Thriving Overseas

NISHIO, Japan — A plant tour for visitors who make the trek 140 miles (225 km) southwest of Tokyo, past Mount Fuji, to Denso Corp.'s mammoth manufacturing complex here generally ends the same way every time — on a bus, heading up a tight, one-lane service road that twists like a librarian's hairpin all the way to the top of a hill covered with nothing but trees and shrubs.

It's from this vantage point that the breadth of the Nishio complex finally can be appreciated. On an overcast day, there is little else to see than parking lots and corrugated rooftops — a manufacturing mecca. If Henry Ford were alive, he would nod in approval.

Occupying 313 acres (126 ha), Denso's Nishio complex, which opened in 1970, is a village unto itself, with dormitories, eateries, a shopping center, indoor pool, tennis courts, baseball fields, an archery gymnasium and even four tombs, some dating back to the Sixth century.

The amenities are impressive, but so is the output. Denso operates 12 manufacturing facilities at Nishio, occupying 139 acres (56 ha) of floor space and producing air-conditioning components and systems, car heaters, radiators and diesel fuel injectors and pumps. With 7,400 employees, Nishio outnumbers even Honda of America Mfg. Inc.'s massive Marysville, OH, assembly plant by nearly 2,000 people. In 2002, Nishio manufactured a staggering ¥600 billion ($5.5 billion) worth of product.

Nishio turns out 11,000 diesel fuel injectors a day, from two shifts, with a cycle time for a fully assembled injector of 10 seconds. In the heating, ventilation and air-conditioning (HVAC) segment, Nishio produces 30 different sizes of heater cores. Each month, Nishio manufactures 600,000 HVAC units, contributing mightily to Denso's status as the world's No.1 car air-conditioning supplier.

Besides Nishio, Denso has 10 other manufacturing sites in Japan. And despite a decade-long recession that has stalled vehicle sales in Japan, none of the facilities are slated for closure or downsizing. Instead, the company has managed skillfully to dedicate much of the domestic capacity to products exported to other markets.

For instance, the percentage of diesel passenger cars in Japan is even smaller than it is in the U.S. (less than 2%, according to Denso competitor Robert Bosch GmbH). A mere 10% of the diesel fuel injectors produced at Nishio remains in Japan, while the other 90% is exported, mostly to supply the booming diesel market in Europe. Denso has benefited, however, from stricter emissions regulations in Japan, which has spiked demand in the truck market for more fuel-efficient diesel injectors, such as Denso's new 26,100-psi (1,800-bar) common-rail system.

“We faced a fairly severe situation during these 10 years,” Koichi Fukaya, Denso president and CEO, tells U.S. journalists in Tokyo. “Many auto makers begin to shift operations overseas, so eventually car production in Japan was 70% compared to the peak.”

Japan's No.1 parts producer has followed an identical course of action by adding manufacturing facilities in the same markets as its Japanese OEM customers. Denso has invested heavily, for instance, in Europe.

“During the next four or five years, we are expecting to almost double sales (in Europe),” Fukaya says. A new plant in the Czech Republic produces air conditioners, which is a blossoming new market in Europe. The plant is nearing full capacity and likely will expand within two years, Fukaya says.

Denso also has a new plant in Hungary producing diesel systems and engine components. A significant piece of new business for the plant comes from Ford Motor Co.'s European operations, which will buy Denso's 26,100-psi common-rail system produced there, beginning in 2005.

It helps that Toyota Motor Corp., which owns 24.8% of Denso and represents about half of Denso's worldwide sales, also is expanding in Europe. Denso's success in the region, however, is pegged to new business with domestic OEMs such as Volkswagen AG. “The main increase of business in Europe is from European car makers, not from Japanese car makers,” Fukaya says.

In the emerging and alluring Chinese market, Denso has nine facilities supporting primarily the Japanese auto makers. “But from now on, we want to expand our business in China for the European makers — for example, VW,” Fukaya says. Volkswagen is the No.1 non-domestic auto maker in China, but to date Denso has no business in the region with the German auto maker.

In North America, where Denso has 23 manufacturing facilities employing 14,000 people, rising sales of Japanese automobiles has driven steady profitability in the region. The newest U.S. plant is under construction in Osceola, AR, to produce vehicle air conditioners and heavy-equipment radiators. Investment will total $35 million, and employment is expected to reach 500 when full production is achieved in 2008.

It is believed the Arkansas plant will produce air-conditioning systems for Toyota Tundra pickups, which will be manufactured at a new plant in San Antonio in neighboring Texas. But Denso executives admit the Tundra business has not yet been secured, meaning the supplier took the risky step of building a plant without a confirmed auto maker customer. That strategy has caused trouble for some suppliers in the past.

One plan calls for Denso to ship some HVAC production to Arkansas from its Battle Creek, MI, plant, which is at full capacity and undergoing expansion. Most of Battle Creek's output goes to Toyota's U.S. and Canadian assembly plants.

As Japanese companies such as Denso thrive in the U.S., the Big Three are complaining that the Bank of Japan has manipulated the yen to keep it undervalued by some 20%, bolstering profits for Japanese companies doing business in other regions.

Fukaya says he understands General Motors Corp.'s argument about the yen, and that he met this past August with CEO Rick Wagoner, who has become the most vocal critic of the yen/dollar exchange rate.

“He says his opinion. If I was president of General Motors, maybe I would say the same argument,” Fukaya says. “Our currency rate fluctuation has bothered us.” But Fukaya makes no suggestion that Japan appears willing to act on the issue.

Denso considers its strategy of locating plants in regions around the world, close to the customers served, and then reinvesting profits in those regions, as the best response to currency fluctuations.

With vehicle sales down in its home market, Denso and other Japanese suppliers have invested more heavily in product development. “We, the Japanese auto parts manufacturers, think Japan should be the center of excellence or center of new technology development,” Fukaya says.

In Nisshin, near Nagoya, Denso maintains a corporate research-and-development center that consumes about 10% of the company's annual global R&D budget, which this year is about ¥183 billion ($1.7 billion).

Here, the company pushes the technological envelope in sectors such as semiconductor electronics, telematics, micro-nanotechnology, human engineering and thermal energy. A few examples:

Toyota's fuel-cell hybrid vehicle has the world's first CO₂ AC system, supplied by Denso. For two years, the supplier has been selling CO₂-based hot water systems for homes in Japan. The current sales rate is 5,000 per month. Denso hopes the successes in hot-water systems will translate into similar success in automotive AC.

A CO₂ AC system costs about 15% more than a conventional system and must be the same size, says Hikaru Sugi, director of Denso's Air Conditioning Product Div. The soonest Denso will supply the CO₂ system for a non-fuel cell vehicle is 2007, Sugi says. Denso has five or six European and Japanese customers for the system. Initial launch calls for about 100,000 vehicles with CO₂ AC, ramping up to nearly 400,000 in the second year, Sugi says.

Some 80% of Denso's R&D work is driven by requests from auto maker customers, says Masami Manabe, managing director of Denso's Engineering R&D and a board member. That leaves a mere 20% of work that is organically driven by Denso engineers.

While Denso strives to expand its customer base beyond Toyota, the supplier walks a fine line in deciding whether Toyota always gets its best technology.

“Of course the main, most advanced technology should be done with Toyota,” Fukaya concedes. “That is the very general answer. But occasionally in case of the very advanced safety technology or environmental technologies, yes, some customer may propose (a project) to us and we pursue joint activities.”
— with Roger Schreffler