Toyota eyes aluminum as Trump targets trade sanctions

Toyota's Jim Lentz Lentz spoke during a ceremony marking the $154 million expansion of the company's r&d center in York Township, Mich. Photo credit: Joe Wilssens/Toyota

ANN ARBOR, Mich. -- Toyota Motor Corp., which is exploring the use of aluminum in car bodies, faces only a minor risk of increased material costs if the Trump administration initiates trade remedies against steel and aluminum imports, company officials said.

The Japanese automaker believes replacing steel bodies with lighter aluminum may be necessary to comply with tightening fuel-economy standards, said Jim Lentz, CEO of Toyota Motor North America. Powertrain modifications alone won’t do the trick, said Lentz, who briefed reporters Thursday before a ceremony marking the $154 million expansion of the company’s r&d center in York Township, south of Ann Arbor.

“We have to look at many, different ways to improve fuel economy,” Lentz said. “So, obviously, we will be looking at more and more ways to use lightweight materials like aluminum in future products.”

Outer body panels, such as hoods, are a relatively easy place to start substituting aluminum, but the next big step for automakers will be to make platform components from aluminum, Robert Young, Toyota’s vice president in charge of purchasing and supplier engineering, said at the event.

Deciding between aluminum and steel comes down to making tradeoffs on cost, reliability, paint compatibility, strength and mass, he explained.

Trump’s order

President Trump recently ordered the Commerce Department to investigate the effects of global overcapacity in steel and aluminum on U.S. metal producers. Cheap steel and aluminum have flooded the global market in recent years leading to artificially low prices, a problem the White House and many experts blame on China propping up too many state-owned steel producers.

Low profits prevent U.S. steel and aluminum producers from investing in development of higher-grade metals, and from retaining a skilled workforce, they say.

Eight U.S.-based smelters have either closed or curbed production since 2015, according to the Commerce Department.

A finding that foreign competitors have harmed the domestic industry could lead Trump to correct the imbalance through punitive tariffs or other measures.

Toyota is not significantly exposed to imported steel and aluminum, so any impact from tariffs that might be levied would indirectly put pressure on overall market prices and adjust the automaker’s existing contracts with steelmakers, Young said.

Toyota procures 95 percent of its steel in the region from North America, mostly from the United States, because imported steel is not automotive quality. Aluminum is purchased regionally, but some applications require alloys that may be imported.

A waiver

The automaker is developing new high-end steel in Japan that could be subject to potential tariffs, but is confident it could seek a waiver, Young said.

“For the next-generation of steel, if it’s developed by our parent company in Japan, an equivalent grade may not be available in the North American market for a period of time. In those cases, if there are tariffs, we would ask for an exemption because we can’t get the equivalent product here,” he said.

“But when we do have those cases, we’re working directly with our materials engineering division, with the local integrated steel mills, to develop the equivalent product so that we can localize as quickly as possible.”

The goal is to validate and qualify steel and aluminum mills to make the new products as quickly as possible and start production simultaneously in all regions, but a small amount of imports may be needed to bridge the time gap until local mills prove they can meet the production standard, Young said.

Mexican steel

Toyota procures a limited amount of steel in Mexico, but that could change in the future as the company builds new plants south of the border, the executive said.

The company has a plant in Tijuana and is building a factory in Guanajuato to assemble the Corolla.

Toyota has come under pressure from President Trump over the planned Mexico plant. Trump won election in large measure by promoting an “America-first” industrial policy designed to boost domestic manufacturing and curtail outsourcing. He has harshly criticized the North American Free Trade Agreement for incentivizing companies to move to Mexico, and the United States is now preparing to renegotiate the trilateral pact after Trump threatened to scrap it altogether.

But Lentz downplayed any differences over trade and said there is common interest in improving the competitiveness of North American manufacturing.

NAFTA

Toyota’s regional chief agreed with industry consensus that NAFTA needs to be modernized after nearly a quarter century but said it has, on balance, been positive for the American economy and consumer.

The White House has said one of its goals is to update rules of origin to ensure greater U.S. content for vehicles produced in North America. Commerce Secretary Wilbur Ross told Bloomberg TV this week that rules of origin for the auto industry are “totally obsolete” because the text specifically addressed many parts that aren’t even used anymore.

Rules of origin are complicated to negotiate, but should be part of the review, Lentz said.

“This is going to be a once-in-a-lifetime opportunity to take a look at what has been a good, but very old, treaty and figure out what makes sense in today’s environment,” he said.

The CEO expressed optimism that Trump would ultimately make the right call on trade protectionism, saying: “One thing I notice about the President is he does listen to different ideas.”

Lentz also characterized Toyota as a U.S. company that in many ways finds merit with Trump’s executive order reminding agencies to adhere to existing laws for buying American products and hiring American workers when engaged in federal procurement.

“One could say in our 60 years in the U.S., that’s exactly what Toyota has done” -- Buy American, Hire American -- he said.

“We went from a company that imported 100 percent of our vehicles to a company that today, 71 percent of what we sell is made in North America,” he said, pointing to Cars.com research that shows the Camry as having more U.S. content than any other vehicle and the Sienna van ranking third. “So we don’t necessarily disagree with his philosophy.”

At its core, however, Toyota is a global enterprise that advocates free trade. Lentz noted the company has 69 manufacturing facilities in more than 30 countries and that the U.S-Korea Free Trade Agreement opened the market to Toyota to the point that the Camry hybrid built in the United States contributed to the Camry nameplate being named by automotive journalists as South Korea’s car-of-the-year in 2013.

Border tax

Meanwhile, Lentz threw more dirt on the “border adjustment tax” that is part of a House plan for comprehensive tax reform.

The controversial plan aims to support domestic manufacturing by applying a new, lower corporate tax rate to the wholesale price of all imports and preventing importers from deducting wholesale expenses from their tax liability, but does not have support of broad constituencies in business or on Capitol Hill.

“It’s never dead until it’s dead,” Lentz said. “We were never a fan of the border tax. I think it would have been a negative to this industry. But I think it would have been a negative to overall consumers because of its impact on consumer goods, on electronics, on clothing, on a lot of things people are purchasing at Wal-Mart.”

The retail, oil and automotive industries are among those that would be most impacted by a border tax, according to analysts.

You can reach Eric Kulisch at ekulisch@crain.com

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