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Politics

Toyota caught between Trump and a pledge to Japan

Boosting American jobs could cost the automaker its competitiveness

Toyota Priuses are made in Mikawa, Aichi Prefecture.

NAGOYA -- Donald Trump's presidency appears to have both positive and negative implications for Toyota Motor.

The Japanese automaker on Monday raised its earnings forecast for the fiscal year through March 2017, citing a weaker yen on the back of the Trump rally. But the U.S. president's protectionist bloviating is drowning out the automaker's outlook further down the road.

Japan's trade policy will likely be discussed on Friday, when Japanese Prime Minister Shinzo Abe visits Trump in Washington.

At any rate, succumbing to Trump and boosting production in the U.S. would lead to a decline in production in Toyota's home country. This has the market wondering whether Toyota can contribute to the U.S., its biggest market, while making good on a promise to make at least 3 million cars in Japan every year.

"We want to continue to contribute to the U.S. as a good corporate citizen" by investing 1 trillion yen ($8.89 billion) in the U.S. over the next five years, managing officer Tetsuya Otake said on Monday. As for domestic production, however, Otake said although management needs to consider various options, its policy is still to produce at least 3 million cars a year in Japan.

In early January, Trump Twitter-threatened Toyota with a "big border tax" if it built a new plant in Mexico. Toyota President Akio Toyoda was quick to announce plans to invest $10 billion in the U.S. over the next five years.

Toyota Motor President Akio Toyoda announces plans for a $10 billion investment on Jan. 9 in Detroit.

Later in the month, the automaker also unveiled part of a plan to boost production of the Highlander SUV at a plant in the U.S. state of Indiana.

North America is Toyota's most important market. The region is responsible for 30% of Toyota's sales and roughly 40% of its operating profit.

A $10 billion investment over five years is no surprise; Toyota had been expected to make 345 billion yen ($3.07 billion) worth of capital investments in North America in the current fiscal year. About 200 billion yen of that can be expected to be spent in the U.S.

Remain competitive

Trump is calling for Toyota to boost its production in the U.S. -- preferably by transferring production from Japan. In the future, the discussion could shift to transferring the making of engines and transmissions to the U.S. as well. But would that even be enough?

One Toyota executive said there is no reason to stick to that 3 million pledge -- as long as a certain level of production is maintained. It seems that numerous options are on the table, including transferring the final assembly of cars.

Toyota derives much of its competitiveness by manufacturing in Mikawa, Aichi Prefecture. The area in central Japan is dotted with parts suppliers with whom Toyota has worked closely to cut costs. In fact, these relationships are why Toyota has pledged to keep producing 3 million cars a year in Japan. Not only does Toyota feel gratitude, it feels that this cluster of manufacturers is the lifeblood of its competitiveness.

Toyota has set a goal of cutting costs by 200 billion yen each year. The automaker feels it can reach this target even if the yen strengthens by 5 against the dollar every 12 months.

If domestic production were to precipitously decline due to a protectionist U.S., however, Toyota could lose its competitive edge.

This is something much different than the short-term risks, like a strong yen, that Toyota is used to facing.

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