Trump victory threatens US auto market

Donald Trump’s surprise victory in the US presidential election is predicted to have a profound impact on US car manufacturers, with many commentators concerned about the potential impact on the auto finance industry in the light of the new leader’s known views on trade with Mexico.

His campaign speeches made clear that he blamed unfair trade, in particular with Mexico and China, for the loss of millions of US-based jobs, and he has indicated he intends to re-negotiate the North American Free Trade Agreement (NAFTA), which connects Canada, the US and Mexico, and leave the pact if Mexico does not agree to improved terms for the US.

Mexican stand-off

Currently, NAFTA allows US carmakers to site production plants in Mexico, where there is access to cheaper labor and a growing supply chain for additional parts and services.

At the start of the year, a report from PwC identified US auto markets as peaking at historic levels, setting a sales record of just under 17.5 million vehicles in 2015, up 5.7 % from the year before and topping the high-water mark of 17,402,486 in 2000.

The consultancy forecast US sales as likely to be relatively flat in the next two years with a moderate downturn in 2018, due in part to higher auto loan interest rates as the Federal Reserve raises overnight rates, and an expected flood of vehicles into the used car market.

PwC pointed out that Mexican auto sales outpaced forecasts in 2015, jumping 19% to more than 1.3 million units, with predictions this will surpass 1.5 million by 2021.

The firm wrote at the time: “Investments in new auto factories in Mexico are surging as well; installed capacity is likely to grow more than 50% over the next five years (partially for North American consumption, but also for global export). These conditions compel automakers and suppliers to manage supply chains and factory usage cautiously in the US, while continuing to expand in Mexico.”

However, Trump’s appointment as president has cast significant doubts over this trend. He has also been openly critical of the state of trade relations with China, the biggest auto market outside the US. Many US carmakers have profitable joint ventures with Chinese automakers, sanctioned by the Chinese government, but if the new president remains hostile to China, these could also be under threat.

CFPB challenge

Fewer car sales are likely to mean less demand for auto leases and loans, although the National Automobile Dealers Association has identified one possible benefit of a Trump presidency.

It says a continuing Republican-led Congress may be a win for dealers and auto lenders hoping to curtail auto lending guidance by the Consumer Financial Protection Bureau (CFPB). A bill to limit the CFPB’s guidance, the Reforming CFPB Indirect Auto Financing Guidance Act, passed the House of Representatives by a wide margin, 332-96, in November 2015. Its companion bill was introduced in the Senate in March 2016 and referred to the Committee on Banking, Housing, and Urban Affairs.

The Financial Choice Act of 2016, which also aims in part to dismantle the CFPB’s auto lending guidance, passed in the House Financial Services Committee in September.

Provisions outlined in all three pieces of legislation, in the same wording, would require any new auto lending guidance the CFPB issues to provide a public notice and comment period before issuing a final guidance on auto lending, and make all studies, data, methodologies, analyses and other information relied on to determine the guidance available to the public.

The CFPB would also be required to consult more widely with the Federal Reserve System, the Federal Trade Commission and the Department of Justice before launching legal action and conduct a study on the costs and impact of such guidance to consumers and female-owned, minority-owned, veteran-owned and small businesses.