Toyota's Lentz: U.S. has a lot to lose in trade fight

PLANO, Texas — From his still-new, glass-walled perch above the flat topography of north-central Texas, Toyota Motor North America CEO Jim Lentz can see storm clouds bubbling up hundreds of miles away.

But not every threat to Toyota's new North American headquarters comes from the sky — or from the west.

A still-polite but growing trade dispute between the U.S. and Japan — one with talk of 25 percent tariffs, volume-limiting quotas and faint echoes of jingoistic populist themes from three or four decades ago — threatens to "derail" an otherwise healthy U.S. auto market, Lentz says.

If worse comes to worst, and the two longtime trading partners can't find common ground, tariffs could knock down 2 million new-vehicle sales as quick as a Texas windstorm, he warned.

"I don't think Japan is interested at all in talking about quotas," Lentz said. "I don't think they want to create that conduit of quotas that maybe seem reasonable today but could be ratcheted down at any point in the future. From what I'm hearing, that's kind of a nonstarter with Japan."

In an exclusive March 25 interview with Automotive News at the company's headquarters here, Lentz said Toyota Motor North America and its Japanese parent are on board with the Trump administration's desire to increase auto manufacturing in the U.S. Toyota just last month upped its planned investments in North America through 2021 by $3 billion to $13 billion, including adding annual production of 100,000 RAV4 hybrids and Lexus ES 300h hybrids to its plant in Georgetown, Ky., which Lentz says would bring output back up to its planned capacity of about 550,000 vehicles.

"I don't think we necessarily disagree with the administration's policy on creating more jobs in the U.S.; we've been doing that for 60 years," Lentz said. President Donald Trump's expectation "on the rate of those jobs in the U.S. may be different, but the fact is, we haven't moved jobs from the U.S. to outside the U.S. We have consistently added jobs over time."

Toyota exports vehicles from the U.S. to more than 30 countries, Lentz explained. Within the company, winning additional investments for a plant such as Georgetown means it must be at least as efficient as other sites within Toyota's global manufacturing footprint. Maintaining that competitiveness is a Herculean task that requires complete buy-in from all of the company's employees.

Lentz said that while the political efforts to boost U.S. auto manufacturing are not surprising, they also can't be viewed in a vacuum, and those investments in capacity aren't without risk.

"This is a global industry, and the markets are global," Lentz said. "You can't just add hundreds of thousands of units of capacity to the U.S. and necessarily have that make sense over time. We're an industry here in the U.S. where it wasn't too long ago that we suffered from overcapacity. I don't think any of us want to go back to that again. We almost lost the industry [in 2009] as a result of overcapacity."

Toyota and Lexus dealers from across the U.S. — along with other members of the American International Automobile Dealers Association — plan to fly to Washington on April 9 to lobby Congress and the Trump administration against imposing import tariffs on vehicles and auto parts coming into the U.S. Lentz said he remains hopeful the industry's warnings will be heard.

"In the end, people look at the importance of the auto industry, and I don't think anyone wants to take action that's going to reduce vehicle sales by 2 million units, and the impact that that would have on employment," Lentz said.

"I believe, in the end, rational decisions will be made," he said.

The threat of a trade row between Japan and the U.S. hangs like the Sword of Damocles over an otherwise healthy market: If the trade thread breaks, damage could be widespread.

"The market's driven by interest rates and consumer confidence, and right now, consumer confidence is pretty good," Lentz said.

"The economics are pretty good, and if interest rates stay low, I think that bodes very well for a good industry."

Lentz predicted U.S. sales in 2019 of 16.6 million to 16.8 million, down from 17.33 million last year. But, he cautioned, "we have to see what happens with trade. Trade can derail that, if we're not careful. Affordability can be driven by vehicle costs going up, either through vehicle inflation, regulation or other things. So, if all of a sudden, the average price of a car goes up $1,000 or $2,000, my forecast changes rapidly."

Lentz said a 25 percent Section 232 tariff on automobiles and other goods entering the U.S., as the administration has threatened, would have a harsh and immediate effect on Toyota and Lexus. In 2018, 31 percent of the company's vehicles sold in the U.S. were imported from outside North America; about half come from outside the U.S.

With 25 percent tariffs, the price of the Toyota Camry, "which is one of the most American-made cars, goes up about $1,800," Lentz said, adding that prices would jump about $2,800 for the Tundra pickup made in Texas and $3,000 for the Indiana-built Sienna minivan. He said he hopes "cooler heads will prevail, but we've got to get there."

In mid-February, Lentz's boss, Toyota President Akio Toyoda, in his role as chairman of the Japan Automobile Manufacturers Association, took issue with the U.S. Commerce Department's ongoing study under Section 232 of the Trade Expansion Act of 1962, which could potentially result in Japanese imports being labeled as "threats" to national security.

"These vehicles clearly do not threaten United States national security," Toyoda wrote in a written statement issued by JAMA. "Introducing import restriction measures would not only negatively affect our U.S. customers, but would also disrupt the operations of U.S. vehicle and auto parts manufacturers as well as auto dealerships. Adverse effects on the U.S. economy and American jobs should be avoided."