Japan's keiretsu suppliers at risk in a new reality

TOKYO -- For all their size and success, Japanese auto suppliers that rocketed to global dominance on the coattails of their No. 1 customer, Toyota Motor Corp., face a perilous new reality.

Pressured by a shrinking home market and a sugar daddy looking further afield, Toyota-affiliated suppliers such as Denso and Aisin Seiki are racing to diversify their customer bases or risk decline.

And it's not just Toyota parts makers.

Across the board, Japanese suppliers are struggling to adjust to a new business reality that threatens to undermine the country's keiretsu system of tightknit cooperation between carmakers and their favorite-son suppliers.

Blame the unraveling on an immutable truth: Japan's carmakers have stopped expanding at home. Now, they are channeling new investment into overseas assembly plants, and Japanese suppliers that want a piece of the action are obliged to do the same.

But not all Japanese suppliers are big enough to do so. And those that are, even giant, longtime Toyota suppliers, bump against a harsh reality that sales are anything but guaranteed.

"In Japan, we can rely on Toyota very much. But if it's outside of Japan, except for maybe Indonesia or Thailand, Toyota's market share is still quite low and not so stable," says Tadashi Arashima, president of Toyoda Gosei Co., a Toyota-affiliated supplier that makes hourglass-shaped grilles for Lexus as well as steering wheels, airbags and sealing and interior components.

"We have to have a broader customer base."

The problem is especially acute for suppliers in which Toyota owns significant stakes, which include four of the world's top 30 suppliers.

In 2012, Toyota r&d chief Mitsuhisa Kato rocked their world with a new product development push prioritizing common parts.

The shift, which underpins a new platform called Toyota New Global Architecture set to debut in 2015, requires suppliers that can deliver millions of identical parts, from Kentucky to Kenya.

"This is a big turning point for Toyota," he said at the time.

Mass commonization puts pressure on supply chains and profit margins because carmakers expect it to drive down parts prices.

The challenge goes beyond Toyota. Nissan Motor Corp. is rolling out a modular platform that also promises to potentially upend the traditional supplier network. And Honda Motor Co. is overhauling its product development to revolve around six global manufacturing centers.

They will rely as much as possible on locally sourced parts.

Japanese automakers' moves are partly a direct result of five years of export-crushing exchange rates. With the Japanese yen hitting all-time highs against such foreign currencies as the dollar after the global financial crisis, Japanese carmakers rushed to shield themselves from exchange rate losses by building factories overseas.

When Japanese carmakers set up shop in new markets such as Mexico or India, they will give a first look to local suppliers and global non-Japanese giants already there.

And American and European suppliers may be well established in places their Japanese rivals don't even have a toehold.

The new approach is breaking old bonds of loyalty.

Toyota Boshoku Corp., which used to coast on its locked-up seat-making business for its biggest shareholder, Toyota, learned the hard way. When the Camry sedan was redesigned in 2011, it lost the contract to U.S. rival Johnson Controls.

The message to suppliers was clear: Broaden your customer base.

Aisin, the Toyota-affiliated maker of transmissions, brakes, engine components and chassis systems, aims to do just that.

"The profile of our customer base is changing," Aisin Executive Vice President Toshiyuki Mizushima said. "We cannot survive if we just stick to our conventional business style."

Yet change comes slowly, even for a global giant such as Aisin, which ranks No. 5 on Automotive News' list of the top 100 global auto parts suppliers.

Sales to the Toyota Group accounted for a whopping 65 percent of Aisin's revenue two years ago and 64.4 percent last year. Aisin expects Toyota's share to edge downward to 63.1 percent this year.

In North America, it's even more lopsided. Toyota accounts for more than 80 percent of Aisin's sales. By 2020, Mizushima wants non-Toyota customers to chip in 30 to 35 percent of the supplier's total revenue from North and South America combined.

But international megasuppliers will be stiff competition.

Take German supplier Robert Bosch GmbH, the world's biggest parts maker. It aims to double its Asia-Pacific sales by 2020, largely by expanding sales to Japanese automakers.

Sales to Japanese automakers will climb 10 percent this year, predicts Bosch Japan President Herbert Hemming. That would outpace the 3 to 5 percent overall growth Bosch predicts for 2014.

Bosch expects the fastest growth with Japanese carmakers to come in emerging markets. The company can use its international factories to win business from traditional Japanese suppliers that lack the same overseas reach.

The race to commonize parts puts Bosch on carmakers' lists.

Udo Wolz, executive vice president for technology at Bosch Japan, cited one example in which Bosch consolidated the supply of 80 windshield wiper types to just 10 for one manufacturer.

He declined to name that customer.

Commonization undermines a key keiretsu tactic: developing and reserving the best technology for the supplier's top customer.

Toyota's keiretsu suppliers say it's a no-brainer that they reserve their best products for Toyota. The world's biggest car company is invariably their biggest shareholder, their biggest customer and usually a joint development partner on a part.

But that, too, is changing.

"Naturally, we supply such technology to Toyota first," said Aisin's Mizushima. "But with such conventional practices, we can't expect faster growth."

Now, he says, Aisin wants to increasingly work with non-Toyota companies to develop unique products for them first.

Among projects that Aisin has pursued outside Toyota: developing variable valve timing systems for the Nissan Altima sedan and Pathfinder Hybrid crossover in North America.

Denso Corp., the world's No. 2 supplier and about 22 percent owned by Toyota, increasingly offers new products to any automaker, not just its Toyota Group stalwarts.

It is developing a portfolio of safety sensors for such features as autonomous emergency braking, lane-keep assist and full-speed adaptive cruise control.

Denso's expensive, high-end sensor systems typically are reserved for Toyota's Lexus brand, while economical lower-end versions go into minicars made by Toyota subsidiary Daihatsu.

But a new range of sensors to arrive in 2016 will target all big volume mass-market vehicles and be on sale to all carmakers.

Keiretsu suppliers also face a growing challenge from independent Japanese suppliers. Nonaligned parts makers say they have a long history of developing products for a broad range of customers and don't play favorites.

"We are under no restrictions in having conversations," says Kunihiko Ohnuma, CEO of unaligned Hitachi Automotive Systems. "Denso and Aisin are very good companies, but when they start talks, later on they always refuse to supply the latest technology because they have to ask Toyota whether they can."

Three of the world's top 20 suppliers -- Hitachi, Sumitomo Electric Industries and Yazaki Corp. -- are Japanese non-keiretsu players.

Independent companies may also have bigger overseas footprints.

"We serve almost every company," said Hiroya Miyazaki, vice president in charge of automotive bearings at NSK, a Japanese supplier of ball bearings and electric power steering systems that ranks No. 39 on the Automotive News list of top suppliers. "We have a global production network, so it's a big advance for us to get global business."

That fact isn't lost on Toyoda Gosei's Arashima.

His company has 64 group companies in 18 countries and 31,600 employees worldwide. Yet to him, it's still a parochial player.

That is because Gosei's overseas business follows in Toyota's footsteps, while product development still feeds through Japan.

"I want to change this company into a true, real global supplier," Arashima says. Gosei has embarked on foreign acquisitions to reach more non-Toyota customers.

In April, it bought German rubber products maker Meteor Gummiwerke K.H. Baedje GmbH for access to Daimler, Audi and BMW.

"We know Japanese engineers quite well, but we don't know the way BMW operates," Arashima said. "We've had some difficulties because the way they do things is a bit different from what we know. The German engineers from Meteor can help us."

Still, there is a big downside for Japan's supplier sector, even as some companies tap new business overseas: the international crackdown on bid rigging at Japanese auto suppliers that has hit them with fines in the United States, Europe and China.

Divvying up business with Japanese carmakers has been part and parcel for decades in the home market. But the practice ran afoul of international norms as suppliers expanded overseas.

Bid rigging was one way smaller suppliers could guarantee themselves a piece of the pie: By agreeing not to challenge big players in return for guaranteed business for a smaller lot.

With regulators stamping out collusion, the Japanese supplier sector is turning more dog-eat-dog. And smaller Tier 3 and Tier 4 suppliers in Japan are being left behind.

As Japan's big suppliers shift operations overseas, they look for ways to mitigate job cuts in Japan. Often, they simply cut their own suppliers loose and bring that work in house.

NSK did that with its electric power steering business. It is transferring two production lines to China from Japan this year.

But to minimize layoffs, NSK is co-opting the gearbox casting and machining processes from a supplier.

Masatada Fumoto, senior vice president in charge of NSK's automotive components unit, said it's "something every Japanese company is facing."

As for job losses further down the supply chain?

"That's their problem," Fujimoto said.

"Japanese are very creative and have overcome such issues in the past. I'm sure we can overcome again."