{"id":24207,"date":"2017-11-15T16:55:45","date_gmt":"2017-11-15T21:55:45","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/will-trumps-economic-nationalism-hurt-toyota\/"},"modified":"2017-11-16T14:27:20","modified_gmt":"2017-11-16T19:27:20","slug":"will-trumps-economic-nationalism-hurt-toyota","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-trumps-economic-nationalism-hurt-toyota\/","title":{"rendered":"Will Trump\u2019s economic nationalism hurt Toyota?"},"content":{"rendered":"<p><strong>Will Trump\u2019s economic nationalism hurt Toyota?<\/strong><\/p>\n<p>Toyota manufactures three of the top ten best selling cars in the United States\u2014the Camry, Corolla, and RAV4.<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a> But of these three models, the RAV4 is the only one where final assembly of all cars takes place outside of the United States.<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a> Throughout the presidential campaign and the beginning of his administration, Donald Trump has vowed to renegotiate NAFTA and place tariffs on many imports from manufacturing heavy countries in East Asia. Can Toyota\u2019s RAV4 sales survive if supply chain costs increase due to changes in government regulation?<\/p>\n<p><strong>Toyota RAV4: A Global Supply Chain<\/strong><\/p>\n<p>At first glance, Toyota seems to have a strong U.S. manufacturing presence, which should isolate them from protectionist trade policy. They have made headlines over the years for opening domestic plants to serve the U.S. consumer with six plants located in six different states. The American Automotive Labeling Act requires companies to report on the country of origin for various parts of cars sold in the U.S. Only 35% of the RAV4 parts are sourced from the U.S.\/Canada with 60% from Japan. Additionally, major parts like the transmission and engine are only partially built in the US with the balance being imported from Japan.<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a> Compare this to the Camry and Corolla, which are both more than 60% sourced from U.S.\/Canada with American made engines and transmissions.<\/p>\n<p>How big is this risk to Toyota? The RAV4 model sold 352,000 U.S. units in 2016.<a href=\"#_ftn4\" name=\"_ftnref4\">[4]<\/a> Toyota does not reveal model specific revenues from sales to its dealers, but the average RAV4 invoice price charged to dealers is roughly $28,000 depending on the finishing package.<a href=\"#_ftn5\" name=\"_ftnref5\">[5]<\/a> Based on company regulatory documents, Toyota made an operating profit of 3% on North American automotive sales for FY17. Therefore, RAV4 U.S. sales make up at least 10% of Toyota\u2019s North American operating profit.<a href=\"#_ftn6\" name=\"_ftnref6\">[6]<\/a> This percentage could be even higher because the margins on crossover SUVs are generally higher than sedans like the Camry and Corolla.<\/p>\n<p><strong>Future of NAFTA and Trump\u2019s Tariffs<\/strong><\/p>\n<p>President Trump has vocally criticized NAFTA for being \u201cthe single worst trade deal ever approved in this country [\u2026] the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.\u201d<a href=\"#_ftn7\" name=\"_ftnref7\">[7]<\/a> Wilbur Ross, the U.S. Secretary of Commerce, has made a more eloquent attack on NAFTA by focusing in on the concept of <em>rules of origin<\/em>.<a href=\"#_ftn8\" name=\"_ftnref8\">[8]<\/a> These proposed regulations would limit the percentage of non-NAFTA parts allowed in products imported to the U.S. from Mexico and Canada. Even if Toyota could immediately shift final assembly from Canada to the U.S., Trump has attacked the trade deficit with Japan and suggested tariffs as a potential solution. These tariffs could require Toyota to find another source for the 60% of parts that are currently produced in Japan.<\/p>\n<p>A recent Associated Press\/GfK poll showed that nearly 75% of Americans would prefer to buy goods manufactured in the United Stated while just 9% only buy American.<a href=\"#_ftn9\" name=\"_ftnref9\">[9]<\/a> The reason for the discrepancy is the increased price associated with items manufactured domestically. With Toyota\u2019s narrow operating profit margins in North America, there is not a lot of room to absorb increased costs without pushing those increases onto the consumer through higher prices. Higher prices for the RAV4 would likely result in decreased sales as consumers move to other brands.<\/p>\n<p><strong>Toyota Moving Forward<\/strong><\/p>\n<p>Toyota openly admits that government regulations and tariffs are a threat to profitability. In their most recent 20-F filing with the SEC, Toyota states that \u201cchanges in these laws, regulations, policies and other governmental actions may affect the production, licensing, distribution or sale of Toyota\u2019s products, cost of products or applicable tax rates\u201d<a href=\"#_ftn10\" name=\"_ftnref10\">[10]<\/a> Toyota has not commented publicly beyond that vague mention in their regulatory documents.<\/p>\n<p>Management should actively lobby the U.S. government to minimize the impact of new regulations on the profitability of their third best-selling vehicle in the U.S. In addition, management must consider a contingency plan should their lobbying efforts fail. Can the RAV4 still be profitable with Canadian assembly? How long would it take to shift assembly to a domestic plant and will that even matter with 60% Japanese parts? Can parts be acquired within NAFTA countries instead of Japan? Furthermore, Toyota must be more transparent with its investors regarding the risks to profitability.<\/p>\n<p><em>(Word Count: 711)<\/em><\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> Zhang, B., \u201cThe 20 best-selling cars and trucks in America\u201d, <em>Business Insider<\/em> (Jan. 7, 2017) http:\/\/www.businessinsider.com\/best-selling-cars-trucks-vehicle-america-2016-2017-1\/<\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> Toyota Customer Help. \u201cWhere are Toyota vehicles assembled for the U.S. market?\u201d Accessed Nov. 15, 2017. http:\/\/toyota.custhelp.com\/app\/answers\/detail\/a_id\/7660\/~\/where-are-toyota-vehicles-assembled-for-the-u.s.-market%3F<\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> National Highway Traffic Safety Administration. \u201cAmerican Automotive Labelling Act.\u201d https:\/\/www.nhtsa.gov\/sites\/nhtsa.dot.gov\/files\/documents\/2017_aala_percent_10032017.pdf<\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> Zhang, B., \u201cThe 20 best-selling cars and trucks in America\u201d, <em>Business Insider<\/em> (Jan. 7, 2017) http:\/\/www.businessinsider.com\/best-selling-cars-trucks-vehicle-america-2016-2017-1\/<\/p>\n<p><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> Car Buying Strategies. \u201c2017 Toyota RAV4 Prices: MSRP vs Dealer Invoice vs True Dealer Cost w\/ Holdback.\u201d Accessed Nov. 15, 2017. https:\/\/www.car-buying-strategies.com\/dealer-invoice\/toyota-rav4-prices.html<\/p>\n<p><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> Toyota Motor Corporation. \u201cSecurities and Exchange Commission: Form 20-F\u201d. (June 23, 2017) http:\/\/www.toyota-global.com\/pages\/contents\/investors\/ir_library\/sec\/pdf\/20-F_201703_final.pdf<\/p>\n<p><a href=\"#_ftnref7\" name=\"_ftn7\">[7]<\/a> Greenberg, J., \u201cWas NAFTA &#8216;worst trade deal ever&#8217;? Few agree\u201d. PolitiFact. (Sep. 29, 2016) http:\/\/www.politifact.com\/truth-o-meter\/article\/2016\/sep\/29\/NAFTA-worst-trade-deal-ever-few-agree\/<\/p>\n<p><a href=\"#_ftnref8\" name=\"_ftn8\">[8]<\/a> Lawder, D., \u201cU.S. Commerce study argues for tougher NAFTA origin rules\u201d. <em>Reuters<\/em>. (Sep. 22, 2017) https:\/\/www.reuters.com\/article\/us-trade-nafta-content\/u-s-commerce-study-argues-for-tougher-nafta-origin-rules-idUSKCN1BX1W6<\/p>\n<p><a href=\"#_ftnref9\" name=\"_ftn9\">[9]<\/a> Tribune News Services, \u201cPoll: Americans prefer low prices to items &#8216;Made in the USA&#8217;\u201d, <em>Chicago Tribune.<\/em> (Apr. 14, 2016) http:\/\/www.chicagotribune.com\/business\/ct-americans-prices-vs-made-in-usa-20160414-story.html<\/p>\n<p><a href=\"#_ftnref10\" name=\"_ftn10\">[10]<\/a> Toyota Motor Corporation. \u201cSecurities and Exchange Commission: Form 20-F\u201d. (June 23, 2017) http:\/\/www.toyota-global.com\/pages\/contents\/investors\/ir_library\/sec\/pdf\/20-F_201703_final.pdf<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Toyota&#039;s RAV4 is one of America&#039;s best selling cars. Can it stay on top with a Japanese supply chain and Canadian assembly plant?<\/p>\n","protected":false},"author":9774,"featured_media":24208,"comment_status":"open","ping_status":"closed","template":"","categories":[217,1601,3323,1202,3239,161,3219,3266],"class_list":["post-24207","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-auto","category-donald-trump","category-economic-nationalism","category-globalization","category-isolationism","category-manufacturing","category-nafta","category-tariffs","hck-taxonomy-organization-toyota","hck-taxonomy-industry-auto","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Will Trump\u2019s economic nationalism hurt Toyota? - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-trumps-economic-nationalism-hurt-toyota\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will Trump\u2019s economic nationalism hurt Toyota? - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Toyota&#039;s RAV4 is one of America&#039;s best selling cars. 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