Akebono looks for way forward after GM pullback

TOKYO — General Motors giveth, and General Motors taketh away.

That's the moral of the story of Japan's Akebono Brake Industry Co., a global maker of brakes that has spent the past three decades demonstrating how well a Japanese parts supplier can succeed in the U.S.

Buoyed by surging business with GM, along with Ford, Chrysler and a slew of Japanese automakers with American assembly plants, Akebono raked in millions, opened American brake factories and hired thousands of U.S. workers.

But this year has been a different story.

Akebono spent 2019 seeking financial assistance in Japan to save the company following a crash in its U.S. business, and it now intends to close three of its four U.S. plants and lay off workers — something Japanese businesses rarely do. Its problems were complex and internal, but in the end, the stone that brought down the house was its loss of GM business.

Akebono offers a cautionary tale about the dangers of diving too deep into the local market. It shows how even a Japanese high-flyer can get tangled in the seesawing fortunes of a fickle U.S. market where — unlike in the Japanese industry — automakers and suppliers do not have cross-ownership relationships or "family understandings" that guarantee future contracts.

What went wrong?

It appears to have been a simple case of miscalculation. Akebono assumed its American relationships would hold tight, and they did not.

A decade ago, the supplier was happy to count GM among its biggest customers. But its over-reliance on GM became a problem that eventually covered the Japanese company in red ink and took Akebono to the brink of collapse, desperate for a bailout.

A GM spokesman said the automaker, as a policy, doesn't comment on a supplier's business.

In September, after years of struggle, Akebono was finally thrown a lifeline by creditors that forgave about $517 million in debt as part of a tough-love revival plan.

To earn that, Akebono agreed to dramatically scale back its global operations. Its total revenue — about $2.24 billion in the most recent fiscal year — will plunge by half under the multiyear restructuring plan, which ends March 31, 2024. The company will shutter six plants worldwide, including three in the U.S., and cut thousands of jobs in the bid to restore profitability.

The CEO who presided over the downward spiral has stepped down, and a new boss poached from Japanese motor-maker Nidec Corp., Yasuhiro Miyaji, took the helm Oct. 1. At its U.S. subsidiary, headquartered in Elizabethtown, Ky., three top American executives have resigned, and the company has installed Japanese executive Takeshi Saito as CEO, while an American is the president.

The brake-maker will now rely more heavily on its Japanese roots. The hope is to shore up sales with more North American business from Toyota Motor Corp. and Honda Motor Co., said Yoshio Arai, senior manager of corporate communications.

"A Japanese-and-American duo will work together to move the business forward," Arai said in September, shortly after shareholders approved the sweeping bailout plan and management shuffle.

It was a different story in the 1980s and 1990s.

Back then, Japanese suppliers hit on an effective business strategy to crack the big U.S. market, where most of them were still unknown. They would ride the coattails of a familiar Japanese carmaker that was setting up shop as a U.S. manufacturer. And they would use that foothold to go after business from the Detroit 3, hoping to outbid an established U.S. parts maker or win contracts with better technology, performance or quality.

It worked for Akebono, which was partly owned by Toyota Motor Corp. and was Japan's largest brake supplier.

In 1986, Akebono formed a U.S. joint venture called Ambrake — its first two letters evoking the word "America" — with its leading U.S. competitor, Delphi Chassis Systems, at that time an in-house unit of GM. The alliance gave Delphi Chassis access to the growing number of Japanese automakers building cars in the U.S.; it gave Akebono access to GM. Ambrake would supply Toyota, Honda, Nissan and a new GM automaking venture that held bright promise for big volumes in the decades ahead, Saturn Corp.

Akebono maintained its North American executive offices in suburban Detroit to be as close as possible to GM. But the U.S. auto landscape was evolving. GM could see disruption ahead and had begun rearranging its internal parts operations to operate separately from the automaker. GM spun off Delphi as a public company in 1999. But in 2005, Delphi filed for Chapter 11 bankruptcy protection.

Akebono swooped in to buy its flailing partner's stake in Ambrake, giving the Japanese company sole dibs on the big prize of GM business. Akebono rechristened its U.S. operations under its Japanese name and relocated the headquarters to Elizabethtown.

The next few years would be a roller coaster for Akebono. The 2008-09 financial crisis and GM's own bankruptcy caused Akebono's outlook to change, and it scaled back its U.S. factory capacity. But the market rebound that followed nearly gave the supplier whiplash.

When its U.S. demand started surging around 2013, Akebono struggled to keep up. At first, its employees were asked to work overtime, and then on weekends, and eventually on holidays, seven days a week.

"That's how we managed to get by," said spokesman Shingo Suzuki.

That hectic factory pace left no time for plant maintenance, and Akebono's equipment became increasingly glitchy.

As a workaround, Akebono began relying on the costly practice of flying in parts from other plants around the world to keep customers on schedule.

"First, our labor costs rose," Suzuki recalled. "Then emergency shipping costs followed. As such, costs piled up considerably, pushing us into deep trouble."

A reckoning came in 2014 and 2015, when GM prepared for the parts bidding on a major new program to produce pickups and SUVs, the bread and butter of GM's business. Akebono had persevered through tough times to become GM's longtime loyal supplier. But GM took a deep look at Akebono's mounting operating troubles and thought again.

"GM people saw the situation at our plants and concluded that it would be difficult to ask Akebono. That was the reason why we missed out on that bidding," Suzuki said.

As a result, Akebono has booked net losses in three of the past five fiscal years and squeaked by with only slim profits in the other two.

Its crowning blow came in the most recent fiscal year, ended March 31, when it sank to a net loss of ¥18.3 billion ($169.1 million) on lower North American volumes and rising costs.

"Further management challenges occurred," Akebono explained to its shareholders in September as it outlined its turnaround strategy. There was an "increase of costs due to a spike in the raw materials markets, and the failure of the planned reduction of the fixed cost in response to reduced sales resulting from lack of orders of new-model vehicles."

The corporation also took a parting shot at its outgoing American bosses, apparently blaming them for the results: "The local-led management system which had been strengthened in the preceding year could not fully cope with those challenges, and as a result, the Company recorded large-scale losses," it said.

In explaining the nomination of Miyaji as global CEO to shareholders, Akebono highlighted his experience in winning Japanese business, first at German supplier Bosch and then at Nidec.

"At both companies he expanded their businesses with Japanese automakers, acquired new customers, and created very strong relationships with numerous Japanese automakers," Akebono said. "It is indispensable for us to recover the trust of automakers, and ... Mr. Miyaji is the best person who can recover the trust of automakers and lead the expansion of our business."

The pivot away from GM has already begun. GM accounted for 28 percent of Akebono's global sales in the fiscal year ended March 31, 2015. That shrank to 26 percent in the fiscal year ended March 31, 2019, and 21 percent in the fiscal first quarter ended June 30.

Nissan is now Akebono's second-largest customer, contributing 13 percent of its sales. Toyota, which is Akebono's biggest shareholder, with an 11.6 percent stake, is No. 3, at 12 percent.

The debt relief plan buoys Akebono as it cuts costs and slashes production.

The planned closure of six plants worldwide accounts for about a third of Akebono's production footprint. Arai said Akebono still hasn't determined how many people will be cut, but Japan's Nikkei newspaper reported that the plan is to eliminate 3,000.

The three U.S. plants to be shut down include the Columbia Plant in West Columbia, S.C., which makes disc brakes, corner modules, castings and other components, and the Clarksville Plant in Tennessee. That plant produces disc rotors and drum brakes, in addition to disc brakes and other parts.

Arai said a decision hasn't been made on the third plant. Akebono's other two U.S. locations are in Elizabethtown and Glasgow, Ky. Arai said the South Carolina and Tennessee plants will likely shut down first. A detailed timeline of the restructuring is expected to be announced in mid-November, he said.

The supplier also has a factory in Guanajuato, Mexico, making disc brakes, drum brakes and components, and that plant is expected to stay open, Arai said.

Akebono is now seeking a buyer for its factories in France and Slovakia, and those will close if no buyer emerges. The company additionally will shut down its advanced engineering center in the U.K.

Despite the company's plan to rely more on its traditional Japanese customers, its Japan operations are not escaping the pinch of restructuring. Akebono will gradually downsize and close its Akebono Brake Sanyo Manufacturing Co. subsidiary in western Japan, as well as its Akebono Brake Fukushima Manufacturing Co. subsidiary, which makes drum brakes, linings and disc brake pads, in northern Japan.

The company will also shift production of low-cost products, such as drum brakes, to overseas plants and refocus Japanese output on higher-margin products, such as electric brakes.

But unknown is whether the supplier will ever be able to climb back to its previous heights in the U.S.