Dismantling the Keiretsu

Renault SA's purchase of a controlling interest in Nissan Motor Co. Ltd. two years ago managed to blow a considerable hole in much that is held sacred to Japan Inc.

The fact that a secondary player from France could buy a Japanese automaker, once a stronghold of efficiency, technology and profit, up to then had been unthinkable. The ensuing acquisition flurry, as Western makers bailed out their weaker Japanese rivals, now is prompting further dismantlement of Japanese ways, including doing away with lifetime employment through layoffs and attrition.

Now, necessary cost-cutting efforts are threatening the institution of the keiretsu system. These networks of equity-interlocked companies translated to business security for Japanese automotive suppliers. When the OEM not only was a customer to the supplier but also a stakeholder, supplier success through a steady stream of business was ensured.

The Nissan Revival Plan — the auto-maker's restructuring scheme — dealt a blow to the keiretsu system, leaving Japan's once-secure parts community struggling in an every-supplier-for-itself climate.

Before the Renault merger, Nissan owned stakes in 1,394 companies; by 2003, the automaker says it will sell off its shares in all but four. The four companies, which Nissan has yet to name, are what the automaker terms as critical to core business. The rest, the automaker says, represent non-performing equity, money that Nissan needs back to pay off its unwieldy debt-load.

The dismantlement of the keiretsu not only feeds equity back into the company but also allows for deeper cost cuts through truly competitive bidding. Nissan has coupled its massive divestment effort with a drive to coax its suppliers to trim 20% out of their costs. The plan called for an 8% cut from its suppliers in its first year, which ended March 31, followed by a 7% cut in the current fiscal year and a 5% reduction in the third year.

Other automakers are emulating the Nissan plan, but not necessarily with the same degree of success. Mazda Motor Corp., controlled by Ford Motor Co., has for years been hashing out a restructuring formula. Mitsubishi Motors Corp., among the weakest of the world's automakers, says it wants to shave procurement costs by 15%, taking a page from new parent-company DaimlerChrysler AG's effort to get 5% out of its suppliers this year, also building up to 15%.

“The keiretsu system is dying in the case of Nissan, Mazda and Mitsubishi,” says Ashvin Chotai, analyst for Standard and Poor's DRI. “All signs spell an end to the cozy relationship between Japanese suppliers and their OEM customers.”

In many cases, Nissan keiretsu members remain suppliers after the slashing has occurred. Johnson Controls Inc. purchased Nissan's seat-making division, which still supplies seats to Nissan. Mazda sold off two of its brake suppliers to Continental Teves, which now will supply Ford and Volvo Cars in addition to Mazda. And although it has yet to materialize, Mitsubishi's plans to sell off supplier stakes long have been in the cards, since even before the DC arrangement, Mr. Chotai says.

The changes in automaker-supplier relationships are affecting more than just Japan's weak automakers. Toyota Motor Corp. is strengthening its keiretsu by increasing its equity stakes in key suppliers and placing stronger control measures around proprietary technology, Mr. Chotai says. At the same time, however, Toyota is sourcing more parts from outside of its keiretsu.

Likewise, Toyota's suppliers are seeking business elsewhere. Such deals include Toyota Group's Denso Corp. supplying common-rail fuel injection for the Nissan X-Trail, and Aisin Seiki Co. Ltd., also affiliated with Toyota, supplying seats, door parts, intake manifolds and bumpers to the Nissan Cima.

In the U.S., Toyoda TRW — a merger between a keiretsu member and the U.S.-based Tier 1 producer — supplies power steering systems to Toyota's U.S. plants, but also to DaimlerChrysler, Renault and Cadillac.

Cross-sourcing only will increase when automakers capitalize on the benefits of joint purchasing. Nissan and Renault started up a common purchasing organization in the year's first quarter. With headquarters in Paris, Tokyo and at Nissan North American manufacturing headquarters in Smyrna, TN, the organization is looking for common suppliers as well as synergies and how to exploit them. Platform sharing, which already has begun between Nissan and Renault in Mexico and South America, will mean even more common sourcing.

The end of keiretsu relationships and the resulting cost cutting have prompted many Nissan suppliers to get creative. Two major Nissan keiretsu players, Calsonic Corp. and Kansei Corp., merged and diversified their client base in order to withstand the impact.

But, according to Emil Hassan, Nissan senior vice president, North American manufacturing, purchasing, quality and logistics, Nissan has exceeded its North American 10% cost-reduction goal for its first year of restructuring.

“It's really deeper than we had planned,” Mr. Hassan says. “We have gotten great operation support from our supplier community. And we will overachieve our goal.”

Mr. Hassan says some suppliers could not meet the cost-cutting target and bowed out of contracts, but in all cases, the automaker has found a supplier that could do the job for the right price. Suppliers, he says, also are encouraged by the fact that Nissan is sharing the pain, making harsh internal cuts whenever possible.

And the fact that Nissan is on the mend doesn't hurt.

“The ones that helped us in our dire need will be the ones that enjoy the fruits with us for a long time,” Mr. Hassan says. “We couldn't tell them a year and a few months ago that if you do this, we're going to give you business for 250,000 more vehicles in a new plant (in Canton, MS), or for another 150,000 new vehicles in Smyrna. You're not going to talk about expanding that much when you're dying on your deathbed.”

Tenneessee-based TKA Plastics Inc., a small Tier 1 interior parts supplier, lost some but not all of its Nissan contracts when cost cuts occurred but did not begrudge the automaker. “We understand they were having some real financial concerns,” says Michael Cherry, TKA president and chief executive. “We wanted to help them stay in business. Nissan is coming back. They made a good recovery.”

Parts suppliers say Toyota is extracting similar cost cuts but in a more low-key way than the restructuring automakers. The carmaker is making target cuts vehicle by vehicle. One supplier says the cuts, although roughly the same size as other automakers, are less painful because Toyota allows the suppliers to work on the vehicle systems with that goal in mind.

Movement within keiretsus and painful cost cuts are opening up doors for Western suppliers and Western supply practices in Japan. When Nissan, for example, sold its 5.9% stake in Akebono Brake Industries, Delphi Automotive Systems Inc. snatched it up.

The U.S. and European model is the direction in which the Japanese industry is going, especially in areas such as modularization, says Standard and Poor's DRI's Mr. Chotai. Competitive Western suppliers also are in the driver's seat when it comes to acquisitions.

Japanese ways, however, are slow to change; in spite of the current climate, it may take a while for outsiders to gain traction.

“In my view, Japanese companies, both automakers and suppliers, are trying to be less dependent on the keiretsu system, as automakers find alternatives to becoming more cost competitive and suppliers find new opportunity outside,” says Choon T. Chon, Delphi Asia Pacific president.

However, says Mr. Chon: “long-lasting, well-established relationships, which they have in the keiretsu system, will take a long time to be displaced, even with market competitive products and services.”