Global price-fixing crackdown threatens supply chain's 'business model'

The U.S. price-fixing investigation has prosecuted 28 companies and yielded about $2.4 billion in fines.
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TOKYO (Reuters) -- When a Japanese carmaker issued a tender for shock absorbers a few years ago for a model it planned to sell in Indonesia, two suppliers came back with bids that were "so obviously coordinated," said an executive at the automaker.

One supplier put in a slightly lower bid for front shock absorbers than its rival and a slightly higher bid for rear shocks, while its rival did the opposite. The intent was clear, recalled the carmaker's former parts procurement chief for Indonesia who is now back in Japan and didn't want to be named because of the sensitivity of the issue: they were dividing the contracts between them.

A few weeks later, he came across the two rival suppliers' chiefs playing golf together in Jakarta, and summoned them to his office for an explanation. The upshot: the automaker asked the parts suppliers to re-bid.

The account helps illustrate how some auto parts makers, in particular those from Japan, have colluded for years to inflate parts prices for automakers, dealers and repair shops in a global market with annual sales of over 80 million vehicles, and which are now being exposed in a worldwide sweep by regulators.

For the past five years, competition watchdogs -- from the United States, Europe and across Asia -- have moved in, handing out record fines in some cases, and calling time on a business model that has served parts makers well.

That model essentially sees parts makers collude to keep prices relatively high for new components they supply to car manufacturers, and then charge even more for the same parts supplied as replacements to dealerships and repair shops.

Denso Corp., Japan's leading auto electronics parts supplier had a higher operating profit margin of 9.2 percent than Toyota Motor Corp. in the year to March, while Aisin Seiki Co.'s 6.1 percent margin topped Nissan Motor Co.'s 5.3 percent.

In South Korea, Hyundai Mobis, a leading Hyundai Motor supplier, had a margin of around 6 percent on parts and component systems sales to automakers last year, but 21 percent on replacement parts sales, according to its filing with the stock exchange.

Some Japanese parts suppliers have evidently taken that business model further.

"To secure high profitability, those suppliers often coordinate bids for a supply contract when they can, and come to automakers with mostly identical bids," the auto executive said in an interview at his firm's procurement office in Japan.

As well as colluding to push up prices for new car parts, they also charge multiple times -- sometimes as much as 10 times -- the price when they make the exact same components available as replacement parts in the aftermarket marketplace.

"In other words, they're doubling dipping to beef up and maximize their profit margins," the executive said. "This is the kind of cartel you deal with in Southeast Asia with Japanese suppliers, and that's not the exception, but the typical business condition we deal with routinely around the world."

As regulators, most recently in China, go after suppliers in what has become a worldwide probe into price fixing, this "business model is in danger," the executive said. "We might be seeing the beginning of an end of it."

Back to basics

Japanese auto component suppliers, such as Toyota Group's Denso and Aisin, have, like their parent, long been considered as running highly efficient operations. But that reputation for being "lean" when selling cars in mature Western markets was challenged as global automakers aggressively went after a new generation of more cost-conscious buyers in emerging markets.

Automakers took note of suppliers' cost structure before the authorities began clamping down on price manipulation -- around a decade and a half ago as they sought to cut costs and vehicle prices to make cars more affordable in emerging economies. At the unnamed executive's company, for example, procurement officials began going after parts suppliers five years ago, mindful of their "pricing tricks," he said.

For parts suppliers now, the answer may be to go back to business basics, industry officials and experts say.

"Rather than change in their business model, parts makers are going to have to quit getting their hands dirty for profiteering and should go back to basics," said Hidehiro Utsumi, an attorney-at-law at law firm TMI Associates in Tokyo and an expert on anti-monopoly.

That means re-embracing what Japanese automakers are best known for -- eliminating excess from the manufacturing process throughout the supply chain and trimming any fat from production to achieve low cost and high quality.

No one at Aisin or the Japan Auto Parts Industries Association was immediately available to comment. A Denso spokesman referred to its earlier press statements on fines in various markets.

Global sweep

The crackdown on auto parts makers began around early 2010, when regulators in the United States, Europe and Japan started looking into parts suppliers including wire harness makers such as Yazaki Corp. and Sumitomo Electric.

Japan's Fair Trade Commission has fined 12 local parts makers a total of $332 million since January 2012 for violating anti-monopoly laws, including Yazaki, headlamp maker Koito Manufacturing Co. and bearing maker NSK Ltd.

China last week fined a dozen Japanese parts makers a record $201 million for manipulating prices, while in the United States, 28 firms including Denso and Yazaki and more than two dozen executives have in recent years agreed to pay $2.4 billion in fines, according to the Justice Department. Japan's NGK Spark Plug Co. last week was the latest company prosecuted for price fixing, agreeing to a $52.1 million criminal fine. 

The European Commission last month fined several parts makers, including Yazaki, NTN Corp, NSK and Furukawa Electric, a total of $182 million, and is currently investigating possible cartels in car lights, thermal systems, air conditioners, seat belts, air bags, radiators and windscreen wipers.

South Korean regulators last year fined units of Denso, Continental AG and Robert Bosch for price fixing, and are looking into whether there has been price collusion among car makers and dealers.

In May, Singapore's Competition Commission fined Nachi-Fujikoshi Corp., NTN and NSK a record S$9.3 million ($7.43 million) for cartel behavior in ball bearings, noting the price fixing, going back as far as 1980, even had a formal name: the Market Share and Profit Protection Initiative.

The crackdown has hit Japanese parts suppliers hardest as they operate globally, though others such as Autoliv Inc. have also been caught up. Car parts implicated in the probes range from wire harnesses, bearings and seat belts to anti-vibration rubber and ignition coils.

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