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Explainer: Why is Toyota being sued by supplier Nippon Steel?

Explainer: Why is Toyota being sued by supplier Nippon Steel?

TOKYO, Oct 20 (Reuters) – Japan’s Nippon Steel Corp is suing customer Toyota Motor Corp (7203.T) to stop it from manufacturing and selling vehicles containing specialty steel made by rival supplier Baoshan Iron & Steel Co Ltd (Baosteel) of China, which it is also suing.

It highlights the important issues for material producers as technology transforms the automotive industry and comes as Japan is increasingly concerned about protecting supply chains and intellectual property.

Here’s what’s behind the lawsuit and why it’s important:

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WHAT IS THE SUIT?

Nippon Steel is suing Toyota and Baosteel (600019.SS) in a Tokyo court for patent infringement, seeking 20 billion yen ($176 million) in damages from each. He is also trying to stop Toyota from selling and manufacturing vehicles in Japan that use Baosteel’s non-oriented magnetic steel sheets.

Nippon Steel believes that the sale and use of Baosteel plate in Japan violates its Japanese patent claims on composition, thickness, crystal grain diameter and magnetic properties, according to a company spokesperson.

Toyota said it confirmed there was no breach before entering into its contract with Baosteel.

Baosteel said it disagreed with Nippon Steel’s claims and would “firmly” defend its rights and interests.

WHY IS STEEL IMPORTANT?

According to Nippon Steel, non-oriented magnetic steel is a specialty metal that improves engine performance in hybrid electric and electric vehicles.

The company has been supplying electromagnetic steel to Toyota for the Prius hybrid for more than two decades.

Japanese steelmakers are focusing on advanced niche markets, such as specialty auto components, where they have so far had an advantage over their biggest Chinese rivals.

But Toyota’s supply deal with Baosteel suggests Chinese producers could catch up. Demand for specialty steel is expected to grow as electric vehicles transform the automotive industry.

WHAT ABOUT NIPPON STEEL’S PAST TRIAL?

Nippon Steel sued the South Korean company POSCO (005490.KS) for more than $1 billion in 2012, alleging that POSCO stole its technology to manufacture a different type of magnetic steel sheets, which are used in transformers.

POSCO then paid around $250 million to settle.

The lawsuit came after a former POSCO employee was convicted of selling POSCO technology to a Chinese steelmaker and told a court that the technology came from Nippon Steel.

The Chinese steelmaker involved in the incident was also Baosteel, according to a person familiar with the matter.

Contacted by Reuters, Baosteel declined to comment on POSCO’s lawsuit.

IMPACT ON TOYOTA?

The damages sought are unlikely to have a material impact on Toyota. The biggest concern would be if a court barred it from using Baosteel steel when it ramps up production of electric vehicles.

“The volume of electrified vehicles is increasing and there is a need to secure the volume of parts,” a Toyota spokesperson said. He declined to say how many models might be affected by an injunction on supplies from Baosteel.

IMPACT ON BAOSTEEL?

Baosteel said it is currently unable to assess the impact on its profits from the lawsuit.

IMPACT ON NIPPON STEEL?

Nippon Steel may have more to lose by taking key customer Toyota, which may try to buy more rivals outside Japan to avoid future supply chain disruptions.

Nippon Steel is more dependent on Toyota than the automaker is on the steelmaker, according to rating agency Moody’s.

However, UBS analyst Harunobu Goroh sees no impact on the fundamental relationship between the two Japanese companies, adding that they will remain strategic partners.

WHAT DOES TOKYO SAY?

The row coincides with heightened concerns in Japan about the vulnerability of industrial supply chains to both U.S.-China trade friction and semiconductor shortages.

Japan is also concerned about China’s alleged theft of technology. New Prime Minister Fumio Kishida has created a new post in his cabinet, that of economic security minister, to tackle these issues.

China has repeatedly stated that it respects intellectual property rights.

For now, however, Commerce Ministry officials and government spokesman Chief Cabinet Secretary Hirokazu Matsuno have declined to comment on the fight between two of Japan’s industrial giants.

“This is private sector litigation and I shouldn’t comment,” Matsuno told reporters on Friday.

($1 = 114.3400 yen)

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Reporting by Tim Kelly, Yuka Obayashi, Aaron Sheldrick, Maki Shiraki, Ritsuko Shimizu and Min Zhang; Editing by David Dolan and Ana Nicolaci da Costa

Our standards: The Thomson Reuters Trust Principles.