Japan’s carmakers are trying to tinker their way out of tariff pain
Clever optimisation will only get them so far
Ever since Toyota entered America in the 1950s, the country has been a vital market for it. The carmaker, which sells more vehicles worldwide than any other, hawks around a quarter of its cars there. That makes President Donald Trump’s 15% tariff on Japanese vehicles a big problem, considering that only around half of the cars Toyota sells in America are made in the country (see chart). In an earnings call on August 7th, Japan’s most valuable company said that American duties cost it ¥450bn ($3bn) in the three months to June. For its full fiscal year it expects the impact to be close to $10bn, the biggest hit reported so far by any carmaker.
Toyota could, of course, pass tariffs on to consumers through higher prices. But this brings with it the risk of losing market share to competitors that choose not to do so. Instead, the company is relying on one of Japan Inc’s great strengths: obsessive tinkering. In the second quarter it revealed a ¥305bn boost to operating profit from various efforts to optimise its business, offsetting around two-thirds of the tariff hit. That included a mix of cost-cutting, marketing to boost sales, particularly of more profitable vehicles, and measures to earn more from add-on services, such as car parts and vehicle financing.
Toyota is not the only Japanese carmaker pursuing such efforts. Mazda, which also generates a sizeable share of its sales from America, is pruning costs and shifting what cars it sells where to lift profits. It reckons it can offset nearly three-quarters of the tariff hit. Subaru, which sells more than 70% of its cars in America, is also busily pursuing measures to mitigate the duties. Nissan, whose troubles predate Mr Trump’s tariffs, is in the middle of a sweeping overhaul of its business.
Eventually, however, Japan’s carmakers may run out of ideas to boost profits. Cox Automotive, a consultancy, reckons carmakers both foreign and domestic have already incurred more than $25bn in tariff obligations on vehicles imported into America so far this year, equivalent to a little over $5,000 per vehicle. Even for cars made in the country, duties on imported parts and materials such as steel are adding to costs. In time the fear of losing market share will run up against the need to make selling cars in the world’s second-largest market profitable.
Shifting more manufacturing to America, as Mr Trump desires, would be another solution. For those carmakers with limited production in America, assembling more vehicles there may make sense. Subaru suggested earlier this year that it might expand production at its factory in Indiana. Japanese carmakers have long tended to suffer from a home-production bias. Toyota, for example, sold around a seventh of its cars in Japan last year, but made around a third of them there, which is hardly a cheap place to manufacture. American tariffs may encourage a rethink.
Yet that would require much more clarity on future tariffs than has so far been given. Building factories can take years. Once completed, they should last for decades. Mr Trump’s duties, by contrast, seem to change every few weeks. That makes it difficult for Japan’s carmakers to commit to any lasting changes to their production footprint. The upshot is likely to be ever more tinkering—and, in time, pricier cars for Americans.
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