Since 3 April 2025, cars imported to the US have been subject to a 25% tariff, with a similar rate to be imposed on the vast majority of car part suppliers from 3 May.
Nearly 8 in 10 cars produced in the UK are exported, with the top three markets being the EU (54.0%), US (16.9%) and China (6.6%). In 2024, more than 101,000 cars were shipped to the US, in trade worth £7.6 billion to the UK. Notably, in 2024 exports to the EU and China were down 24% and 21.8% respectively, but those to the US rose 38.5% - which speaks to the importance of the US market to the UK and the magnitude of disruption that tariffs may have.
Lenders will be aware that the automotive industry is already facing multiple headwinds including global weak consumer demand, increased competition from abroad, falling demand in China, slow EV take-up, increasing inflationary pressures and supply chain issues. Figures released by the Society of Motor Manufacturers and Traders (SMMT) show that production in the UK declined for the 12th consecutive month in February 2025 – with the total output of cars and vans decreasing by 11.6%.
As a result, many auto businesses are under financial pressure – before taking into account the impact of the US tariffs. A study has shown that 22 of the 50 largest automotive firms in the West Midlands region – a hub of the UK auto industry – are at risk of insolvency due to poor liquidity ratios. Data from Q3 2024 shows that there was a 64% quarterly rise in industrials profits warnings, as profits begin to suffer for original equipment manufacturers (OEMs) as well as companies in the supply chain.
Lenders will need to closely monitor automotive businesses in their portfolio to understand which firms could be most at risk of facing additional stress or distress as a result of this new trading environment.
The US is the largest market for the UK’s luxury brands, and businesses like JLR, Rolls Royce, Bentley, Aston Martin, McLaren and Morgan will be directly impacted by import tariffs. The West Midlands, as an epicentre of UK car exports to the US, will be being particularly hard hit. OEMs are currently trying to navigate how their business should respond – for example, JLR has paused shipments for a month and is waiting for increased clarity from the US to work out a strategy.
The tariffs will also impact firms not directly exporting from the UK to the US, such as the Nissan plant in Sunderland and Toyota in Burnaston, as their suppliers may become unviable if they suffer a fall in demand from those UK OEMs with reduced sales into the US.
The price of British cars sold in the US is expected to rise – potentially as much as 11.4% – impacting consumer demand. It’s possible that for luxury brands, customers may be less price-sensitive, but UK manufacturers will need to review their output in the face of constrained demand, potentially leading to a reduction in schedules.
As a result, according to the Institute for Public Policy Research, 25,000 direct jobs in the car manufacturing industry could be at risk. The UK auto industry is already operating below capacity, so if sizeable production cuts materialise there is a risk of a tipping point where plants or suppliers fall below minimum viability levels and therefore have to close completely.
Firms may also have to contend with a decline in the UK economy, contributing further to weaker consumer demand. In February, the Bank of England halved its growth forecast for 2025 from 1.50% to 0.75% and the imposition of trade tariffs adds more uncertainty to the global economic environment.
The UK does not supply large numbers of auto parts directly to the US. However, suppliers will be under pressure to reduce their prices as OEMs look to recover part of the 25% additional tariff. Suppliers may be forced to retender as OEMs look for more competitive options.
There may be a shift towards the localisation of suppliers, as UK OEMs seek to mitigate excessive import tariffs. Some companies could consider moving production to the US or undertake joint ventures with US firms to avoid import tariffs. However, this strategy would take years to implement, and the decision to invest in the US amid such an uncertain and volatile political landscape would be difficult. It would also take significant capital, and for many businesses – particularly those facing financial stress - it would not be a viable option.
Countries subject to more significant tariffs (e.g. China) may look to reroute their auto parts supply into the UK – competing with and putting further pressure on UK-based suppliers.
The shift in market dynamics following the imposition of tariffs by the US administration is expected to significantly impact the credit quality of firms in the automotive sector. This may affect a borrower’s ability to meet financial covenants and comply with existing loan documentation. New financing may be harder to obtain and subject to stricter lender criteria and higher interest repayments.
The current volatility in global stock markets brings additional risks for lenders across the board. For example, the value of collateral may change rapidly, or become insufficient to adequately cover the loan. If market turbulence continues, the ability for companies to secure equity finance may also be impacted which, as key stakeholders, will directly impact lenders.
The full consequences of these tariffs will play out in the coming months and years, but lenders should act now to ascertain the impact on their portfolios and how they can best support borrowers.
Apply for a grant – lenders may not be aware that major automotive grants are available via the Automotive Transformation Fund (ATF) run by the Advanced Propulsion Centre (APC) set up by the Government in 2013. Innovate UK also runs a cross-sector grants system for the UK, with significant funds available. Many local councils have smaller funds to which automotive firms can apply. Automotive borrowers in your portfolio may be eligible to benefit from these grants and we have significant experience in helping automotive businesses apply for funding in this way, with an 88% success rate.
Scenario planning and financial modelling – OEMs will be assessing their supply chains and considering production schedules and pricing models. With approximately 3,000 parts in every car and varying countries of origin, this will be complex. We can help your borrowers model various strategies, to assess the likely impact on their businesses. This will be crucial for identifying the effects on cash flow, profit margins and financial covenants and can enable lenders to develop a suite of KPIs for automotive firms in their portfolio to track performance and act as early warning indicators of stress or distress.
Operational restructuring – more than just cost-cutting, we can help borrowers in your portfolio evaluate how their operational model creates value, ensure it is as efficient as it can be and that costs are being managed effectively to create financial stability.
Understanding the tax impact and customs duties – the increased cost of moving goods could drastically change business strategy. We help firms reassess their international tax planning and consider compliance requirements and mitigation strategies in anticipation of a more protectionist trade environment.
For more information or advice, contact Jon Roden or Owen Edwards.
