Gausageki, Japan (Reuters) – The father of Suzuki Plaza scratched the needles of the U.S. trade war by pushing the family auto parts business to a newer niche product a few decades ago. Now, the Trump administration imposed tariffs so much that it threatens its own attempt to diversify the 78-year-old company into medical devices.
Prime Minister Shigeru Ishiba called U.S. tariffs, including 25% of cars, a “national crisis” for the world's fourth largest economy. Japan's top trade negotiator Ryosei Akazawa traveled to Washington on Friday for the third round of negotiations.
It is obvious to companies like Kyowa Industrial, which is the manufacturer of prototype parts and Race Car components located in Takasaki, northern Tokyo. Kyowa, which has 120 employees, is one of six auto suppliers, who told Reuters they are concerned about their ability to withstand tariff pressures from the Japanese auto industry.
“What are we going to do?” Kyoa's third-generation president Suzuki recalled when the tariffs were announced. “It would be bad.”
Workers walk on auto parts in factory in Kyowa Industrial Co., Ghosakhi
The problems facing Kyowa and other auto suppliers show a decades-long shift in Japan that no longer floods the world with bargaining chips and consumer electronics, and relies on the automotive industry threatened by fierce Chinese competition. This is in stark contrast to the 1980s, when the United States beat trade barriers on Japan's rising trade barriers and its stormy exports at the time.
Based on interviews with more than a dozen people, including industry executives, bankers and senior government officials, the report provides first-hand instructions on how a company responds to uncertainty and details the deepening squeeze on the automotive supply chain in the event of severe damage.
Kyowa and thousands of other small manufacturers form an automated supply network that has been engaged in the production method of “Monozukuri” (literally, “making things”) for decades. Based on the Toyota development approach, this incremental improvement and the cultivation of assembly line efficiency helped make Japan a juggernaut.
But the shift to battery-powered smart cars means software, in which electric car makers such as Tesla and China's Byd Excel have become a bigger selling point.
After Suzuki, 65, realized that the rise of electric vehicles would eventually hammer the engine components, finally Kyowa began developing neurosurgery instruments in 2016. Last year, it began selling the tools in the United States, only to find that Trump's tariffs also apply to medical devices.
Kyowa will not export car components to the United States, but Suzuki fears automakers will force suppliers to lower prices to offset tariffs. So far, this has not happened.
A Subaru company supplier says his company may have to start looking for partners that expand outside the U.S.
Major automakers have largely provided soft support to suppliers since Trump’s tariff announcement. Last month, according to a copy of Reuters' comments, Toyota, Nissan and Ford sent some Japanese suppliers to U.S. weapons, demanding cooperation in the face of tariffs without providing specific details.
These letters have not been reported before.
Nissan told suppliers that they should stick to previously agreed prices. It said the cost of bearing tariffs is “no obligation” but it will mask some hits over as long as four weeks to help secure its supply chain. It added that it can later seek to recover any support payments to the supplier.
Reuters cannot determine how much support Nissan has. The automaker did not send a follow-up letter, and they allowed Reuters to view the letters in anonymous condition, according to the two suppliers.
Nissan told Reuters it is working with suppliers to mitigate the impact of tariffs and include costs including localization.
Toyota said it will seek to protect its suppliers, dealers and employees while maintaining customer trust as it leads to uncertainty caused by tariffs. Ford told Reuters it is working with suppliers to assess their contacts and potentially reconfigure the process and procurement.
Toyota said in the letter it understands “the complexity and economic burden faced by some suppliers” and asked suppliers to identify and share mitigation measures. It said Toyota will work with suppliers “sincerely”.
Some Toyota suppliers, including Denso, did not give annual revenue forecasts on the grounds of uncertainty.
Julie Boote, an analyst at research firm Pelham Smithers Associates, said the trade war has brought “urgent” to the Japanese auto industry, which will speed up the merger.
“To survive, these automakers will have to work together,” she said.
Squeeze cost
Sayuri Shirai, a former member of the Bank of Japan board, said Japanese manufacturers have traditionally put pressure on smaller suppliers, and he is now a professor at Keo University.
If tariffs will remain in place in the long run, regional economies occupied by the decline in population will cause greater damage.
The risks in Japan are already obvious. The economy shrank in the first quarter, and Tokyo took urgent economic measures to ease the pain of tariffs.
“Car exports are too important to Japan to maintain a 25% tariff,” said David Boling, a former U.S. trade official.
Boling said the U.S. is unlikely to be less than 10% agreed with the UK.
Trump imposed a 25% tariff on cars and later a 24% tariff on all Japanese goods. The latter was cut to 10% for a total of 90 days, and the time ran out in July.
Trade envoy Akaze said on Tuesday that Japan insisted on guns and hoped to lift tariffs. A White House spokesman declined to comment on the negotiations.
A U.S. State Department spokesman said the Trump administration hopes trading partners can align with the U.S. efforts to maintain “equal and balance in our trade relations and protect the U.S. economy and national security.”
Senior Japanese officials told Reuters Japan's auto industry is increasingly like a laggard and needs to use tariffs as an opportunity to implement comprehensive changes to catch up with EV competitors.
The Department of Trade said in a statement that regardless of U.S. tariffs, Japan's auto industry needs to deal with major changes in the competitive environment.
Japan's top automotive supplier is called Tier 1, purchasing parts from Tier 2 suppliers, and so on. The companies at the bottom are nothing more than companies that grind part of the neighborhood workshop.
Government officials have previously urged smaller companies to innovate and merge to increase their scale.
At regional lender Ashikaga Bank, the automotive industry team supports approximately 200 companies, about 80% of which are suppliers of Level 2 or lower. Team members who were not spoken publicly said they were concerned that tariffs would lead to higher vehicle prices and lower sales of Japanese cars in the U.S. and hit banks’ customers.
Shinichi Iizuka, president of Toa Kogyo, a suspended manufacturer of OTAs near Subaru's hometown of Gosakhi, said the tariff burden could be shared by consumers, car dealers, automakers, automakers and suppliers.
About 70% of Subaru's car sales are in the United States, where they rely on local manufacturing and imports. Subaru said on Monday that it would raise prices for several U.S. models.
Subaru CFO Shinsuke Toda said this month it was willing to discuss with suppliers sharing their burden, adding that the situation was not clear.
This is personal
Suzuki’s drive to diversify Kyowa Industrial into medical equipment reflects her father’s hub in the trade frictions of the 1980s, when Kyowa abandoned mass production of lower-quality auto parts to focus on higher-quality prototypes and racing engineer components. Suzuki took over in 2000 and her father died in 2013.
Prior to Trump's tariffs, Suzuki plans to build U.S. trails in sales of medical devices to make entry into other markets. With the emergence of U.S. trade barriers, she said her team is considering shifting production to high costs or shifting sales focus to Asia.
Suzuki said Kyna is holding talks with potential distributors in Singapore and Hong Kong, given the uncertainty of Trump's announcement.
About 70% of Kyowa's business still comes from automakers, while chip equipment manufacturers and Japan's space program contribute to the rest. It offers most Japanese automakers, GMs and parts for Formula One.
Annual sales are 2 billion yen (USD 14 million). Despite this, Kyowa is three-quarters of the approximately 68,000 companies, according to research firm Teikoku Databank.
For Suzuki, trade frictions are also personal because she was about the fact that when the United States grew up listening to rock music on US Armed Forces radio, learning English and going to American universities. She remembers seeing Aerosmith Live at her first concert in Japan.
“The friendship between Japan and the United States has a long history. I hope they can find a solution,” she said.
($1 = 145.0700 yen)
(Reports by Maki Shiraki and Daniel Leussink; other reports by Yamazaki Makiko Yamazaki, John Geddie and Kentaro Okasaka, Kentaro Okasaka in Tokyo, Nora Eckert, Nora Eckert and Trevor Hunnicutt in Washington; Edited by Nobuhiro Kubo, David David Dolan and David David Crawshaw
