Auto stocks have taken center stage following the recent announcement by the U.S. government of a 25% tariff on auto imports. This bold move is expected to significantly impact original equipment manufacturers (OEMs) as they grapple with rising costs and the challenge of sourcing alternatives. According to Nomura, this could ultimately dampen demand, especially for companies struggling to shift their manufacturing operations to the U.S. Notably, Tata Motors is poised to feel the brunt of these tariffs, particularly due to its exposure through Jaguar Land Rover (JLR), along with component suppliers like Bharat Forge and Sona Comstar.

Implications of the Tariff on U.S. Operations

The operational landscape for auto manufacturers in the U.S. is set to change drastically with the introduction of these tariffs. Nomura emphasizes that the cost of doing business in the U.S. is significantly higher, with wages being approximately five times those in India. This raises concerns about production shifts. Nomura warns, "Should all OEMs and suppliers attempt to relocate their production simultaneously, a labor shortage could ensue, driving wages even higher." Currently, suppliers benefit from lower costs in overseas locations due to economies of scale.

• Key considerations for OEMs:
  • Increased operational costs in the U.S.
  • Potential labor shortages affecting production timelines.
  • Existing import tariffs on steel and aluminum complicate the situation.

Moreover, establishing new manufacturing plants could take around two years, making it essential for companies to undertake comprehensive cost-benefit analyses. Additionally, any fluctuations in the dollar against other currencies could further compromise the competitiveness of U.S. manufacturers.

Tata Motors: The Most Vulnerable

According to Nomura’s analysis, Tata Motors faces substantial risk from these tariffs, particularly through its JLR division, which derives over 25% of its revenue from the U.S. In the fiscal year 2024, JLR saw 23% of its revenue and 26% of its total wholesale volume come from the American market. The exposure has increased even further, with JLR recently reporting that 33% of its volumes in the first nine months of FY25 were sourced from the U.S. Most JLR vehicles are produced in the UK, aside from the Defender, which is manufactured in the EU.

Following the tariff announcement, Tata Motors experienced a sharp decline, with share prices plummeting by as much as 7% to an intraday low of Rs 661 on March 27. In the past week alone, the stock has dipped over 5%, contributing to a staggering 30% decrease in value over the last six months.

Impact on Auto Component Suppliers

The ramifications of the tariffs extend beyond car manufacturers to auto component suppliers as well. Bharat Forge, a significant player in the auto parts sector with a marked presence in the U.S. market, is expected to be adversely affected. In FY24, the company reported that 25% of its consolidated revenue and 35% of its standalone revenue originated from the U.S. Other suppliers, including Sona BLW and Motherson Sumi, also have considerable exposure to the American market. Nomura suggests that these suppliers are likely to pass the tariff costs onto OEMs, further straining the supply chain.

• Bharat Forge’s financial performance:
  • Share prices have declined by 1.4% over the last five trading sessions.
  • A notable 22.5% drop has been observed over the past six months.
  • However, they’ve managed to achieve a 15% return in the last month.

Nomura’s insights indicate that Sona Comstar, with over 40% of its revenue derived from the U.S., also faces significant risks as the current uncertainty may influence pricing strategies negatively.

In light of these developments, stakeholders across the automotive industry must remain vigilant as they navigate the implications of the new U.S. tariffs.