Will Trump’s economic nationalism hurt Toyota?

Toyota's RAV4 is one of America's best selling cars. Can it stay on top with a Japanese supply chain and Canadian assembly plant?

Will Trump’s economic nationalism hurt Toyota?

Toyota manufactures three of the top ten best selling cars in the United States—the Camry, Corolla, and RAV4.[1] But of these three models, the RAV4 is the only one where final assembly of all cars takes place outside of the United States.[2] Throughout the presidential campaign and the beginning of his administration, Donald Trump has vowed to renegotiate NAFTA and place tariffs on many imports from manufacturing heavy countries in East Asia. Can Toyota’s RAV4 sales survive if supply chain costs increase due to changes in government regulation?

Toyota RAV4: A Global Supply Chain

At first glance, Toyota seems to have a strong U.S. manufacturing presence, which should isolate them from protectionist trade policy. They have made headlines over the years for opening domestic plants to serve the U.S. consumer with six plants located in six different states. The American Automotive Labeling Act requires companies to report on the country of origin for various parts of cars sold in the U.S. Only 35% of the RAV4 parts are sourced from the U.S./Canada with 60% from Japan. Additionally, major parts like the transmission and engine are only partially built in the US with the balance being imported from Japan.[3] Compare this to the Camry and Corolla, which are both more than 60% sourced from U.S./Canada with American made engines and transmissions.

How big is this risk to Toyota? The RAV4 model sold 352,000 U.S. units in 2016.[4] Toyota does not reveal model specific revenues from sales to its dealers, but the average RAV4 invoice price charged to dealers is roughly $28,000 depending on the finishing package.[5] Based on company regulatory documents, Toyota made an operating profit of 3% on North American automotive sales for FY17. Therefore, RAV4 U.S. sales make up at least 10% of Toyota’s North American operating profit.[6] This percentage could be even higher because the margins on crossover SUVs are generally higher than sedans like the Camry and Corolla.

Future of NAFTA and Trump’s Tariffs

President Trump has vocally criticized NAFTA for being “the single worst trade deal ever approved in this country […] the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.”[7] Wilbur Ross, the U.S. Secretary of Commerce, has made a more eloquent attack on NAFTA by focusing in on the concept of rules of origin.[8] These proposed regulations would limit the percentage of non-NAFTA parts allowed in products imported to the U.S. from Mexico and Canada. Even if Toyota could immediately shift final assembly from Canada to the U.S., Trump has attacked the trade deficit with Japan and suggested tariffs as a potential solution. These tariffs could require Toyota to find another source for the 60% of parts that are currently produced in Japan.

A recent Associated Press/GfK poll showed that nearly 75% of Americans would prefer to buy goods manufactured in the United Stated while just 9% only buy American.[9] The reason for the discrepancy is the increased price associated with items manufactured domestically. With Toyota’s narrow operating profit margins in North America, there is not a lot of room to absorb increased costs without pushing those increases onto the consumer through higher prices. Higher prices for the RAV4 would likely result in decreased sales as consumers move to other brands.

Toyota Moving Forward

Toyota openly admits that government regulations and tariffs are a threat to profitability. In their most recent 20-F filing with the SEC, Toyota states that “changes in these laws, regulations, policies and other governmental actions may affect the production, licensing, distribution or sale of Toyota’s products, cost of products or applicable tax rates”[10] Toyota has not commented publicly beyond that vague mention in their regulatory documents.

Management should actively lobby the U.S. government to minimize the impact of new regulations on the profitability of their third best-selling vehicle in the U.S. In addition, management must consider a contingency plan should their lobbying efforts fail. Can the RAV4 still be profitable with Canadian assembly? How long would it take to shift assembly to a domestic plant and will that even matter with 60% Japanese parts? Can parts be acquired within NAFTA countries instead of Japan? Furthermore, Toyota must be more transparent with its investors regarding the risks to profitability.

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[1] Zhang, B., “The 20 best-selling cars and trucks in America”, Business Insider (Jan. 7, 2017) http://www.businessinsider.com/best-selling-cars-trucks-vehicle-america-2016-2017-1/

[2] Toyota Customer Help. “Where are Toyota vehicles assembled for the U.S. market?” Accessed Nov. 15, 2017. http://toyota.custhelp.com/app/answers/detail/a_id/7660/~/where-are-toyota-vehicles-assembled-for-the-u.s.-market%3F

[3] National Highway Traffic Safety Administration. “American Automotive Labelling Act.” https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/2017_aala_percent_10032017.pdf

[4] Zhang, B., “The 20 best-selling cars and trucks in America”, Business Insider (Jan. 7, 2017) http://www.businessinsider.com/best-selling-cars-trucks-vehicle-america-2016-2017-1/

[5] Car Buying Strategies. “2017 Toyota RAV4 Prices: MSRP vs Dealer Invoice vs True Dealer Cost w/ Holdback.” Accessed Nov. 15, 2017. https://www.car-buying-strategies.com/dealer-invoice/toyota-rav4-prices.html

[6] Toyota Motor Corporation. “Securities and Exchange Commission: Form 20-F”. (June 23, 2017) http://www.toyota-global.com/pages/contents/investors/ir_library/sec/pdf/20-F_201703_final.pdf

[7] Greenberg, J., “Was NAFTA ‘worst trade deal ever’? Few agree”. PolitiFact. (Sep. 29, 2016) http://www.politifact.com/truth-o-meter/article/2016/sep/29/NAFTA-worst-trade-deal-ever-few-agree/

[8] Lawder, D., “U.S. Commerce study argues for tougher NAFTA origin rules”. Reuters. (Sep. 22, 2017) https://www.reuters.com/article/us-trade-nafta-content/u-s-commerce-study-argues-for-tougher-nafta-origin-rules-idUSKCN1BX1W6

[9] Tribune News Services, “Poll: Americans prefer low prices to items ‘Made in the USA’”, Chicago Tribune. (Apr. 14, 2016) http://www.chicagotribune.com/business/ct-americans-prices-vs-made-in-usa-20160414-story.html

[10] Toyota Motor Corporation. “Securities and Exchange Commission: Form 20-F”. (June 23, 2017) http://www.toyota-global.com/pages/contents/investors/ir_library/sec/pdf/20-F_201703_final.pdf


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Student comments on Will Trump’s economic nationalism hurt Toyota?

  1. The tension shown here between Toyota and the US government is one that we’ll hear over and over again with many more companies as a result of the proposed regulations on NAFTA. With Toyota, it seems that the company has made efforts to increase its manufacturing presence in the US, with 60% of the Camry and Corolla sedans sourced from U.S./Canada, however the RAV4 is still at risk due to 60% of its parts being sourced from Japan. I agree lobbying is definitely a path Toyota should take, highlighting their efforts to source and manufacture in the US through their other top selling vehicles. Beyond lobbying, Toyota should find opportunities to cut costs, such as building autonomous factories to reduce labor cost and increase productivity by being able to manufacture for longer hours through the use of machines. The effect of finding areas to cut costs could lead to job losses for local communities the factories are located in (which would not be aligned with the government’s efforts and should be another point to get across through lobbying). It’s important that companies continue to educate the government on their long-term strategy if certain regulation and policies are put in place, so that the government can adjust for long-term plans.

  2. This is a really interesting take on the threats that Toyota will feel, and no amount of pulling on the Andon cord will help us predict the future. Moving production of Toyota goods from Japan versus paying the tariffs may be a zero sum game – as so much of the cost is already burdened probably through shipping charges, and labour is probably pretty disparate. However, the place where I see the greatest hope is that all cars face this struggle. According to http://fortune.com/2015/06/29/cars-made-in-america/, even Ford, the stereotypically most American car is not even that American. I think, therefore, the changes in NAFTA agreements would cause all prices to increase in the US, and as cars have shifted to becoming necessities in many households, the market itself will simply become more expensive. This could then lead to an increasingly booming second-hand/used car market, as well as a lower turnover in cars for many – especially as prices will keep increasing with both labour and material costs. The risks, therefore, are not individual to Toyota, and therefore probably do not have to be reported to investors. In addition, many companies will consider shifting to NAFTA countries leading to a worry that those resources will become increasingly scarce and demand will overtake supply.

  3. Great article Reed! Can the RAV4 still be profitable with Canadian assembly? While I do think Toyota should actively engage with Trump to ensure trade measures can help them remain profitable in the US, I don’t think Toyota should make any large moves such as building a RAV4 assembly plant in the US quite yet. I think that any potential regulations could take awhile to come into effect and with presidential elections every 4 years, it’s too difficult to make a long-term decision to build a plant based one president’s stance.

    How long would it take to shift assembly to a domestic plant and will that even matter with 60% Japanese parts? Can parts be acquired within NAFTA countries instead of Japan? I would foresee it taking several years to shift assembly to a domestic plant and therefore don’t agree in pursuing that. They should start to qualify 2nd suppliers in Canada and the United States to hedge against potential trade changes, but but in the short-term, Japanese parts are high quality and very cost effective, and I don’t see trade changes happening quickly enough to press Toyota into making drastic changes. In fact, Toyota still says it’s more cost effective in the current trade environment to build a Camry in Japan and ship it over than produce in the US.


  4. This is a very relevant article today and as LP mentions, this is an issue we will see much more of in the future. I agree with Eddie above, I do not think that Toyota should make any major manufacturing moves just yet.

    As typically occurs in politics, what is said and what actually transpires are often two very different things. Since Toyota is such a big international corporation, I think it has a lot of bargaining power with the United States based on both its operations and sales in the country. As you mention, lobbying in Washington to achieve the most favorable trade terms is always necessary, but Toyota threatening to move operations away from the United States (a move that goes against some of President Trump’s strongest initiatives) alone would cause a major reaction and have devastating implications for the Midwestern communities where most of Toyota’s manufacturing operations are located and which strongly support President Trump (https://www.toyota.com/usa/operations/map.html#!/Operations-By-State). While some of President Trump’s trade ideas would certainly impact Toyota, it is still to be seen whether his ideas can actually come to fruition, so major changes by Toyota would be unnecessary at this point.

    But while Toyota does have this large bargaining power, in an international community that is becoming more isolationist in general, it would still be beneficial for Toyota to continue to look for ways to make production more efficient and improve its technology in order to hedge against unforeseen costs resulting from restrictive trade measures such as those President Trump is proposing.

  5. The above comments highlight how disruptive the emergence of isolationist policies have been for corporate investment. While I agree with the approach of not overreacting, it begs the question of when is the appropriate time to make changes? And, once that time becomes apparent, is it too late? Thus, I agree with the approach of actively lobbying the government. Toyota needs to be a part of the conversation, advocating for itself. Additionally, Toyota should work with the larger business community to push for expedient change as it relates to NAFTA.

    Regarding additional disclosure on profitability, I think there is a fine line between providing too much detail and too little. If I were Toyota, I would be very careful about establishing a precedent on providing model specific revenues or profitability.

  6. Very interesting article, and definitely relatable. I have debated back and forth regarding Toyota becoming more transparent with investors. To me, one of the benefits of a public company is that the investors can predict, and have historical data, on how the company will fare during uncertain political times. I think the investors should educate themselves on the changes the current presidential cabinet can make, and how it will affect the markets and specific companies they are invested in. Investors should be responsible to do their homework, Toyota does not need to be explicitly stating things. (Until the activist investor comes in and changes things)

    As Toyota, however, I would start looking for opportunities in Canada. There are obviously changes coming, and if lobbying doesn’t work, Toyota needs another strategy before it is priced out of the market.

  7. It was extremely interesting and engaging article!

    I have been personally following the move of Toyota after being explicitly attacked, or threatened, by the new administration about Toyota’s original plan to build a new manufacturing plant in Mexico with a potential huge border tax. In August 2017, Toyota announced that it would establish a joint venture with Mazda to open a manufacturing plant in US by 2021. [1] Although on the outlook, it seemed that the threat from Trump played a key role to alter the strategy to change the location of the plant, I completely agree that the factors that influenced this decision also include rising fuel economy standards and local incentives. [1]

    While supply chain disruption and higher costs urged by Trump convinced Toyota and Mazuda, my big question is if the Trump administration’s agenda can really make sure that local manufacturing companies do get the most benefits after the renegotiation of NAFTA. [1] If US manufactures are procuring supplies from companies in Japan, for example, wouldn’t they also suffer from higher price? Also, Toyota, has 10 plants across US already has positive track records to increase the employment for the local hires. Wouldn’t the administration need to factor losing one of the players who supports employment in US?

    Doug Palmer, “the real reasons behind the Toyota and Mazda announcement of a new U.S. factory,” POLITICO, Published on Aug 4th, 2017. URL (https://www.politico.com/story/2017/08/04/trump-toyota-mazda-new-factory-nafta-241341) Accessed on Dec 2017

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