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The prospect of increased costs and diminished profits from President Trump’s tariffs on imported vehicles and automotive components has many automakers concerned. However, Carvana, the online used car retailer known for its unique “vending machine” towers, anticipates a potential upswing in its fortunes due to these tariffs.
Tariffs May Spur Used Car Demand
The imposed tariffs, encompassing levies of 25 percent on automobiles originating from Mexico, Canada, Germany, and numerous other countries, are projected to elevate the prices of new cars and trucks. This shift could compel more buyers to consider pre-owned vehicles. Although an agreement intended to reduce tariffs on Chinese imports was announced, it does not affect tariffs on cars and auto parts.
“To the extent that car prices go up, Carvana is probably positioned to be relatively advantaged as consumers look for high-quality cars at a lower price,” the company’s founder and chief executive, Ernie Garcia, said in an interview last week. “We think that will cause them to shift into used vehicles and into the savings that are available via online buying.”
Automakers Brace for Tariff Impact
President Trump has stated that the tariffs serve to incentivize manufacturers to increase domestic production and job creation, while also citing other objectives such as curbing unauthorized immigration and drug trafficking.
Automakers are anticipating the consequences. Recent reports indicate the projected financial impact:
- General Motors estimates a cost increase of $2.8 billion to $3.5 billion this year, even after factoring in adaptation measures.
- Ford Motor anticipates a net cost of $1.5 billion due to the tariffs, despite having a larger domestic manufacturing footprint than G.M.
- Toyota Motor projects costs of $1.3 billion for March and April alone due to its substantial vehicle imports from Japan.
Analyst Predictions
Analysts foresee potential price increases of up to $10,000 for certain imported models, potentially leading to a significant slowdown in new vehicle sales this year.
Alan Haig, a consultant advising car dealers, supports Mr. Garcia’s assessment of likely consumer behavior.
“I think you’re going to see an increase in used car sales because of the tariffs, and I do think there will be more customers visiting Carvana websites because that’s essentially their sole focus,” he said.
Potential Downsides and Market Dynamics
However, adverse effects could emerge. A potential recession triggered by the tariffs, or substantial vehicle price hikes, may dampen sales for both new and used automobiles. Auction prices for used cars have already risen by approximately $1,000 on average in the past two months.
Mr. Haig suggests the full repercussions will take time to materialize, as most vehicles on dealer lots have not yet seen considerable price changes. The initial shipments of imported models affected by tariffs imposed in early April are just beginning to arrive. Tariffs on imported engines, transmissions, and other components took effect on May 3.
Carvana’s Financial Turnaround
Regardless of future market shifts, Carvana’s financial standing is considerably stronger than in recent years.
During the surge in used car sales and online purchasing triggered by the Covid pandemic, Carvana experienced rapid growth and heightened investor interest. However, as demand waned, the company was left with a substantial inventory acquired at inflated prices, leading to significant losses.
Simultaneously, interest rates rose following Carvana’s acquisition of Adesa, a used car auction company, financed with billions in debt. This debt burden and escalating losses sparked concerns about Carvana’s long-term viability, causing a stock crash in February 2023.
Strategic Restructuring
Mr. Garcia successfully renegotiated the company’s debt, implemented cost reductions, and streamlined operations. Over a period of months, Carvana reduced its workforce, sold vehicles, and transformed Adesa into a source of affordable cars and trucks. The company has expanded its capabilities at 11 Adesa locations to repair and recondition pre-owned vehicles.
Recent Performance and Future Goals
These efforts have yielded positive results. Carvana recently reported record performance for the first quarter of the year, with profits reaching $373 million, a considerable increase from $49 million in the previous year. The company sold 133,898 used vehicles, marking a 46 percent increase compared to the first quarter of 2024, with an average gross profit of slightly under $7,000 per vehicle.
Efficiency Gains
This accomplishment was achieved while maintaining a leaner inventory, reducing advertising expenditures, and employing approximately 4,000 fewer individuals compared to three years prior. The company’s stock has largely recovered from its previous decline.
“From 2017 to 2021, the company focused on growth,” Mr. Garcia said. “We spent the last two years unlocking efficiencies. I think that is what has driven the dramatic improvement in our performance.”
Mr. Garcia has set a goal for Carvana to sell three million cars and trucks annually within the next five to ten years, up from the current volume of approximately 500,000.
Challenges Ahead
Many Wall Street analysts are optimistic about Carvana’s future, but acknowledge one key obstacle: a shortage of auto mechanics, which Carvana needs to hire in large numbers to support its vehicle reconditioning efforts.
“Labor is the key bottleneck,” Ronald Josey, a Citi analyst, observed in a recent report.
Mr. Garcia expressed confidence in Carvana’s restructured business model, believing it can thrive regardless of changes in U.S. trade policy.
“I think it’s now proven that, yes, customers have shown they are willing to buy cars online, and an online business model can deliver value,” he said.