It’s my fervent hope that journalists and their audiences learned a valuable lesson about context from this past weekend’s firestorm about the confrontation on the National Mall between a group of mainly white Catholic high school kids on the one hand, and some Native American and African American protesters. One test of whether the need to avoid rushing to judgment based on limited information really has sunk in will be stories about the impact of President Trump’s metals tariffs on the U.S. auto industry.
So far, the coverage has stressed that the levies, which to some extent, for some period of time, raise the cost of the steel and aluminum for auto-makers, have been major headwinds for the sector. And that’s certainly been the message sent by the industry itself. But there’s also no doubt that other key data, representing that crucial context, have gone missing, and these omissions have significantly distorted the picture being presented.
The key statistic that’s been emphasized is the $1 billion in increased 2018 costs claimed by both General Motors (GM) and Ford due to higher metals prices. Which of course sounds like a lot of money. (Fiat Chrysler, the third of the “Detroit 3” auto-makers, has said that because of its use of fixed contracts, its metals prices were largely unaffected last year, but could cost it an extra $300-$350 million this year.)
But the $1 billion figure doesn’t exist in isolation. It needs to be compared with the total costs these companies pay to run their operations. And when that rudimentary calculation is performed, the $1 billion looks pretty unimpressive.
After all, GM’s total costs and expenses in the third quarter of 2018 (the latest data available) topped $34 billion. Its total costs for the year’s first two quarters exceeded $32 billion. (See here and here.) So if the fourth quarter winds up in that ballpark, GM’s 2018 costs will be nearly $130 billion. Which doesn’t make the $1 billion in extra metals costs look very big at all. Ford’s costs, incidentally, were running even higher than GM’s for the first nine months of 2018. (See the quarterly earnings reports listed here.)
The extra metals costs look much more important compared with the profits of these companies. Through the third quarter of last year, GM’s operating profits were $7.50 billion. Its guidance for the fourth quarter and for this year is even better. Nonetheless, a company with nearly $130 billion in total annual costs would seem to have plenty of opportunities to generate savings to offset higher steel prices.
Ford’s operating profits so far in 2018 have been lower than GM’s (just under $5.2 billion). But its costs have been higher, so it’s hard to finger the metals tariffs as its strongest 2018 headwind.
If President Trump imposes tariffs on vehicles and auto parts from much of the rest of the world, the Detroit 3 could definitely have a tougher slog this year. But that point is irrelevant to the impact of the metals tariffs last year.
Will the business and economics press present a fuller picture going forward? General Motors is expected to announce fourth quarter and full-year 2018 earnings on February 6. Ford’s is coming up tomorrow. Stay tuned!