TOKYO - The grim financial picture at Nissan Motor Co. Ltd. is causing upheaval in its global supplier network.
Not only is Nissan's long-traditional supplier structure - or keiretsu - under siege. So is the automaker's fundamental approach to buying parts.
No longer is the troubled automaker interested in buying diverse parts from different companies around the globe. It now wants to single-source components from suppliers to serve its auto production worldwide.
Such a move is hardly surprising to the rest of the world. American and European automakers already are well into the process of winnowing suppliers. Many have relegated their smaller parts makers to the back of the supply chain and are increasingly handing big contracts for large and complex modules over to megasuppliers.
But the shift at Nissan represents something of an earthquake in the Japanese industry. The old keiretsu business structure has dominated Japan's automotive parts industry since its beginnings. And 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. But the new environment is fraught with risks for both Nissan and its suppliers.
The significance is all the more enormous to the members of Nissan's keiretsu themselves. Nissan is severing the very equity, business and personnel ties that bind Japanese companies into closely knit, mutually supportive webs. Those historic relationships no longer will be the basis of Nissan's dealings with suppliers.
In the future, says Nissan CFO Tadahiro Shirai, Nissan's ties with suppliers 'must be a relationship based on a business case.'
That's easy enough to say. But the road will be tough for firms that have been financially controlled by Nissan for decades, and which have counted on Nissan business - often to the exclusion of other customers - for their survival.
The changes began long before Renault SA agreed last month to buy a 36.8 percent stake in Nissan. And Renault has indicated that they will continue as the new partner works to pare Nissan's massive debt.
One symbolic change in the Nissan order occurred in late January, when Nissan announced it would sell part of its financially weak affiliate, Kinugawa Rubber Industrial Co. The buyer was Toyo Rubber. Toyo was not only a Kinugawa competitor. It is arguably Kinugawa's archrival - its counterpart in Toyota Motor Corp.'s keiretsu system.
That sale marked the fourth time in a month Nissan had cut its ties to a former affiliate. Three of the companies cut loose were former consolidated subsidiaries.
In announcing the Kinugawa 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 debts of approximately $20 billion.
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,' says Chikao Masuzawa, an auto analyst at ING Barings Securities Japan.
ORDERS FROM ABOVE
At the same time that it is tearing off the ties that bind, Nissan is also trying to foster new independence among its old suppliers. Nissan has been encouraging some smaller suppliers to merge, holding out the hope that a Tier 2 supplier may gain enough scale that way to move back up to the first tier of core suppliers.
But Nissan has made it clear: Even if they were part of the historic keiretsu, noncore suppliers will not be given preferential treatment when contracts are awarded.
In response, to protect themselves, some of Nissan's suppliers have begun to search out new business with carmakers other than Nissan. They are in effect walking away from the Nissan group.
'Changes are taking place very quickly among the Nissan group,' says Takaki Nakanishi, auto analyst at Merrill Lynch Japan. 'The shakeout is going to be obvious.'
Getting rid of long-held stakes in a group company is a radical move. But it is an increasingly common one 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 Institute, 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. The automakers are only now beginning to follow the trend.
To be sure, not all automakers are selling off their cross-shareholdings. Toyota actually has been increasing its stakes in some of its suppliers. As banks and other financial institutions have sold their shares of suppliers' stocks, Toyota has bought.
But 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 government will endorse that idea. But the very fact that it is under review by a panel of lawmakers shows how attitudes toward cross-shareholdings are rapidly changing.
'The Japanese financial industry is not going well, partly because stable business operations through interlocking shareholdings have failed in Japan,' observes Itaru Koeda, Nissan's managing director in charge of purchasing.
'Corporate funds should be procured from shareholders, from the market. Therefore, mutual stock ownership has become meaningless and is going down.'
Koeda is directly involved in dismantling Nissan's group by pursuing the strategy he calls 'global single sourcing.' First implemented with the new Sunny/Sentra launched in Japan last October, global single sourcing meant that one supplier would provide a part for all Sunny and Sentra cars Nissan built at its plants in Japan, the United States and Britain.
Nissan now 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,' Koeda says. 'If they can compete, they will win the order.'
Nissan expects to build 350,000 Sunnys and Sentras a year around the globe. The idea that high volumes 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 a supplier community similarly located around the world.
About five years ago, when a new Micra 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 recalls ruefully.
With the latest Sunny/Sentra, Nissan fared slightly better. It found 10 parts it could source globally. Seven of them came from its traditional suppliers, three from foreign suppliers. (See table.)
Three outside suppliers may not seem like many, but it was big news in Japan. It meant that the three traditional Nissan suppliers 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 says.
Koeda notes that a Japanese supplier could embrace global single sourcing as an impetus to expand its non-Japanese business outside Japan with Nissan. It might even form business alliances with foreign parts makers.
'There are a lot of routes available to them if they grab this chance,' he says.
QUICK TO CHANGE
Even as the new rules of global single sourcing began to become clear during the development of the Sunny/Sentra, Nissan's suppliers were taking steps to adapt. For many, there was no choice.
'We rely on Nissan for over 70 percent of sales,' explains 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,' says Tsunehiro Tamura, general manager of Unipres' business planning department.
But merely having plants around the world is not enough, he stresses. To survive today, a supplier has to have engineering and design capabilities. At any given time, for example, Unipres 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 says. 'By 2000 to 2002, a supplier that does not have its own development staff may fall into the arms of another parts supplier.'
ON THE SAFE SIDE
Nissan's suppliers have also been motivated to look for new customers because of the automaker's financial troubles. One Nissan keiretsu member, 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, now supplies the instrument panel for the Honda Odyssey minivan assembled in Canada.
Yorozu Corp., a maker of suspension components and other parts, 'has been trying to push itself off from Nissan over the last six years,' says Peter Boardman, Tokyo-based auto analyst for Warburg Dillon Read. One strategy: Develop hydroforming technology in order to improve its chances of winning business with General Motors.
The changes ultimately will be healthy for Nissan's suppliers, some analysts says.
'Nissan over the last 10 years has oversupported its suppliers to keep them afloat,' Boardman contends. '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.
But what may be good for the suppliers is not necessarily good for Nissan.
Over the longer term, now that Nissan is giving up its power to dictate technology to suppliers that it controls, there will be more black box situations. Nissan will begin taking some cues from the companies it once controlled.
'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,' says 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,' says Masuzawa.
Christopher Richter, Tokyo-based auto analyst for HSBC Securities Japan Ltd., also wonders 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 asks.
Moreover, he points out 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 concedes.
But, he adds: 'Without pursuing structural reform, the Japanese automotive industry will not be able to survive.'