March 26, 2025 - The threat of tariffs is affecting the automotive industry. Auto manufacturers saw sharp stock declines, with Tesla, General Motors, Ford, and Nissan among those hit the hardest. Meanwhile, the U.S. trade deficit widened by over $30 billion in January as many companies rushed to secure inventory ahead of the tariffs.

Auto dealerships were not spared. The longer it goes on, the more we will start to see insurance rates, financing packages, and the overall market for dealerships and cars change.

Consumers are likely to pay the proverbial price as the already expensive average car grows even less affordable. They will become more likely to repair their existing vehicles rather than purchase new or used ones, which often come with unaffordable payment plans. To navigate this shift, it is crucial that dealers offer flexible financing options that cater to the cost-conscious. A well-managed fixed operations department will be essential during this period of volatility, keeping car sales flowing with affordable alternatives for vehicle maintenance and repair.

Dealerships must start preparing now. At a minimum, you should already have an action plan to mitigate the potential impact. This article explores scenario planning for tariffs: How to prepare for and respond effectively if they happen.

To learn how tariffs could affect dealerships, read the first article of this two-part series here.

Diversify Your Inventory

There is no such thing as a 100% American-made vehicle. Vehicles sold in the U.S. are either fully imported — such as the Civic Sedan or Lexus RX — or assembled domestically using a mix of domestic and foreign parts. The impact of tariffs depends on the proportion of imported components in each vehicle. Domestic brands that rely heavily on imported parts will see higher production costs, while vehicles produced or assembled abroad and then imported will be even more affected.

To reduce these effects, diversify your inventory by stocking less of the heavily imported models and brands that use a high percentage of foreign parts. Instead, prioritize domestically manufactured vehicles from brands with stronger U.S.-based supply chains.

For example, Ford manufactures many of its vehicles in the U.S., sources 90% of its steel domestically, and primarily relies on U.S. suppliers for aluminum. The company also evaluates ways to build inventory in preparation for potential tariffs. General Motors is also trying to reduce its inventory of international plants by more than 30%.

As tariffs loom, consider adjusting your stock to these types of brands.

Focus on Fixed Ops

When Tesla first introduced the all-electric Model S, competitors were puzzled — the company had no dealerships and instead sold directly to customers online. “How could Tesla give up the highly profitable stream of revenue that came to car companies from the service centers at their dealerships?” asked author and futurist Stewart Brand in his article, “Maintenance: Of Everything.”

Over time, Tesla’s business model became clearer — its vehicles are lighter, require less maintenance, and receive software updates and improvements regularly, reducing the need for traditional service. However, the electric automotive company eventually opened service centers to handle necessary repairs, such as tire replacements, as its cars do not include spare tires to reduce weight.

From this, we can deduce one key takeaway: Service — and, by extension, parts — are very profitable. They are the most profitable segments of many dealerships. Tesla acknowledged this in its 2023 earnings report, stating that “body shop and part sales are core drivers of profit growth.”

I have experienced the same working with hundreds of dealerships. Service is the highest-margin department, with margins that typically exceed 60%, meaning dealers keep six out of every ten dollars spent there.

In my experience, parts generate around a 30–35% margin, while used vehicles see 6–10%, though that has been trending lower due to high interest rates and reduced inventory. On the other hand, new vehicles typically yield just a 2% margin though they are the “fuel” that brings people to get parts, used cars, or service their vehicles later.

To prepare for potential tariffs, ensure your parts and service departments are operating as efficiently as possible. Hire skilled technicians and help them be productive, improve your service process, and maintain a steady stock of high-demand parts to reduce repair delays.

Revisit Financial Contracts and Expenses

Now is the time to revisit and renegotiate your financing terms with vendors. These gains may be meaningful, especially as interest rates are starting to improve. If you cannot secure better rates, ask for nonfinancial concessions such as better payment terms. Continue to revisit policies and agreements down the line: Get competitive quotes with new insurance providers to gain leverage and consider consolidating parts and service vendors for greater purchasing power.

Revisit Staffing and Compensation

Ensure your department headcounts and employee benefit structures are still appropriate. If you have recently updated annual plans for the business, evaluate the organizational chart along these lines. Where possible, conduct a regression analysis on sales and commission structures to understand if that at-risk pay is contributing to sales or simply rewarding everyday activities.

Optimize Backoffice Operations

If your company does not yet have an automated dealer management system (DMS), this is one additional expense that could turn into additional savings. Dealers often underuse their financial data in our experience, and the number one reason for this is it sits in disconnected systems. Bringing your inventory, sales, and customer relationship into one place can allow you to analyze that data for savings. For example, benchmarking the performance of various locations, identifying needless expenses, and setting performance indicators for general managers to follow.

Strong data from unified systems is also one key to launching AI. “A lack of integrated systems” is the number one reason companies say they struggle to implement new time- and cost-saving AI tools according to our latest Private Company Performance Report. Unified systems may also feature stronger cybersecurity controls and protections against malicious actors who can further erode profitability.

How Citrin Cooperman Can Help

The coming year will be critical for the automotive industry. Many dealers are operating as usual, trusting that manufacturers, lobbyists, and public pressure will influence the President’s decision. However, others are planning how to be flexible if the situation shifts.

Dealers are planning for how to be nimble — reducing inventories, keeping costs down — but they are watching the news closely.

Ultimately, dealers should stay proactive. Continue scenario planning by diversifying inventory, strengthening service operations, providing flexible financing options, and cutting unnecessary costs. We do not know if the tariffs will hold, but those who prepare now are more likely to survive, regardless of what happens.

Citrin Cooperman’s Automotive Dealerships Industry Practice can help with scenario planning for tariffs, including the cross-border tax and accounting implications. For more information, please contact your Citrin Cooperman representative.