Recently, Pierburg US, a manufacturer of parts used in the Ford F-150 pickup truck and Jeep Wrangler SUV, sued one of its suppliers over new tariffs imposed. The two sides have been in business for 20+ years. Pierburg says that the supplier’s refusal to ship electric motors from China to Pierburg’s factory in South Carolina unless it paid the 25% tariff cost in full was “extortion.” A failure to deliver the parts could shut down multiple auto factories and “plunge the automotive industry into complete chaos,” Pierburg added. Sorting out the cost of tariffs is difficult because some parts cross the U.S. border multiple times before being installed in a car, blurring the lines of what is “domestic” content.
A typical vehicle is made up of roughly 30,000 individual parts, and car companies on average work with hundreds of suppliers at once for each model line, either buying components directly or contracting them out further down the chain. Thousands of individual contracts outline in detail parts orders, delivery dates and prices, and many of them are locked in place months and even years in advance.
Toyota has told suppliers they shouldn’t count on the Japanese car maker to help absorb the higher tariff-related costs. The average operating profit margin in the auto parts manufacturing business is already slim–about 7%—so extra costs can hit earnings hard.
Classroom discussion questions:
- Describe the auto supply chain.
- What is the impact of tariffs proposed?