Special Report: Daihatsu dismantling 'Toyota Way' as market changes

Toyota Boshoku

14/01/2015 24:06

(Read this story in a pdf: http://reut.rs/1wZNTEQ) 
    By Norihiko Shirouzu 
    IKEDA, Japan, Jan 14 (Reuters) - When Daihatsu Motor Co 
launched the Mira e:S minicar in 2011, the Toyota affiliate 
thought it had found a model for emerging markets. The Mira e:S  
- e for eco, S for smart - was capable of going 30 kilometers on 
a liter of gasoline (72 mpg) for a sticker price of just 795,000 
yen, or $6,637. And indeed, the car was a hit, super-charging 
Daihatsu's earnings. 
    A number of improvements - in manufacturing, engineering, 
procurement - went into the car. But the real secret to success, 
says Kosuke Shiramizu, Daihatsu's chairman at the time, lay in 
taking something out of the company's business model: the 
vaunted Japanese "keiretsu" system. 
    Shiramizu, now a Daihatsu advisor, says Daihatsu shaved off 
roughly $1,000 in the manufacturing costs of the car by 
dismantling its keiretsu - an informal but close interlocking 
business relationship between a manufacturer and its suppliers, 
cemented by cross-shareholdings and personnel exchanges. 
    The automotive keiretsu system, pioneered by parent Toyota 
Motor Corp. and widely adopted by rivals, was acclaimed across 
the world in the 1980s and 1990s as an ingredient in Japan Inc's 
success. Keiretsu, pundits preached, defused adversarial 
relationships between assembler and supplier, allowing them to 
share information and create better product quality. Hence 
Japanese automakers were able to leap ahead with vehicles such 
as the Toyota Corolla, the legendarily sturdy and reliable 
family car. 
    Today, after two decades of stagnation in Japan, the 
dramatic shift in growth to emerging markets and revolutions in 
automotive technology, Shiramizu says the days of the keiretsu 
are numbered. Companies, he says, are competing for price and 
value by using market mechanisms instead of relationship-based 
arrangements. While analysts have been predicting the system's 
demise for years, Daihatsu, along with Nissan Motor Co  7201.T  
have gone further than any Japanese automaker in scrapping it.   
                                                                 
                                        
    "The Toyota way is the high-cost way," says Shiramizu, 74, 
in an interview at Daihatsu headquarters in the  Osaka suburb of 
Ikeda. "Keiretsu doesn't work anymore. If we stick with it, 
Daihatsu won't survive. Toyota might face a similar fate, too." 
  
    TOYOTA WATCHING 
    As Shiramizu reforms the way Daihatsu develops and buys 
components, Toyota  7203.T , which has maintained a 51-percent 
majority stake in Daihatsu  7262.T  since 1998, is watching 
Shiramizu's experiment with interest, he says. 
    That's because Akio Toyoda, the 58-year-old founding family 
scion who became Toyota president in 2009, has struggled to deal 
with the global auto market's seismic shift toward emerging 
markets. 
    In China, Toyota lags rivals such as General Motors Co 
 GM.N  and Volkswagen AG  VOWG_p.DE . Toyota lacks no-frills 
cars such as the Wuling Hong Guang, a 43,800-yuan ($7,050)  
workhorse van GM designed and sells jointly with its Chinese 
partners. Toyota's cheapest model is the 69,800-yuan Yaris 
subcompact car. 
    In India, Toyota's "strategic volume car", the Etios, has 
failed to ignite demand, chiefly because of its relatively high 
price tag of 570,000 rupees ($9,118), even as rivals such as 
Suzuki Motor Corp.  7269.T  sell cars for as little as 240,000 
rupees. 
    "Daihatsu could potentially offer Toyota a number of 
important lessons on how to effectively use suppliers to come up 
with a viable low-cost small car for markets like India," says 
Shiro Sakamaki, a Daiwa Securities analyst in Tokyo. 
    And not just lessons but actual cars. Struggling to crack 
the no-frills end of India's car market, Toyota earlier this 
year called on Daihatsu for help in designing affordable cars 
that could be sold under the Toyota name and through Toyota's 
sales channels in India - an arrangement similar to one the two 
companies have in Indonesia. 
    Shiramizu, who became advisor to Daihatsu's board and 
technical executive after stepping down as chairman three and a 
half years ago, says his parts procurement reform isn't meant to 
be a template for Toyota. But it is being taken seriously there, 
he says. 
    "Mr. Toyoda is carefully aware of what we're doing," 
Shiramizu says, when asked whether Toyoda is considering a 
similar reform. "He views our parts procurement reform as one 
experimental way." 
    Toyota has been making early moves towards a post-keiretsu 
system on its own. Toyoda, for example, has told affiliated 
group suppliers, such as Toyoda Gosei  7282.T  and Toyota 
Boshoku  3116.T , not to always count on business from Toyota. 
He has given them the green light to do business with Toyota's 
Japanese and foreign competitors, according to two board members 
who spoke on condition of anonymity. Toyota has also begun 
encouraging the company's keiretsu suppliers working on similar 
technologies to merge or combine resources in order for them to 
better compete with major global suppliers such as Robert Bosch 
GmbH  ROBG.UL  and Continental AG  CONG.DE  
   Ryo Sakai, a Tokyo-based Toyota spokesman, declined to 
comment. "As a matter of policy, we do not disclose details of 
our individual dealings with suppliers or our purchasing 
strategies in general." 
     
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      Read this story in a PDF: http://reut.rs/1wZNTEQ 
      Industry's past, future collide in Detroit  ID:nL1N0UO1Z8  
      TAKE-A-LOOK: Detroit auto show  ID:nL1N0UR0LT  
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    COMPETITIVE SHIFTS 
    Two major shifts over the past two decades in the 
competitive landscape have been working against Japanese car 
makers and their keiretsu systems. 
    First, Western rivals dramatically closed the gap with the 
Japanese. That was partly due to the fact cars have become 
easier to design and manufacture, because they are less 
mechanical and are controlled more electronically. Competition 
thus shifted to who could offer more value to the customer: the 
highest fuel economy, the sexiest look, and the most compelling 
functions for the lowest price. 
    The other competitive shift came from the emerging world. 
    Keiretsu worked beautifully for Toyota because an 
overwhelming majority of the finely engineered cars it made were 
sold in the high-priced developed markets of the United States, 
Europe and Japan. 
    That began changing in the early 2000s, with the rise of 
emerging economies such as Brazil, Russia, India, China, 
Indonesia, South Africa and Turkey. These economies already 
collectively buy half of the automobiles sold worldwide today. 
They will account for an estimated two-thirds of overall global 
demand by 2020, when sales are expected to reach 100 million 
cars annually. 
    For Daihatsu, whose business is mostly in the lower end of 
the market both in Japan, as well as markets in Southeast Asia, 
the keiretsu system was especially onerous. As it began buying 
more components from Toyota-group suppliers such as Denso 
 6902.T  and Aisin Seiki  7259.T  over the years, it was also 
stuck with Toyota's lofty quality standards. Shiramizu says 
Toyota's specs are often too high for vehicles that some 
Daihatsu officials describe as "sandals," as opposed to the 
dress shoes that Toyota makes. 
    "Do we need parts and cars that withstand the desert heat in 
Arizona?" Shiramizu asks. 
    Consumers in Daihatsu's key markets outside Japan - 
Indonesia and Malaysia - are also used to driving under brutal 
road conditions, which often force them to replace parts 
quickly. They don't expect parts to last for five to 10 years, 
so they are more willing to sacrifice durability for price, he 
says. 
          
    FOREIGN PRESSURE 
    Shiramizu is an unlikely scourge of the Toyota tradition. A 
career Toyota man, he was known inside the company as "the 
emperor" because of his command of the business - and his 
imperious temper. He reached the high post of executive vice 
president before being sent over to run Daihatsu as chairman in 
2005. But there, he says, he came to see the keiretsu as a 
high-cost, inefficient burden. Shiramizu said his mantra at 
Daihatsu was: dissolve the keiretsu, or die. 
    Shiramizu's reform began in 2009 with a decision to 
terminate a routine redesign of its Mira mini-car in order to 
recast it as a strategic car: the Mira e:S. Shiramizu says the 
trigger was "gaiatsu," or foreign pressure, which he says 
threatened to kill the special category of vehicles in Japan - 
called "kei," or light, cars - that Daihatsu specialized in. 
    Washington and Detroit have considered "kei" cars such as 
the Mira to be a trade trade barrier limiting global automakers' 
business in Japan. The Japanese government offers a low annual 
vehicle tax rate for kei cars - micro-mini vehicles powered by 
engines sized at 660 cubic centimeters or less - which Detroit 
doesn't make. They account for 40 percent of the Japanese auto 
market. But the United States, a key trading partner and ally, 
was unhappy that  kei cars were becoming increasingly 
indistinguishable from other low-cost economy cars with bigger 
engines in Japan. The redesign of the Daihatsu micro-mini, along 
with its new model name "e:S," was aimed at making its "kei" 
cars a unique category - high on fuel economy and light on the 
wallet. 
    An effort to come up with a car priced at $8,000 or lower 
was "way way long overdue" for Daihatsu, Shiramizu says. The 
American trade pressure was simply the last straw, he says. 
    By resetting the Mira's design direction, Shiramizu 
unleashed the program of keiretsu destruction that is still 
playing out inside Daihatsu. 
    His first move was to send agents of change - manufacturing 
engineers like Saburo Yagi, Fumiaki Fukunaga, and Yoshiki Inoue 
- into the company's procurement office. 
    Until then, Daihatsu's purchasing office was staffed by 
non-technical types with little knowledge on how components are 
designed and produced and, says Shiramizu, "no ability to assess 
true cost." Instead of attacking costs, those purchasing 
managers put a priority on their relationships with suppliers - 
getting wined and dined and showered with gifts in the process, 
Shiramizu says. 
    
    "ACCOUNT SYSTEM" 
    Shiramizu then initiated another move: abolishing the 
"account" system that governed procurement deals. The status 
quo, he says, made it almost impossible for new, 
non-Toyota-group suppliers to do business with Daihatsu, even 
when they offered better quality and price. 
    Under the account system, only existing suppliers with 
Daihatsu accounts could supply parts to Daihatsu. These 
so-called account holders tended to be a more financially stable 
group of suppliers. Any aspiring new supplier had to ask an 
account holder to sell through its account. Shiramizu says the 
system tended to inflate costs because account holders charged a 
fee - often 10 percent - for letting newcomers use their 
accounts. 
    Those back-to-back moves took down the two biggest obstacles 
preventing Daihatsu from looking beyond the Toyota group for 
parts. 
    Most important, it allowed Shiramizu to deploy his new 
procurement leaders in the hunt for lower-cost parts across 
Japan - and beyond to China, Indonesia and India. 
    Inoue, who was plucked out of the production engineering 
division by Shiramizu, and his team focused on China. The team 
quickly found Chinese suppliers of windshields, mirrors, 
speakers, and aluminum wheels at savings up to 50 percent. 
    One of the team's most critical findings was not a new 
supplier, however. It was the discovery that some account 
holders were slapping a hefty margin on components they procured 
cheaply in China. 
    Shiramizu was furious. By February 2010, Inoue's team had 
found two new suppliers, one near Shanghai and the other in the 
Hebei provincial town of Qinhuangdao, capable of supplying 
aluminum wheels for as cheaply as 150 yuan to 200 yuan a piece - 
roughly half the price Toyota Tsusho  8015.T  charged for a 
comparable wheel from a different supplier. Daihatsu last year 
bought approximately 1.3 billion yen worth of aluminum wheels in 
China without going through middlemen. 
    "We have too many middlemen skimming off," Shiramizu says. 
"Getting rid of those middlemen is the shortest cut to cost 
savings." 
    Akitomo Inagaki, a spokesman for Toyota Tsusho, told Reuters 
his company strives to provide "customised services" that 
emphasise "timely delivery, safe instalment and sound 
maintenance of equipment we handle". 
    "We don't see ourselves as a stereotypical trading company," 
he said. 
     
    ON-TIME DELIVERY 
    This experience quickly led to an all-out drive to weed out 
the middlemen from an array of contracts. A key target was 
Toyota Tsusho, a main provider of manufacturing equipment 
Daihatsu used to produce cars in Japan, Indonesia and Malaysia.  
    Daihatsu's procurement specialists went factory to factory 
in Japan, and enlisted Komatsu Ltd  6301.T , Trinity Industrial 
Corp  6382.T , Toshiba Machine Co  6104.T , Meidensha Corp 
 6508.T  and Toyota affiliate JTEKT Corp  6473.T  as direct 
suppliers, cutting out Toyota Tsusho. 
    Buying directly from those suppliers has made the job of 
procurement specialists more complex. They have to ensure that 
the logistics for parts delivery are sound, making sure 
equipment orders are delivered to plants on time. It's worth it, 
Daihtsu officials say. For example, the company says it saved 
about 10 percent on milling machines it bought from JTEKT Corp 
 6473.T , which cost up to 30 million yen a piece. 
    Inagaki, the Toyota Tsusho spokesman, said that if companies 
such as Daihatsu has the resources to allow them to do all the 
logistics for safe and prompt delivery then they might not need 
a trading company like Toyota Tsusho . "But in many cases, few 
companies possess such capabilities on their own," he said.  
    Daihatsu's new procurement system was crucial to the success 
of the Mira e:S, Shiramizu says, describing the car's redesign 
as the start of a much broader initiative to help Daihatsu 
adjust to rapid changes in the global market and industry. 
    "We still need to shave off another 100,000 yen to 200,000 
yen to bring down the car's retail price even lower, into the 
500,000-yen to 600,000-yen range, if we are to survive," he 
says. 
    The ultimate $5,000 car would ensure Daihatsu's - and 
perhaps Toyota's - success in emerging markets, he says. 
    
    MAKE AT HOME 
    Shiramizu stepped down as chairman in June 2011 and the Mira 
e:S launched in Japan later that year. Still, lessons from the 
car's redesign set off a wave of other moves now being pursued 
by the talent Shiramizu trained. 
    In one such initiative, Daihatsu opened an office in 
Shanghai. Its 20-person staff now searches across China for 
low-cost parts, an effort that netted 3 billion yen worth of 
parts by 2013. 
    The push last year went into hyper-drive when the China team 
discovered factory hubs in the eastern China province of 
Zhejiang for dirt-cheap generic auto parts - or, as one Daihatsu 
executive puts it, "fakes." 
    Daihatsu discovered those generic parts in a roundabout way: 
on parts shelves of dealers and repair shops in Indonesia that 
stock them for penny-pinching everyday drivers. 
    A quality engineer who took note of the rampant use of those 
parts in Indonesia told Shiramizu of his discovery, and a major 
push to search for usable parts ensued. 
    The results have been mixed: Designs by the generic parts 
producers are often robust, but the production quality is 
unreliable, according to Daihatsu officials. Daihatsu isn't 
giving up on China, but the officials say it is turning out to 
be a time-consuming effort. 
    So how will Daihatsu realize a $5,000 car? 
    One solution being pursued now is to produce on its own many 
of the core, high-ticket parts Daihatsu currently buys from 
Toyota suppliers. Those include air-conditioning and steering 
systems, drive shafts and wire harnesses. 
    "Toyota suppliers aren't going to like it," one official 
says, "but our basic philosophy is to go 'in house' - and that 
means no more middlemen." 
 
 (Reporting By Norihiko Shirouzu. Additional reporting by Aditi 
Shah in   New Delhi and Maki Shiraki in Tokyo.) 
 ((Norihiko.Shirouzu@thomsonreuters.com;)) 
 
Keywords: DAIHATSU TOYOTA/