Donald Trump won the presidency by winning the American heartland, the bastion of the US auto industry. Ohio went for the Republican candidate, and in a real shocker, Michigan continues to lean Trump.
Trump tangled with auto-industry leaders during the election, most prominently Ford CEO Mark Fields, over establishing manufacturing operations in Mexico and taking unwarranted credit for bringing production back to the US from Mexico.
With US auto sales at record levels, the 2009 bailouts and bankruptcies of General Motors and Chrysler weren’t much discussed, but they remain a prominent legacy of the Obama administration.
So what does Donald Trump in the White House mean for the US auto industry?
Establishing plants in Mexico could become a big political issue
The automakers want to build cars in Mexico so that they can continue to manufacture smaller vehicles that aren’t profitable enough, with SUV and crossovers dominating the US market. NAFTA provides them with access to cheaper labour, in a region that has committed to being an auto-manufacturing powerhouse in the future.
This could become politically more challenging, depending on what actually happens with NAFTA over the next four years. However, with a potential structural shift in the US and some global markets toward SUVS, it’s going to increasingly be a money-losing proposition for the carmakers to build small vehicles in the US.
If they can’t move production around, they will have to back off of domestic assembly of passenger cars, which will cause problems if gas prices spike and consumers alter their buying habits.
Trump already inaccurately claimed credit for keeping a Ford plant from relocating to Mexico. The president-elect thought it was a Lincoln plant, but only a small number of Lincoln SUVs are manufactured there, compared with the same vehicle badged as a Ford Escape. That’s just the beginning of the wrangling over this issue.
Economic instability could accelerate a cyclical sales downturn
US auto sales will probably match last year’s record total of 17.5 million. Most industry executives and experts expected that pace to persist through 2017 before slowing as the market drops back to something in the 16-million range.
But overall market instability, coupled with consumer fear about the future, could bring on a cyclical decline sooner. Maybe much sooner. If auto sales don’t maintain a 16 million to 17 million US sales pace through the first quarter or 2017, then a downturn could arrive by summer.
Credit could get tougher to come by
Credit has been flowing of late in the auto-lending-and-leasing space, but if positive Trump feelings on Wall Street contribute to a short-term stock market rally, the Federal Reserve could — given the current full-employment situation — decide to raise interest rates to cool the economy, head off inflation, and provide some much-needed space to cut rates if a recession arrives.
That would put a bit of damper on auto sales, although other factors, such as cheap gas prices and historically high average vehicle age, could keep things running hot for a while longer.
Automakers could get a break on higher fuel-economy standards
Corporate Average Fuel Economy (CAFE) standards are supposed to rise substantially for automakers selling vehicles in the US by 2025 — that’s the MPGs that the car companies have to achieve on average for all their cars and truck, small and large, to satisfy regulators.
But because the mix of vehicles sold in the US has shifted from small, fuel-efficient cars to big trucks and SUV, the ambitious new CAFE goals are at odd with what people are actually buying. Electric vehicles and hybrid sales have also been weak, making it more difficult for carmakers to build these “compliance” vehicles.
The car companies have been pushing back against the standards, and a Republican White House and Congress will likely be more receptive to their case.
Electric cars are in trouble
Because they’re more expensive that gas-powered vehicles, electric cars need state and federal government incentives to make the sticker price more appealing.
Electric vehicle sales are already weak compared with gas-powered cars and trucks, so taking away the credits and tax breaks isn’t going to help. EV sales are ultimately being supported now by government policies, and even with new, affordable, long-range cars coming from Tesla and Chevy, the market won’t grow without some demand stimulus.
The auto worker unions could gain
If General Motors, Ford, and Fiat Chrysler Automobiles have to expand domestic capacity because it’s more difficult to establish manufacturing in Mexico, the jobs they create will be UAW jobs.
Those jobs are more likely to grow in the upper Midwest because Ford, GM, and FCA need to build a lot of trucks and SUVs. They’re less likely to grow in the so-called “Detroit South” where the German and Japanese automakers run plans that are non-union, mainly because those carmakers aren’t as strong on pickups and big SUVs.
The global gains that automakers have made could be curtailed
The biggest auto market outside the US is China, where the US carmakers have profitable joint ventures with Chinese automakers, sanctioned by the Chinese government.
Any destabilizing of trade relations with China could undermine this setup, leaving the US auto industry with no “safety valve” if US sales decline and markets such as Europe remain flat while South America struggles through an economic downturn that’s crushed sales.
All of this is speculative, of course. But given that the US auto industry has been on an epic run since Obama won his second term, a Republican in the White House — and in Trump, one who opposes many of the global business arrangements that benefit carmakers — could create some unforeseen headwinds, but also ease some regulatory burdens.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.