BUSIESS

Bumpy road ahead

A Honda executive lashes out at U.S. trade rules

JOHN DALY February 17 1992
BUSIESS

Bumpy road ahead

A Honda executive lashes out at U.S. trade rules

JOHN DALY February 17 1992

Bumpy road ahead

A Honda executive lashes out at U.S. trade rules

BUSIESS

Isao Suzuki is unusual for a Japanese executive in North America. While most of his counterparts in the automotive industry tend to shun publicity, the Toronto-based president of Honda Canada Ltd. is clearly not shy about speaking publicly on issues that affect his company. These days, one of Suzuki’s most pressing problems is the increasing trade friction between Washington and Tokyo—a standoff that has provoked widespread calls in the United States for a consumer boycott of Japanese cars. Indeed, Honda itself is currently the target of an investigation by U.S. customs auditors, who have questioned whether cars built by the company at its plant in Alliston, Ont., meet North American content requirements under the Canada-U.S.

Free Trade Agreement. In a rare interview in the boardroom of Honda Canada’s Scarborough, Ont., headquarters, the animated, 48year-old Suzuki vowed to pursue the case in the event that the auditors rule against Honda in a decision expected later this month. “If we lose,” he said, “we will do everything we can to fight it.”

The controversy over Canadian-built Honda Civics has become a flash point for trade tensions between the United States and Japan. In a confidential preliminary report that was given to The New York Times last June, U.S. officials charged that the cars shipped to the United States from the Alliston plant in 1989 and 1990 failed to meet the FTA’S 50-percent North American content requirement for duty-free access to the U.S. market. Most analysts expect that finding to be upheld when the Customs Service issues its final report, making Honda Canada liable for $23 million in U.S. import duties—although the company could appeal the decision. In addition, Suzuki and many trade experts caution that a ruling against Honda could discourage future investment in Canada by Japanese companies and damage U.S.-Japanese trade relations. Complains Suzuki: “The Free Trade Agreement was supposed to promote trade. But because of political pressure, the United States is using it to try to minimize trade.”

Suzuki, a marketing expert who moved to the Toronto area from Japan seven months ago

with his wife and two sons, is clearly frustrated by the rising tide of U.S. protectionism. He argues that the Big Three North American automakers were largely complacent about their steady losses in market share to the Japanese during the boom years of the 1980s, when the total number of new cars and trucks sold in North America each year was still rising. The anti-Japanese backlash began in earnest, he says, only when the North American economy skidded into recession. Declares

Suzuki: “As long as the total market was growing, they didn’t complain.”

At the same time, Suzuki questions whether Honda can obtain a fair ruling from U.S. customs officials. “It may be a political decision,” said Suzuki. “Because of the U.S. presidential election next November, Japan-bashing has become stronger.”

An avid tennis player who graduated from Tokyo University with a bachelor’s degree in Western literature and history, Suzuki is keenly aware of the sensitivities that surround Japan’s relations with its Western trading partners. In 1976, nine years after Honda hired him to work in its foreign-sales division, Suzuki moved to Los Angeles as an adviser to the president of Honda’s U.S. subsidiary, a position he held until 1981. He later served as president

of Honda Australia, returning to Japan in 1987. “Suzuki isn’t like a lot of Japanese managers,” said a company representative who works closely with the Honda Canada president. “He doesn’t focus on only one area of the business. He likes to look at the big picture.”

Honda’s battle with the U.S. government arose, at least in part, because of confusion over the FTA. One of the aims of the agreement was to discourage companies from assembling products in North America primarily with parts imported from other countries. For that reason, auto manufacturers are required to meet specific North American content rules in order to ship their goods across the border duty-free. But the FTA itself only lists broad categories of expenses that qualify as North American costs of production; the interpretation of those rules is left to customs officials in each country. “Each country’s interpretation of content rules

is different,” Suzuki said. “Without clear rules, it is not sensible to argue whether we have 50-, 60or 70-per-cent content.”

Suzuki claims that about two-thirds of the value of the compact Civic hatchbacks currently assembled in Canada originates in North America. That includes money spent on labor, on-the-job training and management at the Alliston plant, insurance and taxes on the factory and the depreciation costs of all machinery and equipment. In addition, Honda manufactures the car’s outer-body panels in the Alliston plant and imports its engine from a Hondaowned factory in Anna, Ohio. The car’s transmission, windows, muffler, fuel tank, seats and several other parts are also made in North America.

Still, Suzuki concedes that the cars that

Honda assembled in Alliston in 1989 and 1990—the years covered by the U.S. audit— contained more Japanese parts than newer models. Moreover, Honda Canada has attempted to claim as a North American cost of production the non-mortgage interest expenses it incurred in building the Alliston plant, as well as the full cost of depreciation of machinery and equipment.

The Mulroney government, concerned that the case against Honda could discourage future Japanese investment in Canada, is lobbying U.S. officials at several levels in support of the company’s position. Last month, International Trade Minister Michael Wilson proposed the establishment of a binational dispute-settlement panel to consider the issue of non-mortgage interest expenses. Wilson told reporters that the U.S. position “is not justified under the Free Trade Agreement, nor in light of common business practice.”

Even automotive analysts who criticize the North American content claims of Japaneseowned automakers agree with Suzuki’s contention that the current rules used by the two

countries are arbitrary and unpredictable. Sean McAlinden, manager of economic studies at the University of Michigan’s Office for the Study of Automotive Transportation in Ann Arbor, says jokingly that “there are at least nine different versions of the content rules. Some of them are from Mars.” One example: Canadian customs officials allow Honda’s U.S.assembled engines to enter the country dutyfree on the ground that they exceed the 50-percent local-content requirement. But U.S. authorities declined to accept that ruling and are examining the engines piece by piece to determine the exact origin of each component. According to the preliminary audit, only 15 per cent of the value of parts in 1989 and 1990 model engines was North American.

Last year, McAlinden and his colleagues at the university conducted their own analysis of 1989 Honda Civics and Accords manufactured in Ohio and concluded that only 36 per cent of the value of those cars was attributable to the cost of labor, depreciation and overhead in the United States and of parts produced by U.S.owned suppliers. But when parts purchased

from U.S.-based Japanese suppliers were included, the car’s domestic content climbed to 62 per cent—comfortably exceeding the 50per-cent requirement.

Still, McAlinden says that most Japanese car companies operate as close as they can to the legal minimum for local content. “There are a lot of ‘iffy’ cars in the 50-per-cent range being manufactured by the Japanese in the United States and Canada,” he adds. In fact, the cars assembled in Honda’s factories probably achieve the highest North American-content levels among the Japanese-owned manufacturers. “If they fail to qualify,” McAlinden says, “all the other Japanese manufacturers will fail to qualify.” Currently, Japanese automakers operate two other assembly plants in Canada: the CAMI Automotive Inc. plant in Ingersoll, Ont., jointly owned by Suzuki Motor Co. and General Motors of Canada Ltd., and the Toyota Corolla sedan plant in Cambridge, Ont. Those two factories, together with the Honda facility, employ a total of 4,400 Canadians.

Honda’s defenders also include hundreds of other Canadians who are employed in factories built by Japanese-owned parts suppliers that followed the auto manufacturers to North America. One such person is Rudy Klaming, manager of the Bellemar Parts Industries Canada Inc. factory in Alliston, a facility owned jointly by Honda’s U.S. manufacturing subsidiary and two of the company’s Japanese suppliers. Klaming, 43, who has spent more than 20 years in the auto-parts business, says that many of his 110 employees, who assemble seats and install tires on rims for Honda, would probably be out of work now if it were not for the Honda plant. “With General Motors and the other North American automakers closing plants, we have to find something for the people who are left behind,” he adds.

But some executives who work for domestically owned parts suppliers have less sympathy for Honda. They argue that a ruling against the company would prompt it and other Japaneseowned manufacturers to buy more parts from Canadian firms. “Long-term, they want to source more parts here anyway,” says Daniel Chicoine, president of Newmarket, Ont.-based Atoma International Inc., which makes hinges and window regulators for Honda. “This ruling would push them to do that.”

Suzuki, one of a dozen members of Honda’s worldwide management committee, chooses his words carefully when asked to assess the potential impact of a negative ruling on Honda’s operations. He insists that Honda is committed to expanding the Alliston plant, which is now running at its maximum capacity of 105,000 cars a year, if market demand for its products continues to increase. But at the same time, he acknowledges that the company’s future investments in North America are “closely related to trade issues.” Rather than planning an expansion, Suzuki’s biggest challenge is to defend Honda’s existing operations in Canada from the growing anti-Japanese backlash south of the border.

JOHN DALY