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Automobiles

From eco-cars to gas guzzlers, Toyota adapts to the age of Trump

For some suppliers, paying tariffs is cheaper than moving production

 A Toyota engine assembly line in Huntsville, Alabama. Toyota is one of many companies forced to revisit their plans in the U.S. due to policy shifts under President Trump.   © Reuters

TOKYO/NAGOYA -- Toyota Motor and other Japanese carmakers are being forced to reconsider production plans in the U.S. as President Donald Trump pushes for major trade and environmental shifts in the American auto market.

Toyota quietly issued a press release this summer saying it will produce SUVs instead of the Corolla at a joint plant with Mazda Motor in Alabama, slated to open in 2021. Toyota also decided to produce mid-size pickups instead of Corollas at a Mexico plant coming online in the first half of next year.

The decision to switch production models is unusual for companies, since it typically takes years to line up suppliers for the roughly 30,000 parts that go into a vehicle. But Toyota is being forced to rethink its plans as the U.S. market leans toward larger vehicles and away from the eco-friendly cars that are the automaker's forte.

Trump has been pushing to ease fuel efficiency standards since taking office in January 2017. American companies like General Motors have responded by bolstering their lineup of larger vehicles, forcing Toyota to follow suit.

Parts suppliers face even greater uncertainty. "Maybe just paying the tariff is really the least burdensome option," pondered Katsuya Nishi, president of Japanese supplier Sanden Holdings at a summer meeting. 

Management at the air-conditioning parts maker discussed whether it made more sense for it to continue to ship finished products from Mexico instead of trying to produce in the U.S. to avoid tariffs. But it could not reach a decision because there were too many variables to consider.

Sanden operates factories worldwide making parts for Japanese, European and U.S. automakers. About 20% of its Mexican output is currently exported to the U.S., but the question of what to produce where is only growing more complex.

Under the U.S.-Mexico-Canada Agreement, a revamped version of NAFTA, at least 40% of a car must be made in factories that pay employees at least $16 an hour to avoid American tariffs. Sanden considered bringing its two U.S. plants to full capacity, but the slowing U.S. market complicated the decision. New car sales are expected to fall this year after a narrow gain in 2018. Some within Sanden want Mexican facilities ready to increase production just in case it is needed.

Showa, which provides power steering systems to Honda Motor, is also facing a difficult choice. "Should we bolster our U.S. or Mexico operations? Should we keep paying tariffs? We can't make a decision with so many unknowns," said Senior Managing Officer Narutoshi Wakiyama.

Trump's policies could impact the future of the U.S. automobile market as well. "China and Europe are moving toward electric vehicles," said Goldman Sachs analyst Kota Yuzawa. "If the U.S. falls behind because of President Trump, companies will face greater costs for product development."

Additional reporting by Shuji Nakayama in New York

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