By on January 2, 2015



OK, you probably can’t decipher that. The news – this headline from Yomiuri – is the latest in the supplier antitrust cases that ring the world, from Japan and Korea through the US to Germany. Even China has gotten into the act, slapping fines on firms that charge “excessive” prices for OEM aftermarket parts, though that is a reflection of price discrimination (selling for what the market will bear) rather than collusion.

Fines to date now total $2.5 billion. Even in the auto industry, that’s serious money. Whether we see private antitrust suits (which in the US carry treble damages) is unclear. Will Toyota be willing to go after its suppliers, without whom it cannot produce cars? Will it tighten its purchasing operations, where likely the “ordinary” parts central to collusion have younger, less experienced purchasers?

Now at one time, 50 years ago, kickbacks were not unusual in the US industry, but the one account of the internals of the cartels – a Nov 16th scoop by Hans Greimel of Automotive News in Tokyo – carried no suggestions of suppliers getting buyers to turn a blind eye. Instead, it’s the intrigue of classic cartels in the US, meetings in obscure locations, rules for who is to bid in what manner to make their behavior less obvious to purchasers.

The excuse suppliers give is that they’re in a low-margin business. OK, but why should we care? Car companies need to pay enough that suppliers hang around for another model, but they’re in a low margin business, too — we customers have a plethora of mid-sized cars and small CUVs to choose among, and despite all the attention TTAC readers pay to hot vehicles, in the end price does matter. Furthermore, all of us who are in one way or another in the car business (and surely no one reading this blog does without, and without owners there is no car business) – anyway, all of us want the industry to focus on their core business, not on gaming the system. We don’t want management resting on its laurels, especially when they’ve won their prize by cheating.

Anyway, I’ve done my judge’s reports for my portion of the site visits for this year’s round of 35 PACE Award finalists. There are many suppliers out there that by the 5% of sales metric are high-tech firms; it would be bad for the industry if Japanese suppliers aren’t among them. However, the gut feeling I get from the last few year’s of closed-door, non-disclosure presentations by PACE finalists is that Japanese suppliers aren’t in the game the way they used to be. I don’t see the innovative firms I visit benchmarking themselves against Japanese suppliers, while I see bigger and bigger sales shares for these US- and Europe-headquartered firms coming from Japanese nameplates. [For a story that reflects this, see a Dec 9th article by Hans Greimel on Toyota’s revamping of R&D among its closely-held suppliers.]

Demographics are at play. While more Japanese graduate from college than ever before, 40-plus years of very low fertility means their absolute numbers are down; the number of Japanese who turned 20 in 2014 is half that of 1969 – so that (mortality aside) the number of 55-year-olds, at the experienced end of their engineering careers, is twice that of those potentially taking up the profession. With the number studying abroad in sharp decline, those graduates are even less likely to have experience living in English-speaking countries than in the past. The pool of potential engineers is smaller, and with a small number of exceptions these firms have only Japanese-speaking engineers in their home office. The flip side is that the US looks increasingly good as an engineering location, with more suppliers and car company engineering centers in a day’s drive from metro Detroit than ever before. In contrast, operations are scattered in Europe and China.

So while the news focuses on Takata and whether they will see a big drop in business over the next few vehicle development cycles, we really ought to look as well at the list of firms in the various cartels. Won’t their customers opt when they can for other suppliers? – most of the members of the busted cartels are Japanese companies. Yes, the yen is weak, creating a “buy Japan” incentive. However, no car company wants the risk of long logistics lines; JIT (just-in-time) manufacturing is the industry norm. There’s no guarantee, either, that the yen will stay at ¥120/US$, down from ¥100 in June and ¥80 2 years ago. So this is one more strike against the Japanese industry (in the sense of “Made in Japan”) and against the Japanese supplier industry (since they are more domestic than their US and European rivals).

I wish them a Happy New Year – 謹賀新年. At least for Japanese suppliers, 2014 wasn’t a very good one. I’m afraid, though, 2015 won’t be any better.

Oh, and that headline: ¥7.1 billion in fines on [the shipping company] NYK Line in a car transport cartel…

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9 Comments on “Old Year And New For Japanese Suppliers...”

  • avatar

    Drivers of the world unite!

  • avatar
    Jeff S

    Until the Takata airbag recall I never realized how much the Japanese suppliers supplied all the car makers. I did read that there was a shortage of red and black paint due to the tsunami in Japan and that the Colorado/Canyon shut down production due to a shortage of electronic parts from Japan. I think eventually the Chinese will take the place of the Japanese and Korean part suppliers as the Chinese have been in the aftermarket auto parts business for years. I had an air conditioning compressor replaced in my 99 S-10 with a new one made in China. It was less than hundred dollars more to buy a new compressor versus buying a remanufactured. Eventually many of the cars we buy will be made in China even if they are Toyotas, Hondas, Nissans, Fords, GMs, Chryslers, Volvos, and etc. Many of the electronics are made in China even if they have Sony, Panasonic, Samsung, and LG names on them.

  • avatar

    The Jeep Wrangler plant in Toledo is an example of a well choreographed operation that for the most part relies on suppliers.

    Keep in mind that the real money is made further down the road in repair parts.

  • avatar

    “Even China has gotten into the act, slapping fines on firms that charge “excessive” prices for OEM aftermarket parts, though that is a reflection of price discrimination (selling for what the market will bear) rather than collusion.”

    — Sounds more like a problem created by the government. If the market is free and open, price discrimination will not happen, because there are plenty of businessmen who would buy from a lower priced region and sell at a higher price region. If no one is doing this, it could only mean that the government has created a trade barrier.

    • 0 avatar
      Mike Smitka

      Ah, but such arbitrage doesn’t get you local inventory & warehousing. More important, there are lots of key parts that only the original supplier is capable of making — suppliers are more and more high-tech businesses, and parts are model-specific, and the tooling is in any case too expensive for independent aftermarket suppliers. Body panels? – you can’t afford to build dies (easily $10 million per set for complicated shapes) just for making crash parts. Finally, all of this is reinforced by small volumes, a consequence of the qualitative improvement in quality over the past 30 years.
      Now the margins for replacement parts may be nice, but it’s a sideline for parts makers, and in many cases distribution is through dealerships, so they only get a slice…

  • avatar
    Jeff S

    Agree, the real money is in replacement parts and service. The Chinese have made some significant inroads in the replacement part business.

  • avatar
    Mike Smitka

    Sure, the replacement parts business (brake pads) invites cheap makers. However, no Chinese company is currently capable of making the “hardened” chips for the multiple electronics functions in vehicles, they’re not making the high-end wires for harnesses, they can’t make turbochargers, spark plugs (those are made in China by global suppliers, in plants where the IP for the production process is carefully shielded), airbags and so on. All of these are engineering-intensive, vehicle-specifid and require co-development. Since many models are global (eg, the Ford Focus), suppliers have to be able to deliver (which may require to make) parts locally in every country in which Ford assembles the Focus. What we’ve seen over the past 30 years is a shrinkage in the number of suppliers, not an expansion – exit not entry.

    Yes, in due course some Chinese suppliers will show up, just as has happened with Korean suppliers.

    Oh, and suppliers can account for 70% or more of the manufacturing cost of a vehicle. Downstream adds 25%-30% to costs. So the “car companies” are actually account for a modest slice of the total cost of a vehicle.

    • 0 avatar

      >> they can’t make turbochargers

      Remember, they have a home grown aerospace industry and I suspect they can pretty much make anything. I sure I could find more examples.

  • avatar
    Jeff S

    I would think the Chinese could for the most part make anything. They have made electronics for all the major Japanese and S Korean electronic manufacturers for a number of years. They have also copied other manufacturers cars and trucks. In time they will probably manufacturer most of the vehicles the World drives, including the US.

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