Coming apart: regulators' sweep threatens auto parts business model

NSK

24/08/2014 22:00

(Repeats article first published on Sunday. No changes to 
text.) 
    By Norihiko Shirouzu and Maki Shiraki 
    NAGOYA, Japan/TOKYO, Aug 24 (Reuters) - When a Japanese 
carmaker issued a tender for shock absorbers a few years ago for 
a model it planned to sell in Indonesia, two suppliers came back 
with bids that were "so obviously coordinated," said an 
executive at the automaker. 
    One supplier put in a slightly lower bid for front shock 
absorbers than its rival and a slightly higher bid for rear 
shocks, while its rival did the opposite. The intent was clear, 
recalled the carmaker's former parts procurement chief for 
Indonesia who is now back in Japan and didn't want to be named 
because of the sensitivity of the issue: they were dividing the 
contracts between them. 
    A few weeks later, he came across the two rival suppliers' 
chiefs playing golf together in Jakarta, and summoned them to 
his office for an explanation. The upshot: the automaker asked 
the parts suppliers to re-bid. 
    The account helps illustrate how some auto parts makers, in 
particular those from Japan, have colluded for years to inflate 
parts prices for automakers, dealers and repair shops in a 
global market with annual sales of over 80 million vehicles, and 
which are now being exposed in a worldwide sweep by regulators. 
    For the past five years, competition watchdogs - from the 
United States, Europe and across Asia - have moved in, handing 
out record fines in some cases, and calling time on a business 
model that has served parts makers well. 
    That model essentially sees parts makers collude to keep 
prices relatively high for new components they supply to car 
manufacturers, and then charge even more for the same parts 
supplied as replacements to dealerships and repair shops. 
    Denso Corp  6902.T , Japan's leading auto electronics parts 
supplier had a higher operating profit margin of 9.2 percent 
than Toyota Motor Corp  7203.T  in the year to March, while 
Aisin Seiki Co Ltd's  7259.T  6.1 percent margin topped Nissan 
Motor Co's  7201.T  5.3 percent.  
    In South Korea, Hyundai Mobis  012330.KS , a leading Hyundai 
Motor  005380.KS  supplier, had a margin of around 6 percent 
on parts and component systems sales to automakers last year, 
but 21 percent on replacement parts sales, according to its 
filing with the stock exchange. 
    Some Japanese parts suppliers have evidently taken that 
business model further.  
    "To secure high profitability, those suppliers often 
coordinate bids for a supply contract when they can, and come to 
automakers with mostly identical bids," the auto executive said 
in an interview at his firm's procurement office in Japan. 
    As well as colluding to push up prices for new car parts, 
they also charge multiple times - sometimes as much as 10 times 
- the price when they make the exact same components available 
as replacement parts in the aftermarket marketplace. 
    "In other words, they're doubling dipping to beef up and 
maximize their profit margins," the executive said. "This is the 
kind of cartel you deal with in Southeast Asia with Japanese 
suppliers, and that's not the exception, but the typical 
business condition we deal with routinely around the world." 
    As regulators, most recently in China, go after suppliers in 
what has become a worldwide probe into price fixing, this 
"business model is in danger," the executive said. "We might be 
seeing the beginning of an end of it." 
        
    BACK TO BASICS 
    Japanese auto component suppliers, such as Toyota Group's 
Denso and Aisin, have, like their parent, long been considered 
as running highly efficient operations. But that reputation for 
being "lean" when selling cars in mature Western markets was 
challenged as global automakers aggressively went after a new 
generation of more cost-conscious buyers in emerging markets. 
    Automakers took note of suppliers' cost structure before the 
authorities began clamping down on price manipulation - around a 
decade and a half ago as they sought to cut costs and vehicle 
prices to make cars more affordable in emerging economies. At 
the unnamed executive's company, for example, procurement 
officials began going after parts suppliers five years ago, 
mindful of their "pricing tricks," he said. 
    For parts suppliers now, the answer may be to go back to 
business basics, industry officials and experts say. 
    "Rather than change in their business model, parts makers 
are going to have to quit getting their hands dirty for 
profiteering and should go back to basics," said Hidehiro 
Utsumi, an attorney-at-law at law firm TMI Associates in Tokyo 
and an expert on anti-monopoly. 
    That means re-embracing what Japanese automakers are best 
known for - eliminating excess from the manufacturing 
process throughout the supply chain and trimming any fat 
from production to achieve low cost and high quality. 
    No one at Aisin or the Japan Auto Parts Industries 
Association was immediately available to comment. A Denso 
spokesman referred to its earlier press statements on fines in 
various markets. 
            
    GLOBAL SWEEP 
    The crackdown on auto parts makers began around early 2010, 
when regulators in the United States, Europe and Japan started 
looking into parts suppliers including wire harness makers such 
as Yazaki Corp and Sumitomo Electric  5802.T . 
    Japan's Fair Trade Commission has fined 12 local parts 
makers a total of $332 million since January 2012 for violating 
anti-monopoly laws, including Yazaki, headlamp maker Koito 
Manufacturing Co  7276.T  and bearing maker NSK Ltd  6471.T . 
    China last week fined a dozen Japanese parts makers a record 
$201 million for manipulating prices,  ID:nL4N0QQ1CC  while in 
the United States, 28 firms including Denso and Yazaki and more 
than two dozen executives have in recent years agreed to pay 
$2.4 billion in fines, according to the Justice Department.  
    The European Commission last month fined several parts 
makers, including Yazaki, NTN Corp  6472.T , NSK and Furukawa 
Electric  5801.T , a total of $182 million,  ID:nL6N0FG1JU  and 
is currently investigating possible cartels in car lights, 
thermal systems, air conditioners, seat belts, air bags, 
radiators and windscreen wipers. 
    South Korean regulators last year fined units of Denso, 
Continental AG  CONG.DE  and Robert Bosch  ROBG.UL  for price 
fixing, and are looking into whether there has been price 
collusion among car makers and dealers.  ID:nL3N0K20GJ   
    In May, Singapore's Competition Commission fined 
Nachi-Fujikoshi Corp  6474.T , NTN and NSK a record S$9.3 
million ($7.43 million) for cartel behaviour in ball bearings, 
noting the price fixing, going back as far as 1980, even had a 
formal name: the Market Share and Profit Protection Initiative. 
 ID:nL3N0OC0OY  
    The crackdown has hit Japanese parts suppliers hardest as 
they operate globally, though others such as Autoliv Inc  ALV.N  
have also been caught up. Car parts implicated in the probes 
range from wire harnesses, bearings and seat belts to 
anti-vibration rubber and ignition coils. 
    (1 US dollar = 103.8700 Japanese yen) 
    (1 US dollar = 1.2513 Singapore dollar) 
 
 (Additional reporting by Yoko Kubota in TOKYO, Rachel Armstrong 
in SINGAPORE, Hyunjoo jin in SEOUL and Foo Yun Chee in BRUSSELS; 
Editing by Ian Geoghegan) 
 ((ian.geoghegan@thomsonreuters.com; +65 6870 3837; Reuters 
Messaging: ian.geoghegan.thomsonreuters.com@reuters.net)) 
 
Keywords: AUTOS ANTITRUST/PARTS