Oct. 7 (Bloomberg) -- Toyota Motor Corp., Asia’s biggest carmaker, is telling parts suppliers in Japan to slash prices or face being replaced by overseas rivals as the yen’s value appreciates, four people involved with the discussions said.
Toyota, which loses 34 billion yen ($443 million) in operating profit for every 1 yen appreciation against the dollar, told parts-makers it will buy more from emerging markets if domestic suppliers can’t match overseas prices, according to the people, who declined to be identified because the talks are private.
Toyota Boshoku Corp. led declines among the automakers’ suppliers today, dropping 5.8 percent in Tokyo to its lowest close since March 2009. Toyota, based in Aichi prefecture, Japan, is cutting costs to compensate for the yen’s climb as it restores output in Japan after the March 11 earthquake and tsunami damaged factories and caused parts and power shortages.
“The high yen must be pressuring Toyota to review its supply chain and to seek cheaper options,” Hiroshi Ataku, an analyst at IHS automotive in Tokyo said.
The yen rose to postwar high in August, forcing President Akio Toyoda to focus on cost cuts. He had earlier pledged to make quality the company’s top priority in response to recalls of more than 10 million vehicles for problems related to unintended acceleration.
Carlos Ghosn, chief executive officer of Toyota’s biggest domestic rival Nissan Motor Co., yesterday said Japan faces a “hollowing out” of its industries should the government fail to take steps to counter the yen’s rise.
Toyota made the demand for price cuts at the end of August to its 219 largest domestic suppliers, including Denso Corp. and Aisin Seiki Co., at a meeting held in Nagano prefecture, the people said.
Denso shares dropped 3.4 percent to 2,249 yen at the 3 p.m. close on the Tokyo Stock Exchange, the lowest since Aug. 24. The benchmark Nikkei 225 Stock Average rose 1 percent. Toyota rose 0.4 percent to 2,549 yen.
Toyota spokeswoman Amiko Tomita in Tokyo declined to comment on the automaker’s discussions with parts-makers about prices.
Nissan’s Ghosn, after taking over as president of the Japanese automaker in 2000, slashed the number of domestic suppliers to cut costs and restore the automaker to profit. That recovery is now threatened by the Japanese currency’s sharp rise, Ghosn has said.
Toyota has some of the closest ties with suppliers in the industry, as it shares cost savings, guarantees business and holds stakes in the biggest members of its parts-makers group. The automaker has maintained that system even as global rivals including Ford Motor Co. and General Motors Co. have cut the number of parts-makers to hold down costs.
Toyota’s suppliers network, or keiretsu, has helped the company dominate the Japanese market with market share of about 48 percent last year. The automaker’s 219 closest suppliers are members of the Kyohokai, which stands for “a group that cooperates with Toyota” in Japanese. The group was set up in December 1943, six years after Toyota was established.
Toyota, committed to manufacturing at least 3 million vehicles a year in Japan, has “naturally” favored its affiliated domestic parts suppliers, Ataku of IHS said. The close ties may not last much longer, he said.
“Toyota may have to follow what Ghosn did with Nissan’s parts supply chain 10 years ago, and search for the cheapest possible options,” he said.
Japan-based suppliers should procure more of their parts from overseas as one way to reduce their prices, Toyota said, according to the people involved in the discussions. The company asked some parts-makers to slash prices by as much as half, according to one of the people involved in the discussions.
The yen strengthened to a postwar record 75.95 yen versus the dollar in August and has averaged about 80 yen in the fiscal year started April 1, compared with almost 90 yen in the same period a year earlier.
Toyota’s ratio of domestic production is higher than Japan-based competitors. Nissan built 25 percent of its vehicles in Japan last fiscal year, while Honda Motor Co., the third-biggest, produced 26 percent of its cars at home.
The challenge to achieve lower costs in Japan also comes as output disruptions from the earthquake and tsunami may cause Toyota to fall behind GM and Volkswagen AG in global sales this year.
Toyota recovered production to normal levels last month after the quake, has said it expects global production to rise 5.1 percent from a year earlier to 7.72 million units in the 12 months ending March 31.
The automaker’s global output increased 10.6 percent to 626,817 vehicles in August, the first increase after the government ended subsidies for fuel-efficient cars in September 2010, the Toyota City, Japan-based carmaker said Sept. 28.
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