Toe to toe on trade: but a strong yen pushes transplants to buy more U.S. parts

For Japanese manufacturers, separating the economics of making cars in the U.S. from politics has been nearly impossible. That's becasue the decision to produce here is not the result of business dynamics. It's the culmination of, in one word, a dare.

U.S. politicians, the Big Three and the United Auto Workers union bemoaned the loss of American jobs and plant closings in the early '80s as Japanese carmakers gobbled up market share, more than doubling it from 1980 to '86. So this muscle-bound collective challenged the Japanese to make cars in the U.S. Japan's automakers accepted the political gauntlet and eventually brought hundreds of their suppliers along with them.

What's seen as automotive chutzpah on this side of the Pacific is really an economic gambit by the Japanese. By shifting production of vehicles and some of their components manufacturing to the U.S., Japan's carmakers gambled they could find new markets for idled capacity the transfer caused at home. It worked for awhile, but now the soaring yen dictates that politics give way to pragmatism, making their bet even more expensive.

It's no longer good business for Japanese transplants to import components from Japan. For a long time parts suppliers there remained profitable through continuous cost-cutting. But the warp-speed increase of the yen's value, about 50% since 1990, makes it excruciatingly difficult to keep pace.

"There's a fundamental problem with the supply base of the (automaker) transplants in North America; what they're getting out of Japan (parts) is not cost-competitive," says James Womack, co-author of The Machine that Changed the World, the definitive study of Toyota Motor Corp.'s lean-production philosophy. "They've got to go as fast as they can to get a very high level of North American content."

Besides, Mr. Womack adds, it's kind of a "wacky illogic" to source parts for lean production operations from Japan to the Midwest -- more than 7,000 miles (11,000 km) away.

That's obvious, of course, and it's one reason for the buildup of Japanese-based supplier operations in North America: to be closer to their traditional customers -- and go after Big Three business as well.

Today there are 271 Japanese-affiliated suppliers in the U.S. manufacturing an assortment of parts from roller bearings, driveshafts and brake pads to compressor clutches, crankshafts and windshields. Their profits, or losses, are directly impacted by currency valuations.

"The yen's strengthening makes parts from Japan more expensive and makes it more economical to produce more of those parts in the U.S., even if it requires duplicate tooling," says David Offill, vice president of Nissan Motor Manufacturing Corp. USA in Smyrna, TN.

That's serious stuff. Mr. Offill is saying Nissan will move production of a component from Japan to the U.S. if the saving is substantial. And that transfer includes the price of idle sister capacity in Japan, which is mounting.

Nissan Motor Co. Ltd. shuttered assembly operations last March at its Zama manufacturing complex. Toyota alone has 800,000 units of non-utilized capacity in Japan and the unused parts capacity to go along with it. "There's a tremendous need to find new markets for that capacity," says an American-based Toyota executive.

Meanwhile, Japanese automaker transplants have been adding capacity in the U.S. Toyota Motor Mfg. USA makes the new full-size Avalon at its Georgetown, KY, assembly plant. Nissan's new Altima rolls off the line in Smyrna, and Mitsubishi Motors Corp. has shifted production of the new-generation Galant from Japan to Normal, IL, home of its Diamond-Star Motors Corp. subsidiary.

From the 1,500 cars produced by Honda of America Manufacturing Inc. in Marysville, OH, in 1982, Japanese transplant expansion has been phenomenal. Last year seven Japanese transplants produced 2.15 million vehicles in the U.S. and 364,000 units were made in Canada. The University of Michigan's Office for the Study of Automotive Transportation says production could hit 3 million units in the next two years. In that sense, the Americans who prodded the Japanese to set up shop here have, indeed, gotten their come-uppance.

But unlike in the past, Japanese transplants are localizing a greater portion o their supply base to produce parts for their own vehicles as well as other American-made vehicles. A part of their decision to do so is no doubt anchored in trade politics, but the savings provide a strong incentive.

The decline of the automotive market in Japan, however, has slowed the opening of new supplier operations in the U.S. What's more, says Mark Santucci, head of Elm International, a research concern which tracks Japanese transplant suppliers, there's a slight trend reversal at work.

"Where you have joint ventures, lately it's the Americans buying out the Japanese partner," Mr. Santucci reports. "That may be an indication of the problems they're having back in Japan and the fact that they can get some cash for their operations here in the states."

Thus, localizing their supplier base is an even more pragmatic and pressing issue for Japanese transplants. They have programs to improve the quality, delivery time and to get lower costs from their existing American suppliers as well as identify new ones. That effort will have to speed up as they move more component sourcing to the U.S.

Although critics say promises of more parts production in the U.S. by the Japanese is mere lip service, the facts don't support their skepticism.

Last March in Indiana, for example, some 600 meetings took place between Japanese affiliated first- and second-tier auto parts suppliers and traditional U.S., third- and fourthtier suppliers. The Hoosier State is base for 39 Japanese parts-makers and it's looking for more. Ron Tierney of Indiana's Department of Commerce, says the talks were "very successful. Some deals were made and relationships where established."

Other evidence of Japanese localization efforts:

* Toyota now machines the parts for V-6 engines in the U.S. and it buys the blocks from General Motors Corp.

* Nissan switched to the A.O. Automotive Products Co. for its truck frames when the yen fell to 100. Mr. Offill says studies are underway to determine what other component production might be shifted here. He indicated the triggering currency valuation is 80 to 1. And he adds Nissan will eventually transfer production of big-ticket items -- engines and drivetrains -- to the U.S.

* Honda, the first Japanese carmaker to open a U.S.-based assembly plant, says it will become the first Japanese transplant to produce a luxury car in the U.S. when the Acura CLX rolls off its Ohio assembly line early next year.

It really is a no-brainer for the Japanese to localize their supplier base. Further, that's the way carmakers have globalized their operations for decades: Ship in cars and then knock-down kits. As more of the assembly process takes place at the source of sales, establish joint ventures for the production of parts to localize the supply base.

It's doubtful whether Japanese carmakers ever intended to go that route. The only reason for a country that averages 6 million to 7 million annual sales to have the capacity to produce 12 million vehicles is to export millios of them using a global distribution and sales network.

But politics truncated that strategy. Now the force of a consumer-driven global market and the strength of the yen have Japanese carmakers looking to localize their global operations wherever it makes economic sense. In the U.S., one of those elements is their supply base.

"We've put together a cross-functional team composed of engineers, quality people and production control," says Stan Tooley, senior vice president of administration at Nippondenso Co. Ltd., a major Japanese-owned supplier with extensive U.S. operations. "Their main function right now is trying to find local suppliers who can meet our quality, delivery, specifications and price."

Nippondenso, 23%-owned by Toyota, is feeling the pinch of its home market and is looking to move more production to the U.S. So, too, are smaller Japanese suppliers. International Crankshaft Inc. in Georgetown, KY, makes forgings for a half- dozen Japanese carmakers as well as the Big Three.

Because of the strengthening yen, its parent company, Sumitomo Metal Industries Ltd. of Osaka, Japan, wants to shift some production of forgings to its Kentucky-based subsidiary. Both have 6,000-ton press lines.

"Even if the parent company wants to transfer a job here, the customer always approves the material and who makes it," says Shiro Yukita, vice president of administration and sales at International Crankshaft. Mr. Yukita says higher-ups are still ruminating over a shift, but he expects it to happen if the yen continues to strengthen.

But the U.S./Japan trade dispute taints the pragmatics of business. For instance, there's a perception that in 1992 the U.S. coerced the Japanese into buying $19 billion worth of U.S. auto parts by the end of fiscal 1994. The reality is, according to Lawrence Green, Mitsubishi vice president of procurement and government affairs, that they had expected to buy that much anyway.

What's more, Mr. Green says, "We're buying less from Japan, but every time the currency appreciates, the smaller amount that I buy from Japan looks bigger." He's right, of course, but the lopsidedness of the U.S./Japan automotive trade deficit continues to fuel the dispute.

Mr. Green says Mitsubishi bought $600 million worth of U.S. auto parts in 1990. "We're probably going to exceed $2 billion this year," he says. "That happened not because of politics but because of pure, common-sense business issues." Right again, but the devil is in the politics.