Tariff threat drags down dealers

Threats of tariffs on imported vehicles and parts have U.S. dealers worried about hits to their business should the extra tax be implemented.More than half of franchised dealers answering the Cox Automotive Dealer Sentiment Index survey for the third quarter expect that tariffs would negatively impact future profits. That was a key factor bringing down their level of optimism from the second quarter as it relates to business during the next three months."Tariffs came out of nowhere to be right up there as one of the big things that have been negatives for dealers," Cox Chief Economist Jonathan Smoke told Automotive News.Tariff tensionFranchised new-vehicle retailers are fearful about how potential tariffs on imported vehicles and parts would affect profitability.Positive impact9%No impact35%Negative impact56%Source: Cox Automotive Dealer Sentiment IndexBeyond tariffs, dealers were more positive than negative in describing the current market, and franchised dealers' view of business today improved from the second quarter. Concerns about marketplace conditions, competition from other dealers and limited inventory were the top three factors cited as holding back business during the third quarter.The survey gauges dealers' perceptions of the past 90 days and expectations for the next three months. It identifies key factors affecting retailers' optimism or pessimism.The latest survey, conducted July 31 to Aug. 13, had 1,276 franchised and independent dealer respondents. Responses were weighted by dealership type and sales volume to represent the national dealer population. They then were used to calculate what's known as a diffusion index, in which a number greater than 50 indicates that dealers view conditions as strong.Cox calculated overall results, as well as separate results for franchised and independent dealers. This report focuses on the franchised dealers' responses, unless noted.Dealers overall reported tariff worries at an aggregated score of 37, putting their concerns about tariffs on par with their negative perceptions of price pressures. The concern was even stronger for franchised dealers, with a score of 27 ranking the impact of tariffs as the most negative factor dragging down their optimism."The cost of vehicles is likely to increase, significantly in some cases, due to the tariffs on steel, aluminum and vehicles," one anonymous dealer responded. "Add in the uncertainty of all aspects of the political season running toward November elections and consumers are likely to pull back."A minority of dealers — 1 out of 9 — indicated tariffs could improve business. Namely, they would be able to sell more used vehicles or domestic-brand vehicles.Holding back businessFranchised new-vehicle dealers are concerned about these topics, with limited inventory jumping the most on their worry list this quarter. Dealers concerned Q3 2018Dealers concerned Q3 2017Market conditions40%43%Competition37%37%Limited inventory28%16%Staff turnover28%25%Expenses25%23%Credit availability for consumers23%18%Note: Multiple responses were allowed.Source: Cox Automotive Dealer Sentiment IndexIn the short term, the tariff concern could increase used-vehicle prices and sales. Even if as little as 1 percent of American households decided to purchase a vehicle based on potential price increases from tariffs, that would translate to 1.2 million sales — or 5 percent more demand in a given month such as July or August, Smoke said.Higher prices for new and used vehicles are being watched closely by dealers, who don't really benefit from short-term pricing gains, Smoke said, even as they're moving inventory more rapidly. If prices are climbing because concerns about potential tariffs are pulling ahead demand, retailers are aware that eventually the party has to end, he said."Dealers believe that this isn't just a new-vehicle market thing, that higher prices will result across the board," Smoke said. "They're worried about used-vehicle markets almost as much as they are about new-vehicle prices."Increased demand helps explain why low inventory was the top overall concern for dealers, franchised and independent, in the third quarter, cited by 38 percent of dealers compared with 34 percent a year ago. Smoke tied that to higher summer sales spurred by the tariff threat.For franchised dealers, limited inventory tied with staff turnover for No. 3, cited by 28 percent. It was behind market conditions, with 40 percent, and competition, at 37 percent.Smoke noted the survey's measurement of future optimism has had a roller-coaster ride in 2018. Federal tax changes to start the year had given dealers almost "euphoric" optimism heading into 2018. But the specter of tariffs by the administration of President Donald Trump has all but eliminated that."Because Trump giveth and Trump taketh away," Smoke said.Still, dealers are emerging from a strong summer season feeling relatively positive about the next three months.Among franchised retailers, optimism about the coming three months scored a 61. While that's down from 69 during the second quarter, it's up from 57 a year ago. Their views about the current market, as the survey was taken, scored 59, up from 55 last year and the second quarter's 56.Dealers reported their ability to get credit for their own business has improved, with a score of 67, up from 66. And while customer traffic is still weak, at 46, that score is higher than the 42 reported a year ago.

Tariff threat drags down dealers

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