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Crumbling keiretsu networks good sign for foreign firms and Japan

by Jochen Legewie

Special To The Japan Times

For years and decades, foreign observers have cried foul over various barriers — both existing and perceived — to the Japanese economy. Their main target is usually the keiretsu, the closely knit business networks automakers exclusively maintain with groups of 200 to 300 suppliers.

These so-called vertical groupings were regarded as the main hurdle for foreign companies doing business with Toyota & Co. But this seems to be changing.

Over the past 12 months, announcements by Toyota, Honda and other automakers have sent shock waves through the rings of keiretsu suppliers. More importantly, the first organizational changes have actually begun.

In November 2012, Honda held its first mega-supplier meeting in the United States and did not invite any of its affiliated domestic suppliers. Honda promised to reduce its reliance on the keiretsu firms in exchange for lower prices from the foreign suppliers.

Honda is targeting a 30 percent reduction in procurement costs by 2017 by using more common parts. Commonality for its three top models is to climb to 50 percent by that time, and Honda actually began its first experiments with outsourcing component design and procurement to parts makers earlier this year.

Toyota announced similar targets in March. In the short run, development costs are to be reduced by 30 percent, mainly by increasing parts commonality to a minimum of 30 percent. The new framework is called Toyota New Global Architecture, and the first models developed under TNGA will hit the market in 2015.

Nissan, which has been reducing its dependency on keiretsu suppliers for many years, is hoping to slash development and procurement costs 30 percent by 2020. Again, the focus is on common parts use, with Nissan shooting for a commonality rate of 50 percent in all Nissan/Renault vehicles by that time. Nissan launched its Common Module Family platform concept in 2010, and first models will hit the market by the end of the year.

The keyword behind these development changes is “modular production,” a method long championed by Volkswagen. It has been masterfully implemented throughout the many brands maintained by the Volkswagen Group and it has put the company far ahead in common parts use. This has allowed Volkswagen to achieve massive savings in development and procurement, and is clearly the main factor behind its recent ascent in the global sales rankings.

With Japan’s automakers on track to mimic modular production, parts and material suppliers are beginning to see a change in their needs. Among these is a global presence, which is becoming crucial. It is now at least as important as the other three key factors of quality, technology and service.

Global presence is also the weakest point in many keiretsu suppliers. While this opens a window of opportunity for globally active foreign suppliers, the design and procurement decisions at Japanese automakers are still being made mainly at home, rather than at their many plants around the world. This is why foreign suppliers focus on strengthening their Japanese operations. Just look at the ¥3.5 billion investment recently made by Johnson Controls of the U.S. for a new testing center in Yokohama, or the decision of Germany’s Continental to hire 100 additional engineers for their Japanese operations.

Although auto sales in Japan might stagnate or even decline, the global production of Japan’s automakers is rising steadily. In 2012, it even hit 24.7 million units, accounting for more than 30 percent of global vehicle production. The U.S. and German automakers (at 19 and 16 percent, respectively) are nowhere close to having such an international impact.

This means that no global parts or material supplier that is serious about selling big to the auto industry can ignore the potential of selling to the Japanese. But despite the new openness to foreign suppliers, generating new business from Toyota & Co. will neither come easy nor overnight.

The increase in common parts comes with even higher quality requests because it also increases the risk of costly global recalls. It is thus imperative that foreign suppliers build relationships of trust, and do it mainly here in Japan.

They are not only facing rising competition from their peers, but also from Japanese suppliers who are already cranking up efforts to internationalize via tie-ups with local automakers, and increasingly with overseas firms.

But overall, the trend is clear: The keiretsu system is losing importance and foreign suppliers are making greater inroads into automobiles — Japan’s largest and internationally most competitive industry.

This makes us witnesses to a major business reform, one brought about not by politics, but by the simple power of international competition.

These changes have nothing to do with “Abenomics” and Prime Minister Shinzo Abe cannot claim credit for it. But they will be a major factor in keeping the Japanese automotive industry internationally competitive and will contribute significantly overall to the uptrend in the Japanese economy.

Jochen Legewie is president of German communications consultancy CNC Japan (See his blog: www.cncblogs.jp).