TOKYO - It seemed like a simple enough transaction. A small, financially weak auto-parts maker linked up with a rival to gain scale.
But when Nissan Motor Co. Ltd. announced Jan. 27 that it will sell part of its stake in Kinugawa Rubber Industrial Co. to stronger, Toyota Motor Corp.-affiliated Toyo Rubber, it marked yet another step in the unraveling of Nissan's keiretsu network of suppliers.
It isn't the first such sale, and it won't be the last.
Indeed, it was the fourth time in a month that Nissan cut its ties to a former affiliate. Three of the companies cut loose were former consolidated subsidiaries.
What's the significance?
Nissan is severing the very equity, business and personnel ties that bind Japanese companies into closely knit, mutually supportive webs - the keiretsu.
Those historic relationships no longer will be the basis of Nissan's dealings with suppliers. In the future, Nissan's ties with suppliers 'must be a relationship based on a business case,' said Tadahiro Shirai, Nissan CFO.
Nissan's actions are the most visible sign yet that the consolidation that has swept the parts business in Europe and North America finally is taking place in Japan. The changes could lead to a shakeout in Japan's parts-making sector and could create opportunities for foreign suppliers that want to expand in Asia. But the new environment is fraught with risks for both Nissan and its suppliers.
Indeed, in announcing the Kinugawa Rubber sale, Nissan noted that suppliers will have to become systems integrators, using 'parts transcending existing company affiliations and frameworks.'
Driving Nissan's decision to disband its keiretsu is its dire financial situation. Nissan will post its sixth loss in seven years this fiscal year, and the company is selling assets in an attempt to reduce its debt of ¥2.5 trillion, or about $22 billion at current exchange rates.
Selling the shares it holds in its suppliers raises cash. In addition, scouring the world for the lowest bid on a car part, rather than favoring historic suppliers, cuts costs.
'Nissan has to think of itself these days. They cannot protect these parts makers anymore,' said Chikao Masuzawa, an auto analyst at ING Barings Securities Japan.
In addition, Nissan has been encouraging some smaller suppliers to merge, holding out the hope that a second-tier supplier may gain enough scale to move to the first tier of core suppliers.
Noncore suppliers, even if part of the historic keiretsu, will not be given preferential treatment when contracts are awarded.
For their part, some of Nissan's suppliers quite consciously have chosen to search out business with carmakers other than Nissan, in effect walking away from the Nissan group.
'Changes are taking place very quickly among the Nissan group. The shakeout is going to be obvious,' said Takaki Nakanishi, auto analyst at Merrill Lynch Japan.
Selling long-held stakes in a group company is a radical move - but one that is increasingly common in Japan's troubled financial climate.
'Business groupings in the domestic industry are going through a process of reorganization. These moves are expected to stimulate competition among domestic companies and invigorate the stagnant economy,' said Kiroku Hanai, a professor at Shumei University.
A survey by NLI Research Insti-tute, an arm of Nippon Life Insurance, found that in the fiscal year through March 1997, long-term cross-shareholding of publicly traded companies - the shares that companies hold in their business partners more to cement the relationship than as an investment - amounted to 35.69 percent of all stocks issued in Japan, its lowest level in a decade.
Much of the selling was done by Japan's financially troubled banks and insurance companies.
To be sure, not all companies are selling off their cross-shareholdings. Toyota, for instance, actually has been increasing its stakes in its suppliers. As banks and other financial institutions have sold their shares of suppliers' stocks, Toyota has bought.
Still, the sale of cross-shareholdings has become so widespread that Japan's ruling Liberal Democratic Party, at the urging of its business backers, is mulling various plans for the government to step in and buy shares from companies that want to unwind their holdings. The idea is to keep such sales from dragging the stock market down.
It is not yet clear whether the party will endorse the idea. But the fact that it is the subject of a review by a panel of lawmakers shows how attitudes toward cross-shareholdings have changed.
'The Japanese financial industry is not going well, partly because stable business operations through interlocking shareholdings have failed in Japan. Corporate funds should be procured from shareholders, from the market. Therefore, mutual stock ownership has become meaningless and is going down,' said Itaru Koeda, Nissan's managing director in charge of purchasing.
Global single sourcing
Koeda has been involved directly in dismantling Nissan's group by pursuing a strategy called 'global single sourcing.' First implemented with the new Sunny/Sentra launched in Japan last October, global single sourcing meant that a single supplier would supply a part for all Sunny and Sentra cars Nissan built at its plants in Japan, the United States and Britain.
Nissan hopes to use global single sourcing for other vehicles, as well as powertrains, in the future.
'Our affiliate companies are included (in the bidding), but the bidding is not limited to them. If they can compete, they will win the order,' Koeda said.
The idea that high volumes - Nissan expects to build 350,000 Sunnys and Sentras a year around the globe - will yield low parts prices is an appealing one. But Nissan could not pursue global single sourcing until it had plants in all three major markets and the supply community similarly was located around the world.
About five years ago, when a new Micra, known as the March in Japan, was launched at Nissan's plant in Sunderland, England, Koeda was working there. He tried to use common parts for both the British and Japanese models but could find only three parts that could be sourced in common.
To understand the problems he faced then, consider the alternator. Koeda looked into one that had been given good reviews in the European market, but it was noisier than the ones available in Japan. The European users said the noise didn't matter, but Japanese users flatly rejected it as too loud.
'I was annoyed about it,' he recalled ruefully.
With the latest Sunny/Sentra, Nissan fared slightly better. It found 10 parts it could source globally. Seven came from its traditional suppliers, three from foreign suppliers. (See table.)
Three may not seem like many, but it was big news in Japan because it meant that the three traditional suppliers of those parts to Nissan had lost out.
Koeda is unapologetic. 'Open sourcing of auto parts is necessary. This is not a matter of whether we want to do it or not, but an inevitable thing,' he said.
Koeda noted that a Japanese supplier could use the impetus of global single sourcing to expand its non-Japanese business outside Japan with Nissan, or it could form business alliances with foreign parts makers.
'There are a lot of routes available to them if they grab this chance,' he said.
As they saw the demands of global single sourcing in the years during the development of the Sunny/ Sentra, and even before, Nissan's suppliers began to adapt.
Some saw that they had no choice.
'We rely on Nissan for over 70 percent of sales,' said Toshihiro Nishimuri, a spokesman for Unisia Jecs Corp. 'If we cannot respond to global single sourcing, we will not be able to survive.'
Ohi Seisakusho Co. linked with Meritor so that the two could bid on the contract for locks for the new car. Meritor is the designated official worldwide source, with Ohi its Japan-market subcontractor.
Yamakawa Kogyo and Daiwa Kogyo, two stamping companies, merged to form Unipres Corp. Unipres has manufacturing plants in Japan, the United Kingdom and North America.
'We can respond to global sourcing. We can supply worldwide,' said Tsunehiro Tamura, general manager of Unipres' business planning department.
Just having plants around the world is not enough, however, he stressed. To survive today, a supplier has to have engineering and design capabilities. Unipres, for example, at any given time has between 30 and 40 development engineers stationed at Nissan's research and development center in Atsugi, west of Tokyo.
'Planning used to be done by a carmaker. We have come to cover a wider range of responsibilities these days,' he said.
'By 2000 to 2002, a supplier which does not have its own development staff may fall into the arms of another parts supplier.'
Nissan's woes at home and abroad also had nervous suppliers looking for orders elsewhere. Aichi Machine Industry Co. began selling its continuously variable transmissions to Daihatsu Motor Co., which is 51 percent owned by Toyota. Kansei Corp., considered by Nissan to be one of its core keiretsu companies, supplies the instrument panel for the Honda Odyssey minivan built in Canada.
Yorozu Corp., a maker of suspension and other parts, 'has been trying to push itself off from Nissan over the last six years,' said Peter Boardman, Tokyo-based auto analyst for Warburg Dillon Read. One strategy: Develop hydroforming technology so as to improve its chances of winning business with General Motors.
The changes ultimately will be healthy for Nissan's suppliers, some analysts said.
'Nissan over the last 10 years has over-supported its suppliers to keep them afloat. It has been a supplier of capital. They were overly centralized. Nissan should have cut their ties, as Toyota has,' by pressing its suppliers to seek business outside Toyota, said Boardman.
What may be good for the suppliers is not necessarily good for Nissan, however.
Over the longer term, now that Nissan has given up its technology, there will be more black box situations.
'Without their own technology, they won't know suppliers' costs. So I'm not sure that over the longer period it's good for the company,' said ING Baring's Masuzawa.
'But Nissan is desperate to reduce costs now, not five years from now. Five years from now, they might not exist,' said Masuzawa.
Christopher Richter, Tokyo-based auto analyst for HSBC Securities Japan Ltd., questioned what the severed ties might mean to Nissan's product development.
'As they go from a system of being closely affiliated with suppliers involved in product development at an early stage to more of a low-bid system, are they going to be able to get the same sort of cooperation from suppliers early in the product development cycle?' he asked.
Moreover, he noted that 'among the different suppliers in the Japanese industry, the Nissan-affiliated ones have been among the least profitable. Now that they're being thrown into a more competitive environment, they'll be more hard-pressed to hang on.'
That could force more mergers like the one that produced Unipres.
'In the free competition era, some (suppliers) may be absorbed by others, if management goes wrong,' Koeda conceded.
But, he added, 'Without pursuing structural reform, the Japanese automotive industry will not be able to survive.'