Nissan to Cut Production Costs by 12%

Feb. 20, 2006; Kae Inoue writing for Bloomberg News reported that Nissan Motor Co., Japan's second- largest carmaker, plans to cut production costs by 12 percent as surging commodity prices threaten to curb earnings.

The company will start making different models on the same production line in Taiwan, Thailand, South Africa and Indonesia, said Executive Vice President Tadao Takahashi in a Feb. 17 interview. The carmaker also plans to use 80 percent of global factory capacity by the year ending March 2008, from 75 percent last fiscal year, to achieve the cost cuts over three years.

``It's extremely important to continue cutting costs,'' Takahashi said. The Tokyo-base maker of Altima sedans already has 18 so-called flexible production lines in Japan, the U.S., Mexico, Europe and China.

Nissan Chief Executive Officer Carlos Ghosn, poised to report a sixth year of record profit for the year ended March 31, needs to hone efficiency to compensate for higher prices for raw materials. He has cut 1 trillion yen ($8.5 billion) in costs since taking the helm at the company in June 2000. The new technology has allowed Nissan to retool its assembly lines to make a new model in one and half months, compared with more than three months in 1999.

``Every company that's successful has to come up with ideas to reduce costs,'' said Koji Endo, Credit Suisse's Tokyo-based analyst who said Nissan shares will ``outperform'' the market. ``Nissan will probably achieve the cost cut target.''

Nissan also plans to increase the number of suppliers that make parts at its production sites, measure factories more rigorously against each other and offer more models.

Boosting Utilization

Nissan plans to sell 28 new or redesigned vehicle models in the three fiscal years ending March 2008. Nissan, 44.3 percent owned by Renault SA, expects to sell 4.2 million vehicles globally in the year ending March 2009. That's up 16 percent from an estimate of 3.62 million units, which the company plans to sell this business year.

The automaker, boosting capital investment by 13 percent to a record 540 billion yen this fiscal year, also expects return on investment capital to exceed 20 percent, Takahashi said.

``It's important to keep the factory running steadily and to do so, we need to be able to offer models suited to customers' preferences and local needs,'' said Takahashi. Nissan's factories in Japan have a utilization rate of about 85 percent, which is among the highest, Takahashi said.

Steel Costs

Prices of cold-rolled steel sheets in Tokyo rose 13 percent to 87,000 yen as of the end of fiscal first half in September, according to data from Japan Metal Daily's Web site.

Nippon Steel Corp., Japan's largest steelmaker and a supplier to Nissan, said it charged an average of 75,600 yen per ton for steel in the third-quarter, 20 percent higher than the same period a year earlier. JFE Holdings Inc. said on Jan. 31, it charged an average 75,600 yen per ton for steel in the six months to September, 31 percent more than a year ago.

The automaker's so-called Nissan Internal Benchmarking compares productivity, quality and efficiency at 17 vehicle factories around the world using more than 110 criteria.

To gauge monthly performance of Nissan's plants, Takahashi focuses on capacity utilization, whether the production is on time, paint quality, overall quality, and whether vehicles are made in the same sequence in which they are ordered, he said.

``By making factories compete with one another, we have been able to see improvement,'' said Takahashi.

Suppliers

Having suppliers on site also helps Nissan cut costs, he said. Calsonic Kansei Corp., 41.2 percent owned by Nissan, has its own production facility in three of Nissan's factories in Japan to make air conditioning systems and radiators, while Visteon Corp. makes auto interiors at Nissan's Canton, Mississippi plant.

``Nissan is the only major Japanese automaker that has suppliers producing modules and parts in a Nissan factory, which helps cut logistics costs and inventory costs,'' Endo said.

Nissan may build new factories or expand after March 2008 when existing capacity is stretched to the maximum, Takahashi said. The automaker is working with Renault to start selling and making vehicles in emerging markets such as Russia and India by cooperating, he said without elaborating.

Renault, France's second-largest carmaker, will sell Indian-made Logan sedans in a venture with Mahindra & Mahindra Ltd. starting in 2007.

India, Asia's fourth-largest economy, is among the so- called emerging markets that Ghosn said Nissan ``still isn't tackling,'' including Russia, Eastern Europe and South America.