Trump’s unintended consequences: Detroit down, Toyota up

Senior Managing Director Masayoshi Shirayanagi, and Executive Vice President Moritaka Yoshida. (c) Bertel Schmitt

If you sought a break from the depressing news emanating from major U.S. automakers, all you had to do is go to Japan, to Toyota’s Q2 results conference, to be exact. In the company’s bunker conference room in Tokyo, Toyota’s head accountant Masayoshi Shirayanagi delivered numbers in tune with Toyota’s image: Unexciting, but reliable.

But wait, there was a waku-doki number: Toyota’s operating income was up a whopping 19% compared to the corresponding quarter of the previous fiscal, while net income was up 7%. Compare that to GM, if you dare, who’s net income was down nearly 60% in last quarter, while across town in Detroit, Ford’s second-quarter earnings plunged by almost 50%.

And there was another jaw-dropper: Toyota reported an operating margin of 9.3%, up from an already very respectable 8.1% in the same quarter last year. This makes Toyota the “world’s most profitable carmaker,” says Martin Koelling, Tokyo correspondent of Germany’s financial daily Handelsblatt. German premium OEMs Audi (9.2% operating margin), BMW (8.6%) and Daimler (8.4%) are “less profitable than the Japanese,” says Koelling.

Over stretches, this morning’s results conference felt like the White House press room, as opposed to Toyota’s: Nine out of 10 questions by reporters focused on U.S. President Trump, and the answers made clear that Trump’s erratic policies are helping Japan, while Detroit is getting it between the teeth. At home, GM, Ford, and Chrysler suffer from raised tariffs on steel and aluminum, and they are getting worn-down in the cross-fire of a U.S.-China trade war that is picking up in tempo.

The already imposed U.S. steel and aluminum tariffs will impact Toyota to the tune of “10 billion yen” ($90 mln) which are already baked into Toyota’s profit outlook, Shirayanagi said.

As far as the tit-for-tat tariffs between the U.S. and China are concerned, “we are not directly hit by that,” mentioned Shirayanagi, “but some of our suppliers are.”

Should Trump make good on his threat on raising tariffs on car imports from the rest of the world, however, Toyota would have to revise its numbers. “This is not in the profit forecast,” said Shirayanagi. He confirmed numbers published a few days ago, stating that the threatened tariffs could drive up the U.S. price of a Toyota Camry by $1,800, “and therefore the impact would be quite significant.”

Senior Managing Director Masayoshi Shirayanagi, and Executive Vice PresidentMoritaka Yoshida. (c) Bertel Schmitt

Shirayanagi’s colleague Moritaka Yoshida, who actually was here to talk about Toyota’s production prowess instead of trade politics, mentioned that Toyota has “10 production location in North America, and 1,500 dealers, and we give jobs to 137,000 people. We have also announced plans to invest $10 billion over the next 5 years there.” Yoshida said that the global free trade framework was good for customer and society, and that his company “hopes it will be preserved and maintained.”

Some of the extra expense incurred by Trump’s tariffs can be recouped elsewhere by Toyota, along with many other global OEMs.

Last month, Toyota’s exports from Japan to China became cheaper, due to China lowering its import tax on cars from 25% to 15% before it raised the tariff on cars imported from the U.S. to over 40% in retaliation to Trump. Toyota’s sales in China are up strongly. Ford’s China sales were down 25%, GM’s were basically flat.

China is by far the world’s largest car market, accounting for nearly a third of the world’s total industry volume. China also is GM’s largest single country market.

In Trump’s simplistic reasoning, Detroit has not much to fear from higher tariffs between the U.S. and China. Indeed, nearly all of GM’s and Ford’s cars sold in China are made in China. But then, it is GM, and not Chinese automakers, that imports Made-in-China cars to America in somewhat appreciable numbers. 19% of all Buicks sold in the U.S. last year were China-made. This week, GM filed a request with the U.S. government to be exempted from the Section 301 punitive tariff on certain imported goods from China.

Trump overlooks that Detroit has much more to lose in China than its negligible imports and exports. For many years, Japanese-branded cars led Chinese charts with a market share of over 20%. When a dispute over a few rocks in the East China Sea boiled over in 2012 between Japan and China, sentiment turned against Japan-branded cars in China, and their market share dropped by half at the height of the crisis. It took Japan’s automakers many years to claw back most, but not all of their losses.

A major trade war with the U.S. arguably would be more serious for China than a few uninhabited islands some say it never really owned. Likewise, Detroit is more exposed to a Chinese flareup than Japan ever was. Between GM, Ford, and FCA, more than 5 million U.S.-branded vehicles were sold in China last year. GM accounted for more than 4 million units, meaning that 42% of GM’s 2017 global sales were in China.

The public usually is not aware of this exposure. The New York Times is developing some sensitivity to the looming danger, writing that “Chinese officials have suggested in recent weeks that if the United States proceeds with tariffs on a very wide range of Chinese goods, then Beijing may also retaliate against the Chinese-owned operations of big American companies. From Apple to General Motors, a long list of large American enterprises have transferred extensive operations to China and could be vulnerable to any response from Beijing.”

If ‘drive American’ suddenly becomes the wrong thing to do in China, GM would be bankrupt again.

PS: Too much editorializing you say? If you want Toyota’s quarterly results in all their gory details, the they are here, and here, and here, and here.