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(Bloomberg) -- Toyota Motor Corp. recently ceded its title as the world’s best-selling automaker to arch-rival Volkswagen AG. Yet the Japanese company’s biggest adversary this year may be U.S. President Donald Trump.

North America accounts for 38 percent of Toyota’s revenue, and both the company and Japan have taken some political heat from the new administration, which has a lot riding on its plan to revive U.S. manufacturing.

Just before taking office, Trump called out Toyota in a tweet for plans to build a plant in Mexico to produce a next-generation Corolla, Toyota’s flagship compact, and threatened it with a “big border tax” if it doesn’t manufacture the car in the U.S. Toyota shows no sign of backing down from its investment plans in Mexico.

While Toyota has invested $22 billion in the U.S. over the last six decades, the company still imports a relatively major proportion of high-value components like engines and transmissions, Takaki Nakanishi, the top-ranked auto analyst for six consecutive years through 2009 in analyst rankings by Nikkei Veritas, wrote in a report last month. “Japan’s auto industry,” according to the Jefferies Group LLC analyst, “has not sufficiently localized operations in the U.S, its largest sales destination market.”

Toyota President Akio Toyoda, who dined with Prime Minister Shinzo Abe on Feb. 3 as the Japanese leader prepares for a visit to the U.S. later this week, said last month at the North American International Auto Show that the company will invest $10 billion in the U.S. over the next five years. Some 75 percent of the best-selling Camry sedan sold in the U.S. are made locally, Abe told Trump during a recent call.

On Monday, Toyota undershot estimates with a 39 percent decline in operating profit for the quarter ended on Dec. 31. The company expects U.S. sales to remain difficult for passenger cars with the market’s preference for trucks and SUVs, and competition has intensified with carmakers stepping up incentives, Toyota Managing Officer Tetsuya Otake said Monday.

Tough Options

Toyota makes only about 49 percent of what it sells in the U.S. locally, according to the company. It exports more vehicles to the U.S. than either Nissan Motor Co. or Honda Motor Co. On top of that, the carmaker manufactures most of its Lexus luxury cars in Japan and also ships its Tacoma pickup trucks from Mexico to the U.S. 

For Toyota, shifting more production to the U.S. would be both politically fraught back in Japan -- and expensive. Koji Endo, an automotive analyst at SBI Securities in Tokyo, estimated that building the Lexus in the U.S. would require a new plant that would cost up to 150 billion yen ($1.3 billion).

“If Toyota wants to shift production even more to the U.S., it would probably have to close plants in Japan and fire people, and some suppliers might disappear,” Endo said.

Aside from trade politics, Toyota faces a U.S. car market showing signs of flagging demand and growing reliance on sales incentives which hurts profits. Toyota’s U.S. sales fell about 11 percent in January.

SUV Production

Toyota is investing more in SUV and truck production to meet growing demand in an era of low gas prices. The company is adding 400 jobs and investing $600 million at its facility in Princeton, Indiana, where the Highlander mid-sized SUV is produced.

Last month, the company unveiled the fifth generation of its Lexus LS, which competes with the Mercedes S-Class lineup and BMW 7-Series. Also available from Toyota later this year is the all-new 2018 Camry sedan. “Toyota does seem to have a lot of new products for 2017,” said Endo.

Yet that advantage could be offset somewhat if Japanese automakers face tariffs on the cars they bring into the U.S. from home or Mexico. Tariffs may be a tough sell in Congress, but if they were approved and “the end result were higher prices, there would be less demand for big ticket items like passenger vehicles,” said Maryann Keller, an independent auto analyst in Stamford, Connecticut.

--With assistance from Yuki Hagiwara To contact the reporters on this story: Ma Jie in Tokyo at jma124@bloomberg.net, Kevin Buckland in Tokyo at kbuckland1@bloomberg.net. To contact the editors responsible for this story: Brian Bremner at bbremner@bloomberg.net, Chua Kong Ho at kchua6@bloomberg.net, Subramaniam Sharma

©2017 Bloomberg L.P.

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