Nissan's suppliers balk at demands for 15 percent price cut

June 27, 2002- Bloomberg News is reporting that Nissan Motor Co. is meeting resistance from suppliers to its demand that they cut parts prices an average 15 percent over three years, making it tougher for Japan's No. 3 automaker to meet cost-reduction targets.

"Some suppliers say they can only commit for this part but not the other one," Itaru Koeda, Nissan's executive vice president for purchasing, said in an interview. "Or they can only give a 5 percent reduction in the first year and have to consider the remaining two years."

Nissan's failure to wring price concessions from suppliers on purchases equal to 60 percent of sales would threaten the carmaker's profit targets, investors said. Nissan, 44 percent owned by Renault SA, expects to post a third record profit this year thanks to lower costs and the introduction of new models.

"The additional 15 percent reduction is quite severe for the parts makers and it's usually the automakers that gain from cutting purchasing costs," said Dai Nishiyama, who helps manage $8 billion at SG Yamaichi Asset Management Co. Still, "the bottom line is that parts makers need to cut costs to survive."

Nissan shares fell in Tokyo for four of the past five days, and dropped as much as 3.6 percent today to 787 yen. Up to yesterday's close of trading, the stock had gained 17 percent so far this year.

Nissan President and Chief Executive Officer Carlos Ghosn said he's confident the remaining parts makers will sign on for the three-year plan that began on April 1.

"We aren't concerned about the 15 percent target," Ghosn said in an interview. "The big challenge for us is that we try to come up with the most competitive results for us and for the suppliers."

Ghosn said Nissan has "finished most of our talks with our suppliers," which total about 700 companies.

The maker of March/Micra compact cars shaved about 20 percent off its purchasing costs in the two years to March 2002, meeting its targets a year earlier than originally planned. The cost cuts now sought by Nissan will save it about 400 billion yen over three years, analysts said.

Auto parts makers were caught unawares by the speed of Nissan's first round of cuts, which placed unexpected financial strain on some of them, companies said.

"Nissan said they were able to finish their plan in two years and not three, but I don't think there are parts makers that have been able to achieve that," said Calsonic Kansei Corp. President Koichi Takagi last month. "We need to meet the 15 percent cost reduction in the next three years as that's the benchmark to beat global competition, but we haven't said we will cut 5 percent in the first year."

Nissan owns 32 percent of Calsonic Kansei, and had been in talks to sell its stake to Delphi Corp., the world's biggest auto-parts maker.

Ichikoh Industries Ltd., an automotive lighting maker 20 percent owned by France's Valeo SA, Europe's No. 2 parts maker, said it hadn't yet decided whether to accept Nissan's price demands. Nissan sold its 20 percent stake in Ichikoh as part of its plan to unravel shareholdings.

"Suppliers cut costs to the bone in the first three-year plan, which turned out to be only two years, and now they are being asked to cut more," said Hiroya Shirato, a director at the Japan Auto Parts Industries Association, an industry group representing about 470 members. "There may not be enough room for further cost reductions."

Renault found Nissan was paying as much as 40 percent more for its parts than the French automaker when executives arrived to help steer the Japanese company in 1999.

"We've got 15 percent more to go," Ghosn said. That cut still won't be enough to give Nissan an edge, "but at least we won't have a competitive disadvantage," he said.

Nissan probably saved about 600 billion yen on purchasing costs in the two years ended in March, from the 3.3 trillion yen spent in the year ended March 2000, analysts estimate.

"All of the main suppliers have come back to Nissan with an answer to the requested cut," Nissan's Koeda said, declining to say how many demanded concessions.

The maker of Altima sedans has been trying to reduce both supplier numbers and its shareholdings in them. In the last two years, Nissan cut the number of suppliers to 700 from 1,145, Koeda said. Of those remaining, 28, including Calsonic Kansei and Unisia Jecs Corp. rely on Nissan for more than a fifth of sales.

Other automakers are also squeezing price cuts from suppliers, although Nissan is more open about its plans, said the industry association's Shirato. These include Toyota Motor Corp. and Honda Motor Co.

Mitsubishi Motors Corp., 37 percent owned by DaimlerChrysler AG, is also trying to shed affiliates, while Toyota and Mazda Motor Corp. have consolidated their regional affiliate groups.

For Nissan's suppliers, the incentive to sign up includes tapping the automaker's expansion plans and its ties to Renault.

"The carrot for the parts makers is Nissan's plan to increase sales volume by 1 million units in the next three years," about 40 percent more than in the business year just ended, said SG's Nishiyama.