainty in the automotive industry.

In this Q&A, six Stout contributors provide expert insights into how these forces are affecting automotive manufacturers and suppliers.

• Jasmeet Singh Marwah, Valuation Advisory and Business Valuation
• Robert Levine; Disputes, Claims & Investigations
• Ray Roth; Disputes, Claims, & Investigations and Automotive Recall
• Jeffrey Harnden, Accounting & Reporting Advisory
• David Hale, Investment Banking
• Gonzalo Nespolo, Financial Due Diligence

Broadly, speaking, how are tariffs affecting your automotive clients currently?

Jasmeet Singh Marwah, Valuation Advisory: The automotive industry is capital-intensive in nature, and the suppliers need to consider long-term implications from any changes to the OEM facilities’ footprint. Similar to the disruptive period in COVID-19, our automotive industry clients are considering all options, but initially we have noticed many opting to pause production in various global plant locations. They also are working to balance their customer and supplier relationships while continuously considering recovery of a portion of any costs from customers and defray costs with vendors.

For North America-based clients, another consideration is that the United States-Mexico-Canada Agreement (USMCA) is up for renewal in 2026. That adds another layer of decision-making pains in the short order.

Robert Levine; Disputes, Claims, & Investigations: The tariffs are causing significant disruption and great uncertainty. The automotive supply chain is complex, and the impact of tariffs is nuanced and widespread.

Automotive suppliers and manufacturers rely on materials and components manufactured overseas, and therefore face a significant burden from tariffs. Moreover, the dynamic policy environment makes it difficult to understand the scope of tariffs and plan for their impact.

Ray Roth; Disputes, Claims, & Investigations: Tariffs are only the most recent challenge facing the automotive industry. U.S. light vehicle production began declining prior to COVID and has since been weathering the associated labor and supply disruptions, war in Ukraine, UAW strike, high interest rates, a rapid pace of innovation, and other challenges.

Despite drops in production, light vehicle recalls have increased to record volumes in recent years. The uncertainty caused by tariffs and ensuing stress on the supply chain may contribute to increased rates of vehicle defects.

Jeffrey Harnden, Accounting & Reporting Advisory: To put it short, the tariffs are creating uncertainty. We are seeing some reaction to this from the end consumer market with a run on inventory of both new and used cars, as consumers are trying to make purchases before “tariff pricing” takes hold. This could lead to vehicle shortages across the market place as both OEMs and automotive suppliers are currently assessing their supply chains and production planning in the anticipated tariff environment.

The accounting impact to all of the marketplace reaction remains to be seen. If automotive companies are overproducing now in the pre-tariff environment, will this create inventory issues once tariffs are implemented? Will sales volumes drop due to anticipated increases in prices to customers? Will these issues lead to depressed cash flow generation, which in turn could lead to impairment issues?

What do you see as potential short-term and long-term impacts of the tariffs on the automotive industry?

Jasmeet Singh Marwah: Raw material and input pricing will increase in the near term, creating pricing and availability uncertainties. In addition to the 25% tariff, the automotive industry participants are impacted by duties on other input costs (like tariffs on steel and aluminum).

A global slowdown in various economies, including the Unites States, could lead to reduction in economic activity and trade in 2025. Specific to the automotive industry, a recent update from S&P Global Mobility estimates that April 2025 global light vehicle sales outlook is a sharp decline from their March 2025 forecast of 1.3 million units, with reductions of 2.5 million for 2026 and 2.0 million for 2027. Overall, global sales in 2027 are forecasted by S&P Global Mobility at 92 million units.¹ This has significant ramifications to sales and earnings for the automotive suppliers and OEMs.

Given the global nature of this industry, most companies have currency hedging and SWAPs, and these contracts / exposures will need to be revisited with the significant fluctuations in the strength of the U.S. dollar.

However, long-term impacts are tough to predict and will depend on the final tariff structure between the U.S. and each country, and through the new trade agreement for North America.

Robert Levine: In the short term, the tariffs are likely to lead to increased costs for automotive manufacturers, which may result in higher vehicle prices for consumers. These price increases could potentially alter customer demand, as some buyers may delay purchases or seek alternative options. Additionally, disruptions in supply chains are expected, as raw material and component manufacturers may struggle to absorb the added costs imposed by the tariffs, potentially leading to delays or shortages in production.

Over the long term, the automotive industry may experience a shift in the global supply footprint. If the tariff regime remains stable and predictable, manufacturers may opt to relocate production facilities or establish new sourcing strategies in regions with more favorable trade conditions. This migration could reshape the industry’s global supply chain and operational strategies.

Ray Roth: At this point, it remains unclear how increased costs will be shared and passed through the supply chains. Existing contractual terms will set the legal frameworks for negotiations, but suppliers will be well served to identify the total impact of tariffs on distinct products as they consider negotiating price increases. Because the ratio between labor and material costs, as well as considerations for overhead, will vary between products, product costs will not increase by a flat percentage.

Suppliers that are able to justify where they will be unable to profitably produce certain parts might be able to create negotiating leverage. These analyses can be complex and often involve the consideration of production variances, scrap rates, allocations, and investments in tooling among other factors.

David Hale, Investment Banking: In the short-term, select tier suppliers in the U.S. could benefit as vehicle production capacity is reshored from Canada and Mexico. Domestic plants already tooled up for same platform production and plants with excess capacity could be first to experience temporary volume windfalls. 

Longer-term, tariffs are redistributive and can be extremely disruptive. Tariffs may discourage purchases of foreign-produced goods, encourage buyers to switch to more expensive domestically produced goods, and place a burden on U.S. exporters. 

Gonzalo Nespolo, Financial Due Diligence: It is likely that every company operating in the vast automotive segment will be impacted by tariffs. North American vehicle production is expected to fall significantly (25% or more) in part due to inventory shortages and as plants with substantial cross-border reliance idle. Decreased consumer demand for new cars as prices surge from tariffs will drive higher demand for used vehicles and drive up the cost of used cars. Used car dealers, repair shops, and aftermarket component suppliers will benefit from consumers looking to stay in their current vehicles longer.

Long-term economic and regulatory stability is key to capital planning, and the lack thereof will cause automotive manufacturers and suppliers to reconsider their long-term capital investment plans.

It is still expected for U.S.-based manufacturers to affirm their commitment to the U.S. through mid-term investment or shifting Mexico/Canada manufacturing to the U.S. (some of which may include previously unannounced plans to do so and not driven by tariff policy), and the ongoing trade uncertainty will defer development of future vehicle programs. 

Jeff Harnden: Impairment of both hard and intangible assets is going to be a key area to monitor as we progress throughout FY 2025. While most companies may avoid impairment-related issues for the end of the first calendar quarter, these issues will likely become a hot topic for the remainder of 2025.

Under U.S. GAAP, companies are required to report their inventory at the lower of cost or net realizable value (NRV). If a company is unable to pass through increases in costs related to tariffs to customers, this could result in the need to write down tariff-impacted inventory values, especially in industries with tight margins.

Public companies will need to address any volatility in market capitalization as part of an assessment of goodwill impairment, as downturns in market capitalization are an indicator for the impairment of goodwill under GAAP.

Beyond market capitalization fluctuation, tariffs promise to impact the cash flows of a business, and downward pressure on these cash flows can create impairment-related issues for companies.

Additionally, I would suspect that there will be increased scrutiny in evaluating the cash flow projections used in performing any quantitative test for either fixed or intangible asset impairment to ensure that any negative impacts of tariffs are appropriately reflected. With regards to qualitative disclosures, I would expect to see public companies disclose the potential impact of tariffs as part of their disclosure of risk factors in their quarterly and annual filings.

What else do those in the automotive industry need to know?

Jasmeet Singh Marwah: Many automotive suppliers may already be operationally on thin ice, as some products do not demand high profit margin. Therefore, the tariffs could exacerbate it further to significant financial difficulties (leading some to consider restructuring/bankruptcy).

As a valuation advisory firm, Stout provides numerous impairment tests annually for goodwill, indefinite-lived assets, and long-lived assets. Given the current economic headwinds, potential loss of customers, consistent decline in share price, or various other factors, a company may need to assess if an impairment test requirement has been triggered. Given the expected decline in sales and earnings forecasts, automotive suppliers and OEMs need to consider these risks and triggering events.

As clients consider logistical and facility mapping (U.S. in-shoring), they may need to consider international legal entity reorganizations and inter-company intellectual property transfers, which can require independent fair market value determinations.

As automotive companies rethink their manufacturing and supply-chain footprint, they would also need to evaluate and quantify the key value drivers, operational strengths and weaknesses, and competitive positioning through strategic modeling and analytics (either internally or through independent consulting firms, like Stout).

Gonzalo Nespolo: Prior to tariff announcements, middle-market deals were taking longer to execute as diligence processes were extended to refine risk considerations due to heightened valuations. This is expected to continue into the foreseeable future as buyers will seek to understand the impact of tariffs to short-term profitability, a target’s ability to pass these costs on to customers and the potential investments needed to offset prolonged impacts from the trade war.

If not already part of their diligence scope, buyers will seek enhanced operating and commercial due diligence to ensure they fully understand a target's sourcing strategy and operations to assess risks and opportunities under proposed tariffs. Use of earn-outs, equity rollover, contingent and deferred consideration will be of increased use in deal structures as buyers seek to bridge valuation gaps caused by tariffs and financial uncertainty, a trend we have seen play out over the last 12-18 months as valuations have risen.

Beyond a tentative pause as investors and deal makers sought to understand the impact of tariffs, we expect deal volumes to fall below expectations for FY25 as the current level of uncertainty and expectations of a prolonged negotiating cycle by trade partners force investors and deal makers to scale back plans to expand through M&A.

Until investors see a path of certainty, M&A activity should taper in the short-term. In the meantime, we expect M&A activity to focus on localizing supply chains, reshoring operations, and targets with operating resilience or transformational characteristics. 

While still too early to tell, distressed opportunities could drive a larger share of M&A activity, especially with tier two or three suppliers that lack cash reserves for tariff hits. Prior to tariff announcements, we already saw a wave of bankruptcies primarily with-PE owned businesses resulting from a challenging interest rate environment. Prolonged periods of high interest rates followed by continued softening demand will spell trouble for companies who lack the balance sheet protection and cash reserves to manage a period of uncertainty and increased costs.

1. Stephanie Brinley, "Auto Tariffs Lead to Major Forecast Downgrades," S&P Global.