Toyota leans on Denso in keiretsu comeback

TOKYO — Denso Corp.'s big new r&d headquarters here is a declaration that the megasupplier intends to become a global force in the emerging technology of autonomous vehicles.

But Denso's new push — involving plans to invest more than $3 billion through 2020 and more than quadruple its advanced engineering staff — signals something equally profound in the world auto business: Japan's mighty keiretsu system is reasserting itself.

Keiretsu, the decades- old system of financially connected suppliers and customers, is often dismissed by critics as an inefficient throwback to a day when Japan's automakers struggled to compete globally. But in a new era in which vast scale is key to competitiveness, Toyota Motor Corp. is suddenly finding familiar potential in its colossal kingdom of loyal and affiliated suppliers.

Denso, for its part, has abruptly emerged as the lynchpin in a whole host of new joint ventures. The enterprises bring together Toyota, its wider supplier network, and even other Japanese automakers as they confront an industry thrown into upheaval by autonomous driving, electrification and connectivity. When size suddenly matters, the old keiretsu counts.

As Toyota Motor's top supplier, Denso is a global giant by almost any measure, with almost $41 billion in 2017 sales and ranked No. 2 on Automotive News' list of the top 100 global suppliers. It is 24 percent owned by Toyota.

But even Denso sees itself as a latecomer to the self-driving car race. Yet by leveraging Toyota's keiretsu and recruiting new startups to the ranks, executives hope Denso can quickly leapfrog to the head of the pack — not only in autonomous driving but in a gamut of futuristic fields that require colossal investment and newfangled expertise foreign to legacy automakers and suppliers alike.

"The keiretsu suppliers, if they successfully join forces, can be a mighty weapon," said Tatsuo Yoshida, senior auto analyst at Sawakami Asset Management in Tokyo.

Denso was a centerpiece in two newly announced joint ventures in August alone to begin harnessing Toyota Group resources.

In one, Denso said it will join Toyota Group transmission maker Aisin Seiki to develop electrified driving modules that combine a transaxle, motor-generator and inverter.

In the other, Denso and Aisin Seiki said they will partner with brake manufacturer Advics Co. and steering supplier JTEKT Corp., two other Toyota Group giants, to develop the integrated electronic control unit software that acts as the brains for automated driving.

The new game in supplier circles is delivering integrated component systems, not simply individual parts. And nowhere is that more important than in autonomous driving, where the software must fuse the operation of sensors, drivetrains, braking and steering.

"We are now in a life-or-death situation," Denso President Koji Arima told reporters Aug. 27 after announcing the ventures. "We will bring together our strengths and take a new step. Even though we have high levels of technology, whether you can create a system is what matters."

Arima has positioned Denso at the nexus of several similar consortiums.

In March, Denso joined Aisin Seiki and Toyota Motor in investing $2.7 billion in another joint venture called Toyota Research Institute-Advanced Development. That project combines staff from across the Toyota empire to develop software for self-driving cars.

Denso also was a founding partner in EV Common Architecture Spirit Co., an alliance between Denso, Toyota Motor and Mazda Motor Corp. to develop the architecture and components of electric cars. Subaru, Suzuki, Daihatsu and Hino later joined.

All the while, Denso has been busy expanding the realm of partners through aggressive investment in startups from around the world that might have new technologies to tap.

This year, Denso took a stake in U.S.-based Metawave Corp., which develops millimeter-wave radar for detecting vehicles and pedestrians. It also bought in to Dellfer, another young U.S. company that focuses on cybersecurity for connected and autonomous cars.

That focus on the future is now on full display at Denso's newly opened Global R&D Tokyo.

In an office block in Tokyo's waterfront district, computer programmers alternately huddle in consultation, hammer out new algorithms and then test their handiwork on a self-driving car simulator that seems pulled straight from a local video game center.

The Toyota logo on the simulator's steering wheel leaves little doubt about the final destination of the reams of autonomous-driving code being generated here.

But its engineers must collaborate with a multitude of old-school suppliers and pint-sized startups, said Hajime Kumabe, executive director of the Tokyo r&d office.

The Japanese call it "open innovation," a big bet on massive, collaborative cross-fertilization.

"Autonomous driving requires so many technologies, many of which Denso has never undertaken," Kumabe told Automotive News. "Denso is very good at developing technologies one by one, in house. But that practice doesn't work anymore. We need open innovation to obtain new technologies."

The approach highlights the resilience of Japan's keiretsu system.

Some Japanese automakers, notably Nissan Motor Co., have slowly dismantled their group supplier networks over the years, prioritizing competitive costs over corporate loyalties.

Toyota Motor President Akio Toyoda is no less concerned with keeping his company efficient. But in contrast, he is ordering Toyota's keiretsu to close ranks, partly through the blitz of new joint ventures. And when Toyota embarks on a new campaign, Denso is almost always in the mix.

Toyota Group companies account for about 46 percent of Denso's global revenue. Together, the Toyota Group can draw from a vast pool of resources spanning more than a dozen companies covering everything from auto parts to steel and real estate. Toyota Motor usually hand picks the top executive at key suppliers to keep everyone on the same page.

This year, Toyota Motor dispatched Kiyotaka Ise to lead Aisin Seiki. Ise was previously the global boss of Toyota's Lexus luxury brand and the head of Toyota's advanced r&d. Toyota also appointed its chief accounting officer, Tetsuya Otake, as president of Advics.

But coaxing cooperation among such a disparate group brings risks.

"If it's not done well, it can just be an aggregation of inefficiencies," Yoshida said.

That is one reason keiretsu giants such as Denso, Aisin and JTEKT have worked so diligently in recent years to expand their customer bases beyond Toyota. If they coast along with guaranteed Toyota business, the thinking goes, how competitive can their products truly be?

After Toyota, Honda and Fiat Chrysler are Denso's next-biggest customers.

Denso's Global R&D Tokyo opened in April to oversee a mushrooming network of satellite offices around the world that already includes locations in Finland and Israel. It's part of an effort to attract top-tier international talent from the high-tech industry, where old-school players such as Denso are thrust into competition with the likes of Google or Apple.

The facility has about 230 employees today. But Denso wants some 1,000 software engineers in two years. It has earmarked $3.14 billion for autonomous driving r&d through 2020 alone.

"I think this is aggressive and challenging," Kumabe said of Denso's direction. "Even if we start with small steps, we need to focus more on speed."

To generate buzz, Denso located the autonomous vehicle headquarters in cosmopolitan Tokyo, rather than in its hometown of Kariya in the backwaters of central Japan.

Denso plans to have a Level 3 autonomous driving system ready for deployment in retail vehicles, not just fleet, in the early 2020s, Kumabe said. Denso wants to supply the electronic control units, the sensors and the algorithmic software that make the whole system work.

Level 4 systems should be available by the mid-2020s, he said.

Denso's Level 3 prototype can stop and go with traffic signals and negotiate intersections. A demonstration video shows vehicles driving at normal speeds through blizzard conditions, even though the road is completely obscured by snow.

Japanese suppliers and automakers were off to a slow start in autonomous driving, partly because of restrictions on public road testing in Japan, Kumabe said. But regulations have been relaxed, and Denso has filed for approval to begin testing on Tokyo's streets.

"Our technology in Japan is not behind global peers," Kumabe said. "But the timing of public road testing was behind. In order to get good algorithms, we need good data. And public road testing plays a big role in data collection."

Kumabe counts the German competitors Bosch and Continental AG among Denso's fiercest rivals. Continental drew blood with a big breakthrough in 2015 when it began supplying a precrash emergency braking system to Toyota for use across its compact car range. Marketed as Toyota Safety Sense C, Continental's package is now in such nameplates as the Corolla, Yaris and Prius C hybrid. That order took a big slice of a pie that might otherwise have gone to Denso.

But with the industry evolving so quickly, Kumabe says, competitors could just as easily swoop in from Silicon Valley, China or elsewhere. And when they do, it pays to keep an open mind.

"They are all rivals," Kumabe said. "But they also might be future partners. In this era, it is very difficult to work alone. So, we also need to be well prepared to collaborate."