Beyond the keiretsu.

OEMs are changing the rules by which they select suppliers. With their traditional ties to carmakers disintegrating, Japanese automotive suppliers must reposition themselves to survive. Japan's automotive industry from its inception was shaped by keiretsu, business groups that have bound banks, trading houses, and industrial firms into loosely knit conglomerates. Sticking together by holding shares in each other and buying each others' wares, foreign companies were largely prevented from gaining a foothold in this market. While the pyramidal tier structure has long dominated the relationship between carmakers and parts suppliers throughout the world, the keiretsu system kept Japanese suppliers especially bound to OEMs because of cross shareholdings.

Long-term purchasing relationships, intense collaboration and the frequent exchange of personnel and technology between OEMs and select suppliers characterized Japan's keiretsu automotive sector. Parts suppliers were guaranteed business in return for devoting their best technologies and resources to one OEM. But then Carlos Ghosn arrived at Nissan Motor in 1999 and refused to play by the traditional Japanese rules. Under Ghosn's tutelage, Nissan dissolved the keiretsu relationship it had with hundreds of suppliers, keeping only four major parts makers on board. Once Nissan questioned keiretsu business practices, its domestic rivals followed suit. It wasn't long before Mazda and Mitsubishi Motors started to shed their ties with shareholder suppliers and began to embrace an open supplier selection policy.

The withering of keiretsu obligations means competition among suppliers has increased. Japanese suppliers now have to compete with local and foreign companies. In addition to the traditional supplier selection criteria for Japanese OEMs--quality, testing capability in Japan and co-development capability--OEMs increasingly are placing emphasis on the outsourcing of systems and modules to improve efficiency. More and more RFQs also are being sent to foreign global suppliers. A network structure based on an open supplier selection policy is emerging from the collapse of the keiretsu pyramid structure.

No longer guaranteed business from within the keiretsu and unable to survive on their own because of sub-optimal scale and limited technology investment, Japanese suppliers need to seek out new opportunities for collaboration.

Japanese OEMs today are making three major demands of parts suppliers--more system/module development capability, global supply capability, and continuous-and-aggressive cost reduction. The need to develop new technologies such as active safety, environmental technology and information/telematics technology along with increasingly "disloyal" new car buyers who are demanding an increased number of car models require R & D staff and engineering resources which Japanese OEMs currently are not equipped to provide. As Japanese OEMs are increasingly forced to focus their resources on technology development that adds true value to their brands, their reliance on suppliers to develop systems and modules is increasing as well. However, many Japanese suppliers do not have the capability to develop and supply systems or modules because it has traditionally been the OEM's role within the keiretsu to coordinate and integrate parts within a system or a module. Today Japanese suppliers are seeking mergers and joint ventures to develop systems capability.

As OEMs move to share global platforms, suppliers are being asked not to only supply parts to Japanese OEM plants, but also to their partner's plants, for example to Renault on behalf of Nissan. Japanese suppliers also are being forced to search for foreign partners to supply overseas markets. Furthermore, Japanese OEMs are not yet fully satisfied with aggressive annual cost-reduction initiatives of 5 to 10% and are demanding that their suppliers generate creative ways to reduce costs even further. As a result, many Japanese suppliers have begun to collaborate with former competitors to co-purchase common raw materials and commodities.

Japanese suppliers currently face the need to clearly define long-term strategies for survival. Like their global rivals, Japanese suppliers to survive must chose between three roles: systems integrator, technology satellite, or process satellite. Skill sets necessary for transformation must be acquired from wherever available, whether from a former competitor or from a foreign supplier. In some cases, the Japanese supplier may even make itself available for acquisition by a foreign competitor.

Japanese OEMs today seem to be in pursuit of their own individual forms of supplier strategy. Mazda, and Nissan, for example, are rapidly reforming their supplier selection models. Nissan clearly promotes a "project partnership" policy when it comes to open supplier selection. Regardless of what kind of project, whether new technology development or construction of a new plant, Nissan selects a main supplier partner who Nissan expects to share its latest and best technology, resources and skills in addition to being responsible for the management of sub-suppliers on Nissan's behalf.

Toyota, long considered the quintessential keiretsu OEM, still favors Toyota Group suppliers, but the company is reforming the structure of its supplier organization and encouraging mergers and acquisitions among its keiretsu suppliers in line with Toyota's own global outlook and vision for future technology ... In short, it can be said that Toyota and Nissan have similar objectives, but have adopted very different ways to reduce costs and leverage of their suppliers' technology, assets and resources.

Honda appears to be still undecided with regard to its supplier landscape. Honda has long preferred to develop technology internally somewhat like Toyota, but recognizes that it does not have the volume to continue to do so. Honda also recognizes that its keiretsu suppliers are not as large or as strong as those of Toyota. Mitsubishi is currently re-forming its supplier network by establishing a "Kyoryoku-kai [supplier cooperative community]", but its primary objective appears to be to protect its suppliers and maintain Mitsubishi's relationship with them.

By Akio Okamura, partner, Automotive Competence Center, Roland Berger Strategy Consultants. [e-mail]