Tariffs crossfire on Toyota, Nissan and Ford suppliers in Japan

Hiroko Suzuki’s father sparked a U.S. Trade War four decades ago by converting the family business, which produced auto parts, into niche products. The tariffs that the Trump administration has imposed are so extensive, they threaten Hiroko Suzuki's own efforts to diversify her 78-year old company into medical products. Shigeru Shiba, Prime Minister of Japan, has described the U.S. Tariffs, which include 25% on automobiles as a "national crises" for the fourth largest economy in the world. Ryosei Takazawa, Japan's chief trade negotiator headed to Washington for a third round on Friday.

Companies like Kyowa Industrial in Takasaki (north of Tokyo) are showing signs of concern. They make prototype parts and race car components. Kyowa Industrial, which employs around 120 people, is one of six auto suppliers who expressed concern about the impact of tariffs on Japan's automobile industry.

What are we going do? Suzuki, Kyowa’s third generation president, remembered thinking about the tariffs when they were announced. This is going to be bad. Kyowa's and other auto suppliers' problems illustrate a long-term shift in Japan. The country no longer floods consumer electronics with chips, but is now reliant on a car industry that faces fierce Chinese competition. This is a stark contrast to the 1980s when the U.S. placed trade barriers against a rapidly growing Japan and its exports.

This report is based upon interviews with 12 people including senior government officials and bankers. It provides a firsthand account of the way one company is dealing with the uncertainty and the pressures on the automotive supply chains at a time when there is great disruption.

Kyowa, along with thousands of small auto suppliers, has been pursuing a "monozukuri", or "making things" approach to production for decades. This culture of incremental improvements and assembly-line efficiency based on Toyota's methods helped Japan become a giant.

The shift to battery powered smart cars means that software, an area in which EV manufacturers such as Tesla, and China's BYD excel at, is now a more important selling point.

Kyowa began developing neurosurgery tools in 2016, after Suzuki (now 65) realized that the growth of EVs was going to have a negative impact on demand for engine parts. The company began selling the devices in the U.S., but found that Trump's tariffs applied to medical equipment as well.

Suzuki is worried that automakers may force suppliers to lower prices in order to offset tariffs. She hasn't had that happen to her yet.

Subaru Corp. supplier says his company might have to look for partners outside of the U.S.

Since Trump's announcements on tariffs, major automakers have offered a muted level of support to suppliers. Toyota, Nissan, and Ford, among others, sent letters last month to U.S. subsidiaries of Japanese suppliers, asking for their cooperation against tariffs.

The letters were not previously reported.

Nissan instructed suppliers to adhere to the previously agreed price. It claimed that it was not "obligated" to pay for tariffs, but would take a portion of the cost up to four weeks in order to secure its supply chain. It said it could seek to recover support payments made to suppliers later.

Nissan did not provide any support. According to two suppliers who reviewed the correspondence under condition of anonymity, automakers did not send follow-up letters.

Nissan said it worked with suppliers to reduce the impact of tariffs and costs, including by localisation.

Toyota stated that it would protect its dealers, employees, and suppliers while maintaining customer trust in order to navigate the uncertainty caused by tariffs. Ford said it was working closely with its suppliers to assess the exposure of their products and possibly reconfigure processes.

Toyota stated in its letter that it understands the "complexity of financial burden" some suppliers face and asked them to share and identify mitigation measures. Toyota said it would work "in good-faith" with suppliers.

Denso is one of the Toyota suppliers that has not provided earnings predictions for the upcoming year. They cited uncertainty.

Julie Boote is an analyst with research firm Pelham Smithers Associates. She said that the trade war was an "emergency", which would accelerate consolidation in Japan's automotive industry.

She said that in order for these automakers to survive they will need to work together.

Squeezed on Cost

Japanese manufacturers have traditionally pushed smaller suppliers into lowering their prices, according to Sayuri Shirai. She is a former Bank of Japan Board member and now a Professor at Keio University.

She said that if the tariffs are kept in place for a longer period of time, they would cause more harm to regional economies already weakened by the demographic decline. Japan's risks are clear. Tokyo's economy contracted in the first three months of the year, and it has taken emergency measures to reduce the impact of tariffs.

"Automobile exports to Japan are too important for a 25 percent tariff to remain in place," said David Boling. He is now director of consulting firm Eurasia Group.

Boling stated that the U.S. will not go below the 10% agreed upon with Britain.

Trump imposed a 25% tariff for automobiles, and a later 24% tariff on Japanese goods. The tariff on Japanese goods was reduced to 10% for 90-days, but that period ends in July. Akazawa said on Tuesday that Japan is sticking to its guns, and wants tariffs removed. The White House declined to comment.

The U.S. State Department spokeswoman said that the Trump administration wants trading partners to align themselves with U.S. efforts in order to achieve "fairness, balance and protection of U.S. national and economic security."

Two senior Japanese officials said that the auto industry in Japan was becoming a laggard. They suggested using tariffs to make sweeping changes and catch up to EV competitors.

The trade ministry stated that the auto industry in Japan must adapt to the significant changes to the competitive environment, regardless of the U.S. Tariffs.

Japan's Tier 1 auto suppliers purchase parts from Tier 2 suppliers and so on. The bottom of the chain can consist of little more than a neighborhood workshop that produces a single component. Officials from the government have urged small companies to innovate, consolidate and gain scale.

A team of automotive industry experts supports 200 companies at Ashikaga Bank. Around 80% are Tier 2 suppliers or below. Unauthorized member of the team said that they were worried about tariffs leading to higher vehicle costs and a decrease in Japanese car sales to the U.S. which would affect the bank's customers.

Shinichi Iizuka of Toa Kogyo - a suspension manufacturer in Subaru's hometown, Ota near Takasaki - said that the burden of tariffs will be shared between consumers, car dealers and automakers.

Subaru sells 70% of its cars in the U.S. where it is reliant on local production and imports. Subaru announced on Monday that it would be raising prices for several U.S. model lines.

Subaru CFO Shinsuke Toda said this month that the company was willing to discuss with suppliers how they could share their burdens, but added that the situation remained uncertain.

It's Personal Suzuki's desire to diversify Kyowa Industrial to include medical devices is similar to the pivot her father made during the trade tensions of the 1980s, when Kyowa shifted away from mass-production of lower-profitable auto components to concentrate on prototypes and racing engine components with higher margins. Suzuki took over the company in 2000, and her father passed away in 2013.

Suzuki planned to establish a U.S. sales record for medical equipment before Trump's tariffs to ease entry into other markets. She said that with the introduction of U.S. tariffs, her team had considered shifting production to the U.S. where costs are higher, or shifting sales focus to Asia.

Suzuki stated that Kyowa was in discussions with potential distributors from Singapore and Hong Kong due to the uncertainty surrounding Trump's announcements.

Kyowa still gets 70% of its business from automakers. The rest comes from chip-equipment manufacturers and the Japanese space program. It provides parts to Formula One racecars, General Motors, and most Japanese automakers.

Sales are modest at 2 billion yen per year ($14 million). According to Teikoku Databank, Kyowa still has a larger market share than the other three quarters of Japan's 68,000 auto-supply companies.

Suzuki's love for America is a personal issue, as she grew up listening rock music in the U.S. Armed forces radio. She also studied English at university and has a deep attachment to America. She recalls watching Aerosmith perform live in Japan at their first concert.

"Japan has a long-standing history of friendship with America." She said, "I hope they can come up with a solution."

(source: Reuters)