Japanese Auto Makers: Machete Time

In a cost-cutting war with Nissan, Toyota leans on suppliers

Toyota (TM ) vs. Nissan (NSANY ): It's one of the oldest rivalries in the auto business--and one of the most lopsided. For years, Toyota Motor Corp. has steadily grabbed share in Japan and the U.S. from its main competitor, ramped up record profits while Nissan Motor Co. lost billions, and helped shove Nissan to the edge of bankruptcy. Even now, with Nissan in the middle of an impressive turnaround under the aegis of its European partner Renault, Toyota still walks away with top honors in sales and profits.

Yet as both prepare to close the books on their fiscal years, which ended Mar. 31, Nissan can lay claim to one surprising accomplishment: cost-cutting. Nissan is on track to slice 10% off its 2000 bill for car parts, thanks to a brutal decision to drop its most inefficient suppliers and consolidate orders with the most cost-conscious ones. That adds up to at least $2.25 billion in savings--savings that go straight to the bottom line. Mighty Toyota, in contrast, expects to shave $1.5 billion off its procurement costs, much less than Nissan, whose sales amount to less than half its rival's.

QUICK RESULTS. Company executives in Toyota City hate losing at anything, so this achievement of Nissan's has set off loud alarm bells. To keep its competitive edge, Toyota is jettisoning the traditional approach to cost-savings that won it fame: kaizen, the slow and steady approach to chipping away at expenses. Kaizen will still be applied to factory operations. But in parts purchasing, Toyota is no longer content to tinker: It wants 30% cuts in the cost of almost every type of auto part sourced from outside. "Toyota wants nothing less than to be the world's lowest-cost producer of the highest-quality automobiles," says analyst Noriyuki Matsushima of the Tokyo office of Nikko Salomon Smith Barney.

The sweeping undertaking is the cornerstone of a plan dubbed CCC21, or Construction of Cost Competitiveness for the 21st century. The goal of the drive is to chop costs by $8 billion by the end of fiscal 2005. That's a huge change: Before, it would normally take Toyota a decade to squeeze out that much in savings. According to Toyota Senior Managing Director Akio Watanabe, the point man in the drive, the company has no choice. "It may come as a shock," he says, "but if we're content with the little-by-little approach of kaizen, then we can't win."

That may sound overdramatic, given Toyota's awesome strengths. Yet the company has made some disturbing discoveries. At about the same time Nissan announced its widely publicized plan to slash jobs, close factories, and wring huge savings from its supplier network, Toyota learned from internal studies that it was paying prices well above those charged for similar parts used in General Motors Corp. and Volkswagen vehicles. "We thought we had the world's cheapest parts, but we were wrong," says Tadaaki Jagawa, Toyota's executive vice-president for corporate planning and purchasing.

How did Toyota get caught flat-footed? It stuck with the old ways--asking local Japanese suppliers it has used for decades to bid against each other for parts contracts every time Toyota rolled out a new model. Toyota also spurned the growing industry practice of installing standardized parts in a range of car models: No sharing of door locks in Camrys and Corollas, if you please.

But in the past five years, the worldwide auto-parts business has undergone massive change. Foreign auto-parts makers such as Delphi Automotive Systems Corp. (DPH ) and Robert Bosch Corp. now enjoy gigantic economies of scale by providing similar parts to a host of U.S. and European carmakers. Nissan, for example, has teamed up with Renault to buy standardized parts at big savings from fewer suppliers. "We are going more and more for global contracts," says Nissan CEO Carlos Ghosn.

Toyota so far has turned down offers from GM (GM ) and Volkswagen (VLKAY ) to team up on parts purchases. But that means it's new cost-cutting drive has to work, or it risks a steady erosion in margins. A key part of the exercise: Figuring out the lowest prices paid by carmakers for 173 commodity-type components, from rear-view mirrors to the bearings inside shock absorbers. Once Toyota learns these benchmark prices, it asks suppliers to match them as closely as possible without sacrificing quality.

NO HANDOUTS. So far, Toyota's procurement team has used the pricing data uncovered on about 85 of these parts to devise new ways to save money. For example, Toyota wants to cut the number of bearings it buys to as little as 1/20 of current levels by asking suppliers to design simpler parts.

The broader message is clear: If Toyota is ditching its old habits, longtime suppliers had better follow. "We won't give handouts anymore," says Jagawa. That kind of talk is aimed squarely at the 213 companies that make up the Kyohokai, an organization of Toyota suppliers that was founded during World War II. "We thought our products were already low-cost," says Yoshihei Iida, president of Tokai Rika, which supplies 90% of Toyota's turn signals and other switches. "Now we have to work even harder at it to maintain our business." Toyota may be turning up the heat in another way: Reports are surfacing that the giant wants its three biggest brake suppliers to set aside their rivalry and combine their manufacturing operations.

Toyota is also for the first time actively encouraging suppliers to seek business ties outside the group. Whereas Toyota once frowned on sales to other auto makers, it now wants each of its main suppliers to aim for at least a 20% share of the global market for components. That way, they can take advantage of larger production runs and share the savings with Toyota.

The effect of these changes is already being felt. Tokai Rika is now developing standardized parts for joint use in different models: All five variations of the Toyota Vitz subcompact, for example, now share the same dashboard knobs for adjusting temperature. Tokai Rika has also simplified its turn-signal levers, which are being installed on cars of entirely different classes. The Vitz-based Platz, electric-gas hybrid Prius, and Rav4 SUV now all share a single lever, as do the midpriced Camry Gracia, upscale Lexus series, and seven other models sold in Japan.

No part is too mundane to escape scrutiny. One of the first successes under CCC21 involves the plastic grips installed above a car's doors on the inside--passengers grab them to brace themselves on sharp turns. Toyota found out that Volkswagen was procuring much cheaper, but still high-quality, grips. So by knocking heads at major suppliers such as Kojima Press Kogyo, Watanabe says his team has come up with a way to use simpler designs and cheaper materials to produce grips for upper-end car models for $4 a piece, half the earlier price. The number of grips used will also be cut from 30 or so to just 3 main types.

Of course, there are limits to how far you can standardize basic parts before customers start to notice. But for the senior managers at Toyota, the war on costs is just beginning. If Nissan can do it, they say, Toyota can--and will. Suppliers, prepare to be squeezed.

Corrections and Clarifications "Machete Time" (International Business, Apr. 9) misidentifies Toyota Motor Corp.'s Senior Managing Director in charge of purchasing. His correct name is Katsuaki Watanabe.

By Chester Dawson in Tokyo

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