Honda, Toyota Face $125B Tariff Threat, Cut Earnings Forecasts

Toyota Motor Corporation (TM.US) and Honda Motor Co. (HMC.US) are currently grappling with the uncertainties surrounding the U.S. tariff policy, which poses a significant financial threat of over $125 billion. The lack of clear policy details and the ever-changing assumptions make it challenging for these automakers to make decisive pricing strategies.

Honda recently adjusted its fiscal year operating profit forecast to 700 billion yen (approximately $47.6 billion) for the period ending March 2026. This adjustment comes despite the fact that the forecast still represents a 40% decrease from the previous year's earnings. The company's stock price reaction to this news was muted, indicating that the market had already anticipated the impact of the tariffs.

Toyota, with a market capitalization of $237 billion, also released its current fiscal year earnings forecast, predicting a one-third decline in annual operating profit. The subdued market reaction to these announcements suggests that while the tariffs are painful, they are largely in line with market expectations.

However, the companies and investors are left to fill in numerous critical gaps in their predictions. The U.S.-Japan trade agreement has reduced the import tariff on Japanese automobiles from the previously threatened 27.5% to 15%, but the agreement is not yet finalized, and details could still change. Honda assumes the new tax rate will take effect in September, while Toyota's calculations are based on an August implementation date.

Both companies have also assumed a 25% tariff on whole vehicles imported from Canada and Mexico, where they produce a significant number of cars for the U.S. market. They also assume that parts imported from these regions will be exempt. However, these assumptions could be incorrect: U.S. Secretary of Commerce Howard Lutnick stated last month that the president would "absolutely" renegotiate the USMCA.

This uncertainty makes it risky for automakers to adjust their production lines, relocate supply chains, or raise prices in response to the tariffs. Honda is considering increasing factory shifts to boost U.S. production capacity and outsourcing some production to Nissan's U.S. factories, as reported by the Nikkei. However, this could increase manufacturing costs and force the company to urgently find alternative suppliers for critical Japanese-made components such as batteries and motors.

Honda's CEO, Toshihiro Mibe, understands the need for caution in making such decisions. Meanwhile, Toyota has remained silent on the issue of tariff-induced price increases, and its performance guidance does not include any price hikes. Most industry peers have also chosen to wait and see, as the first company to raise prices risks losing market share and potentially angering Trump. Once a price increase is implemented, it is difficult to reverse.

What is certain is that the latest forecasts and their underlying assumptions should not be taken too literally. This leaves automakers and shareholders navigating a vast area of uncertainty.