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Trade heat from Trump makes Toyota's test in U.S. even tougher

by Ma Jie and Kevin Buckland

Bloomberg

Toyota Motor Corp. recently ceded its title as the world’s best-selling automaker to archrival Volkswagen AG. Yet the company’s biggest adversary this year may be U.S. President Donald Trump.

Japan’s largest automaker expects profit to fall to ¥1.7 trillion for the fiscal year ending next month, about a quarter less than the previous annual period. The forecast given Monday — still less than analysts’ consensus — reflects challenges including a stronger yen and flagging U.S. demand for passenger cars like the Camry sedan.

Trump’s opposition to imported vehicles risks making company President Akio Toyoda’s job even more difficult. Toyota has invested about $22 billion in the U.S. and would likely need more than $1 billion and several years to add to the six plants it has already built in politically conservative U.S. states. The company still imports a significant proportion of high-value components like engines and transmissions, said Takaki Nakanishi, the top-ranked auto analyst for six consecutive years through 2009 in rankings by Nikkei Veritas.

“Japan’s auto industry has not sufficiently localized operations in the U.S., its largest sales destination market,” Nakanishi, a Tokyo-based analyst for Jefferies Group LLC, wrote in a Jan. 30 report.

Just before taking office, Trump called out Toyota in a tweet for plans to build a factory in Mexico to produce a next-generation Corolla, Toyota’s flagship compact, and threatened it with a “big border tax.” Toyota shows no sign of backing down from its investment plans in Mexico.

The stakes for Toyota are significant, as North America accounts for about 38 percent of its revenue. Both the company and Japan have taken some political heat from the Trump administration, which has a lot riding on plans to revive U.S. manufacturing.

Toyoda, who dined with Prime Minister Shinzo Abe ahead of his visit to the U.S. this week, has said Toyota will invest $10 billion in the U.S. over the next five years. About 75 percent of the parts used to build the best-selling Camry sold in the U.S. are made locally, Abe told Trump during a recent call.

On Monday, Toyota missed estimates with a 39 percent decline in operating profit for the quarter ending Dec. 31. The company raised its profit forecast for this fiscal year from ¥1.55 trillion previously. Analysts project the automaker will earn about ¥1.74 trillion.

Toyota expects U.S. sales to remain difficult for passenger cars as buyer preference shifts to trucks and SUVs, and competition has intensified with automakers stepping up incentives, Managing Officer Tetsuya Otake said Monday.

Toyota makes about 49 percent of the vehicles it sells in the U.S. from plants within the country, according to the company. It exports more vehicles to the nation than either Nissan Motor Co. or Honda Motor Co., as it manufactures most Lexus luxury cars in Japan and ships RAV4 sport utility vehicles from Canada and Tacoma pickups from Mexico.

For Toyota, adding more production to the U.S. could be both politically fraught back in Japan and expensive. Koji Endo, an automotive analyst at SBI Securities in Tokyo, estimates that building more Lexus models in the U.S. would require a new plant that would cost as much as ¥150 billion.

“If Toyota wants to shift production even more to the U.S., it would probably have to close plants in Japan and fire people, and some suppliers might disappear,” Endo said.

Aside from trade politics, Toyota faces a U.S. car market showing signs of flagging demand and growing reliance on sales incentives, which hurts profits. Toyota’s U.S. sales fell about 11 percent in January.

Toyota is investing more in SUV and truck production to meet growing demand in an era of low gas prices. The company is adding 400 jobs and investing $600 million at its facility in Princeton, Indiana, where the Highlander midsize SUV is produced.

Last month, the company unveiled the fifth generation of its Lexus LS, which competes with the Mercedes S-Class and BMW 7 Series. Also available from Toyota later this year will be the all-new 2018 Camry sedan. “Toyota does seem to have a lot of new products for 2017,” Endo said.

Yet that advantage could be offset somewhat if Japanese automakers face tariffs on the cars they bring into the U.S. from home or Mexico. Tariffs may be a tough sell in Congress. But if approved, prices would rise and “there would be less demand for big-ticket items like passenger vehicles,” said Maryann Keller, an independent auto analyst in Stamford, Connecticut.