Cost-conscious automakers rediscover value of keiretsu

Tokyo July 2, 2005; The Asahi Shimbun reported that in a reversal of recent procurement policies, automakers are forging closer relationships with suppliers in efforts to enhance long-term competitiveness.

In the late 1990s, observers said the industry's keiretsu system, under which automakers vertically integrated their operations with affiliated parts makers, had all but collapsed.

When Nissan Motor Co., Mitsubishi Motors Corp. and Mazda Motor Cop. fell under the wing of foreign companies, they began putting price ahead of affiliation in parts procurement.

However, industry executives now say they have found that benefits from long-term relations with suppliers outweigh the value of cheap parts.

The industry's latest move to re-establish automaker-supplier relationships came this week, when MMC set up an association of about 160 large-volume suppliers.

To seamlessly cut costs and improve quality, the company will regularly conduct research with parts makers on technical requirements, send engineers to their factories and work with suppliers from an early development stage.

Many of the association members used to belong to the Kashiwa-kai, a similar organization that MMC disbanded in 2002 after DaimlerChrysler AG acquired a large stake in the company.

In a typical keiretsu relationship, parts makers conduct research on materials or assembly methods and invest in production or distribution facilities, based on information supplied by automakers, even if orders are not committed.

Executives say they are not simply reviving keiretsu groupings, in which some suppliers tended to take the manufacturer's patronage for granted.

MMC President Osamu Masuko told parts makers that the struggling automaker cannot support all members of the new association as though they were a convoy.

The company plans to urge parts makers to continually squeeze costs even after they achieved initial cost reduction targets, officials said.

In the days of the Kashiwa-kai, suppliers would hobnob with MMC executives on trips and golfing, but those social events will not be part of the new association's activities.

Nissan, which sold its holdings in most of its 1,394 affiliated suppliers following a capital alliance with France's Renault SA in 1999, raised its stake in Calsonic Kansei Corp. to 41.7 percent in January, from 27.6 percent.

President Carlos Ghosn, who spearheaded the past divestments, said his policy remains unchanged, emphasizing that Nissan may obtain a controlling interest in indispensable partners but withdraw investments from uncompetitive suppliers.

Calsonic Kansei is a major supplier of modular automotive systems, such as dashboards preinstalled with meters, air-conditioning units, instrument panels and other associated items.

Still, a company executive said he got Ghosn's message when Nissan bought such components from U.S. rival Visteon Corp. for some of its models assembled in North America.

Mazda, one-third owned by Ford Motor Co., revived Japanese-style automaker-supplier relationships in fiscal 2002, only two years after it switched to U.S.-style competitive bidding.

The company slashed procurement costs by 25 percent over the past three years. It has launched a new program to achieve higher targets through closer cooperation with parts makers.

Honda Motor Co., the nation's only major automaker that does not have a group of affiliated suppliers, raised its stake in auto body producer Kikuchi Co. to 20.7 percent in May, from 8.3 percent.

Executives say there are limits to cost reductions if they are to be achieved through price competition alone.

MMC, after disbanding the Kashiwa-kai, reduced procurement costs by 20 percent over the three years through such measures as buying Chinese-made parts.

According to one industry executive, however, MMC's relationships with parts makers deteriorated, and the negative impact exceeded cost reductions.

An official at one MMC supplier said: "When we knew we might be dropped from the next round of procurement, we were reluctant to incorporate all of our technologies into MMC parts."

Perhaps most important, industry leader Toyota Motor Corp. has defied the industry trend away from the keiretsu tradition and steadily cut down on costs on the strength of its firm grip on suppliers.

Groupwide cost-cutting is a primary reason behind the company's recent record earnings.

Toyota slashed production costs of about 170 components by 30 percent on average over three years through March 2003. It launched a new cost-cutting program in the current fiscal year