TOKYO—North America's auto makers face a new reality of sourcing vehicle content under the free-trade deal agreed to by the U.S., Canada and Mexico.
But for Japan's auto companies, the moment is particularly worrisome.
After decades of building vehicles in relative stability in North America and spending billions of dollars to move factory capacity and suppliers from Japan, the Japanese now must re-examine their supply chains and plant investments to make sure they can meet the local-content rules of the U.S.-Mexico-Canada Agreement.
That free-trade plan raises the portion of vehicle content that must originate within the region to 75 percent, from 62.5 percent, to sidestep tariffs, and it requires at least 40 percent of a vehicle to be built by workers whose pay averages more than $16 per hour.
It also requires that 70 percent of steel and aluminum be purchased in-region.
"We acknowledge that regulations on local content are much tougher," Seiji Kuraishi, Honda Motor Co. executive vice president, said last week while announcing his company's latest quarterly financial results. "We will think of how to achieve the best allocation in the world."
It is no small challenge.
Even as executives here pledge to bring their North American operations into compliance, they concede that the mandates set to replace those of the 24-year-old North American Free Trade Agreement have put seven key component systems under the microscope: engines; transmissions; body and chassis parts; propeller shafts; suspensions; electrified vehicle batteries; and steering systems.
Auto companies in Japan are trying to grasp the full repercussions. Honda is hardly alone in grappling with the new reality. Although the impact will vary by company and nameplate, the new rules pertain to auto makers from South Korea, Europe and even Detroit—in short, any company with business crisscrossing the borders of North America's three neighboring nations, and also any company thinking of building or expanding plants in the region, such as Mazda and Toyota.
Mazda and Toyota said in January that they will build a $1.6 billion joint-venture auto assembly plant in Huntsville, Ala. That was before the new content rules were written.
"They have to make a decision about making new investments in supply chains, paying the tariffs or possibly stop selling a product," Chris Richter, senior auto analyst at CLSA Asia-Pacific Markets in Tokyo, said of Japan's automakers. "That could become a big problem because it can get very expensive."