Global Growth Drives Transmission Supplier JATCO

FUJI, Japan – JATCO Ltd. President and CEO Shigeo Ishida is bullish about his company’s future, despite unit sales that still lag fiscal-2007 peaks.

For starters, earnings continue strong at or near last year’s record pace, the effect of extensive cost-cutting dating back nearly two years and the onset of a global recession.

More importantly, Ishida, whose company is the main supplier of automatic and continuously variable transmissions to Nissan Motor Co. Ltd., is bullish on China, the world’s largest auto market.

“What I see in China is what I saw in Japan in early 1970s,” Ishida tells Ward’s. “Everyone wants a car, and not only people who live in big cities.”

From 1965 to 1973, when the Arab oil embargo triggered an earlier recession, the Japanese market tripled in size, while vehicle exports grew 10-fold.

Ishida is not concerned about instability in the Chinese labor market, where in recent months both Toyota Motor Corp. and Honda Motor Co. Ltd. have experienced work stoppages in the face of demands for higher pay and better conditions. Analysts expect wages to double in the next five years.

“Labor cost is out of our control,” he says. “We might need to raise prices and vehicle cost might go up, but the market is growing.”

In fact, most forecasts project Chinese vehicle production and sales will double over the next 10 years to more than 20 million units. In contrast, sales and production are expected to remain flat in Japan.

JATCO’s Fuji CVT plant turns out more than 70 units per hour on two shifts, with defect rate of just 0.1%. Pictured here is the line’s valve body shop, staffed mostly by women, seen as having greater dexterity than their male colleagues. In the enclosed shop, they assemble an estimated 80 small parts.

Factoring in a slow but steady recovery in U.S. vehicle demand, Ishida expects JATCO sales to rebound this year to 4 million units, up 300,000 from last year’s total, and grow to 4.5 million by fiscal 2015. Sales peaked at 4.2 million in fiscal 2007.

Against this backdrop, the straight-talking executive, who formerly headed Nissan’s powertrain group, has several big tasks on his agenda this year. At the top of the list: further expansion of production capacity in China.

He notes JATCO’s ¥5.3 billion ($59 million) Guangzhou plant expansion will be completed next April, at which time the supplier will have capacity to manufacture 380,000 CVTs in China.

“We must make a decision on further expansion within this (fiscal) year (ending March 2011), because Nissan’s China production has already exceeded 600,000 units,” he says. “Half are equipped with CVTs and the other half with automatic transmissions from Japan.”

That may mean any future China expansion will involve adding an automatic transmission line at JATCO (Guangzhou) Automatic Transmission Co., the supplier’s 3-year-old subsidiary in Guangdong Province.

JATCO began CVT production last September at a new ¥6 billion ($66 million) plant in China, which in less than a year’s time has reached capacity of 11,700 units per month, or 140,000 annually, necessitating the 240,000-unit second line.

The facility supplies CVTs for 2.0L and 2.5L cars produced nearby at Dongfeng Nissan Passenger Vehicle Motor Co.’s Guangzhou plant, including the Teana, Sylphy, X-Trail and Qashqai.

Elsewhere, Nissan’s joint venture plant with Renault SA in Chennai, India, went into operation this May. Initially, the Rs45 billion ($955 million) facility is making only the 1.2L Micra small car, although it will add two Renault models in 2011.

China reminds Ishida of 1970s Japan.

The car currently is available with an optional 5-speed manual transmission and CVT; but no conventional automatic.

Manual transmissions still dominate the Indian market, Ishida notes. However, he warns both Maruti Suzuki India Ltd. and Hyundai Motor India Ltd. have introduced automatic-transmission options.

Maruti Suzuki makes the automatic-equipped 1.6L SX4 at its Manesar plant in southeast India. The auto maker also produces the automatic-drive A-Star hatchback at the facility. But unlike the SX4, the A-Star is sold outside of India.

“We’ll have to wait and see, particularly with respect to (Maruti) Suzuki,” says Ishida. “After all they’re the dominant player with a more than 50% market share (53% to be exact). If they can price the transmission competitively, the market impact could be huge.”

Ishida also expects JATCO’s Aguascalientes, Mexico, plant – having recently completed a $200 million expansion – to reach its new capacity of 700,000 units in 2011. In fiscal 2009, the facility turned out 550,000 units for a half-dozen Chrysler Group LLC and Nissan models.

Included in the list were the Dodge Caliber, Jeep Compass and Jeep Patriot, as well as the Nissan Altima, Maxim and Sentra. The Altima and Maxima are produced in Smyrna, TN, while the Sentra is built in Aguascalientes.

JATCO’s Aguasalientes plant, which opened in November 2005, is modeled after the supplier’s Fuji facility in Shizuoka prefecture.

Ishida declines to predict whether expansion of JATCO’s business in China, India and North America might lead to plant closures in Japan, where the supplier still operates seven transmission facilities including two – Yagi and Fuji – making CVTs.

In Europe, manual transmissions will continue to dominate beyond fiscal 2015, when the JATCO executive expects combined CVT and automatic-transmission penetration to reach 20%, up from less than 15% today.

He does not envision much new business with Renault, the exception being Renault Samsung Motors Co. Ltd., the auto maker’s South Korean subsidiary. In fiscal 2010, he projects sales of 200,000 units, with that as much as doubling by fiscal 2015.

In the current fiscal year, Ishida predicts more than 60% of JATCO global transmission sales will be CVTs, or 2.4 million out of its 4 million-unit total.

In the small but growing 7-speed automatic segment, the supplier currently sells an estimated 500,000 units annually, mostly through Nissan’s Infiniti lineup. The auto maker introduced the transmission in December 2008 on the Fairlady Z sports car in Japan, then followed one month later on the 370Z export version sold in the U.S.

Ishida projects 10% growth in 7-speed sales by 2015.

JATCO’s CEO downplays the company’s record ¥34 billion ($378 million) profit last year, in part due to fears the supplier’s main customers – Nissan, Suzuki and Mitsubishi Motors Corp. – will pressure it to lower prices.

Nevertheless, he confirms extensive cost-cutting last year resulted in JATCO lowering its breakeven point to 2.5 million units, 60% of fiscal-2007 production levels, while exporting profitably at a ¥90:$1 exchange rate.

Prior to the market downturn in fall 2008, JATCO’s breakeven was 80% of capacity.

One new measure moving forward is to reuse of older machinery. Last August, when JATCO launched its new CVT for 0.66L minicars, the supplier retained more than half of the 10-year-old equipment on a renovated line at its Fuji plant.

“This helped us minimize investment,” Ishida says. “We had to upgrade older equipment, but most refurbishment cost less than 15% of buying new equipment.”

Models equipped with the new CVT include the Suzuki Alto, Alto Lapin and Palette, along with the Nissan Roox and Juke.

In the near future, Ishida hopes to expand the production mix at its Yagi and Aguascalientes lines from the current two models to three.

JATCO’s Yagi plant makes CVTs for vehicles with torque capacities of 110-184 lb.-ft. (150-250 Nm), while the Aguascialentes facility focuses on 110-lb.-ft. and 258-lb. ft. (350 Nm) units.

Earlier this month, Nissan introduced a new JATCO CVT on the Indian-built Micra and its March sibling produced in Thailand. The transmission utilizes a 1-piece structure with a sub-planetary gear and is 10% smaller and 13% lighter than previous designs. The new design cuts friction 30%.