Development Bank of Japan
Research Report
No. 8

Trend of International Reorganization Affecting theJapanese Automobile and Auto Parts Industries

June 2000

Economic and Industrial Research Department
Development Bank of Japan

Contents
Summary ............................................................................................................................. iii
I

International Reorganization in the Automobile Industry.......................................... 1
1. Stagnant Automobile Demand and Deteriorating Business Conditions........................... 1
2. Developments in International Reorganization in the Automobile Industry................... 2
3. Changes in Purchasing Policy.................................................................................................. 7

IIInternational Reorganization in the Auto Parts Industry...........................................11
1. Comparison of Sales among Mega-Suppliers......................................................................11
2. Survey of Business Sentiment of Japanese Auto Parts Manufacturers............................11
3. Developments in International Reorganization and Conditions ofCompetition by Product.........................................................................................................12
4. Views of Automobile Manufacturers ...................................................................................16
5. Improving the Competitiveness of Japanese Auto Parts Manufacturers........................19

References ........................................................................................................................... 21

Development Bank of Japan Research Report/ No. 8iTrend of International Reorganization Affecting the Japanese Automobile
and Auto Parts Industries

Summary
1.

Demand for automobiles in Japan has matured and sales volume has leveled off in the longterm. Stiff competition and the preference for smaller cars have increased the share of lowpriced cars. These factors, coupled with increasing development costs, have adversely
affected the profits of automobile manufacturers.

2.

In contrast with the buoyant economies in the U.S. and Europe, the sluggish economy inJapan has made conditions difficult. The Japanese automobile industry has responded byforming capital alliances with foreign companies in particular, as well as in-house
restructuring. These strategic alliances are part of a trend toward business portfolio
reorganization through complementary relationships, involving three aspects: car type, sales
area and strategic technology (environment, safety, information). Most of the recent strategic
alliances in Japan have also been flexible and partial, with a degree of autonomy.

3.

U.S. and other foreign auto makers have changed their purchasing strategies toward
outsourcing to take advantage of the labor cost differential with parts manufacturers.
Meanwhile, Japanese car makers are increasingly moving away from their affiliated suppliers
and procuring more from overseas, and have been adjusting their capital relationships withparts manufacturers. The transformation has been faster for companies affiliated with automakers that have accepted foreign capital. Moreover, information technology may encouragereorganization of procurement and sales in the automobile industry.

4.

In the auto parts industry, mega-suppliers have been formed in the U.S. and Europe throughspin-offs of parts-manufacturing departments and M&A, and the sales of many of these
suppliers exceed one trillion yen. In contrast, the sales of most major Japanese parts makers
are around several hundred billion yen. Our survey of Japanese parts makers suggests that
this difference in sales might make Japanese manufacturers less competitive than foreign
ones, and hence lose out due to the weakened relationships between affiliated companies inthe domestic market. There are concerns that American and European manufacturers will
dominate the world market as competition and modularization intensify and technologicaldevelopment costs rise.

5.

However, a closer look at the industry suggests that although American and European megasuppliers are ranked top for many products, many specialized parts makers remain strong inspecific fields. Japanese manufacturers are ranked highly for products such as power steering,
air-conditioners, wiring harnesses, lamps, meters, fuel injection systems, air bags and pistonrings. In general, the top three companies have a considerable share of the world market forindividual components, and the oligopoly has increased for many products due to the recent
international reorganization.

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iii

6.

By product, reorganization in the car seat market in the U.S. and Europe has led to global
operation in areas of consumption and expansion of business into interior equipment ingeneral. Instrument panels, which are bulky and fragile, also need to be produced inconsumption areas, but the market for this product is less oligopolistic than for otherproducts due to the difficulty in generalizing its use and rationalizing installation work.
Oligopoly has increased for brakes, a major safety device, following large-scale
reorganization. As regards air bags, acquisitions of inflater manufacturers have progressed assafety standards have become more strict. The fuel injection industry, a capital intensive
industry, is highly oligopolistic and the technology has changed due to environmental issues.
Japanese manufacturers are strong in power steering, which is currently shifting toward
electric operation. The production of wiring harnesses, which is labor-intensive, has beenshifted to developing countries. Global operations are necessary for air-conditioners toensure production near consumption areas. Japanese manufacturers are strong intechnologies related to downsizing and precision processing for air conditioners.
Reorganization has progressed for pistons and piston rings to integrate the two components
in the design, as well as in oil seals and engine gaskets for supplying the two components as a
package. In lamps, capital intensiveness has constituted a barrier to entry. However, thetraditional Japanese practice of placing orders with affiliated suppliers is changing. Pricecompetition in shock absorbers has intensified as related technologies have matured. The
clutch market is highly oligopolistic with the advent of automatic transmission, and somemanufacturers have already retreated. Thus, the competition varies widely according to thecharacteristics of individual products, making it difficult to discuss the current status of the
car parts industry as a whole. Nevertheless, the following observations can be made.

7.

In general, the Japanese auto makers highly evaluate domestic parts suppliers in terms of
product quality and timely delivery, and are not entirely satisfied with the product quality ofEuropean and American mega-suppliers despite lower prices. In particular, they are reluctant
to accept suggestions for modularization mainly due to concerns about losing technologicalexpertise. However, Japanese car-makers admit the supremacy of American and European
parts manufacturers in conducting basic development work and creating ideas. The
difference in scale may cause a difference in competitiveness in the future.

8.

Introduction of foreign capital and alliances between domestic companies have occurred in
the Japanese auto parts industry, and such strategic alliances allow faster development thanautonomous development. Among strategic alliances, the disclosure of secret information
between partners is more limited in business tie-ups as compared with M&A, but such tieups are more appropriate to the Japanese corporate culture and provides more options.

9.

Although modularization has not developed much in the domestic market, it will likely berequired when supplying auto parts to foreign manufacturers or to overseas production
facilities of Japanese auto makers, and Japanese parts manufacturers should be prepared forthis eventuality. Their response has been bipolarized: some manufacturers have expanded to
become primary suppliers while others have specialized to become secondary suppliers.
Primary suppliers have greater sales opportunities but face increased risks in quality
guarantee and investment; secondary suppliers can concentrate on core businesses but could
be eliminated by competitors unless they fully utilize their strengths.

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10. As the Japanese market matures, the long-term business relationships that have sustained
product quality are giving way to an emphasis on lower costs, market principles and ad-hoc
contracts. In view of the structural changes now underway, manufacturers must quickly
enhance their advantages and reduce their weaknesses, but there is no simple solution.
Individual companies will have to make their own choices, including whether to form
strategic alliances, according to their situation.

Development Bank of Japan Research Report/ No. 8v

IInternational Reorganization in the Automobile Industry

1.

Stagnant Automobile Demand and Deteriorating Business Conditions

1.1 Long-term trend of automobile demand
Automobile production in Japan has been falling since the economic bubble burst. It stood at
9.97 million vehicles in fiscal 1998, just 70% of that in fiscal 1990 (13.59 million vehicles), andfailing to reach the 10 million mark for the first time in 20 years since 1978. Production is
expected to remain low in fiscal 1999.
Domestic sales have been falling due to recession since the peak of 7.8 million vehicles infiscal 1990. Exceptional movements include the increase in truck sales in fiscal 1994 due to thetightening of rules against overloading and the eleventh-hour demand in fiscal 1996 before theconsumption tax hike in April 1997, while sales of recreational vehicles have remained buoyant.
Subsequently, however, domestic sales have declined due to sluggish personal consumption andcapital investment: sales were 5.87 million vehicles in fiscal 1998, down 6.5% on the previous
year and falling below the 6 million mark for the first time in 12 years since fiscal 1986.
By type of vehicle, domestic sales of mini automobiles in fiscal 1998 increased 20.5% on theprevious year to 1.05 million vehicles as new models with greater safety and comfort weremarketed at relatively low prices following the introduction of new standards in October 1998,
the first time that sales of mini automobiles have topped 1 million vehicles. However, theoutlook is bleak for standard automobiles: sales of high-end automobiles were particularly poor,
amounting to only 0.74 million vehicles (down 9.1% from the previous year) as consumers opted
for cheaper cars. Sales did not pick up either for small automobiles (2.36 million vehicles, down
6.0%) and for trucks and buses (1.72 million vehicles, down 17.4%). Sales for fiscal 1999 are
expected to remain under 6 million vehicles as the demand for mini automobiles slows in thelatter half of the year.
Exports are declining after peaking in fiscal 1985 (6.85 million vehicles) due to the expansionof production capacity overseas. In the early 1990s in particular, automobile exports plummeted
as the American and European markets shrank. Although they picked up slightly in fiscal 1996-97
as the yen weakened and no major plants were established overseas, exports slid further in fiscal
1998 to 4.52 million vehicles due to the Asian economic crisis. This is the lowest level since fiscal
1993-94 and corresponds to the level recorded in fiscal 1976-77. Fiscal 1999 is expected to see afurther decline in exports mainly due to the continuing yen appreciation.
Due to the yen appreciation since 1985, overseas production has grown based on four coreregions: Japan, the U.S., Europe and Asia. Overseas production peaked in 1997 at 6.33 million
vehicles, then fell back 7.2% in fiscal 1998 to 5.87 million vehicles mainly due to reduced
production in Asia — the first decline since overseas production took off.
As the Japanese automobile market continues to falter, the 11 domestic manufacturers arecompeting fiercely with numerous foreign automobile makers for market share.
1.2 Mature demand
Despite their high prices, automobiles remain popular and selection is highly personal. Thus,
although consumers take time when buying an automobile, they may replace it before the carreaches the end of its useful life.
Japan is the second largest car-owning country in the world, next only to the United States.
The number of cars per person in Japan has reached 0.56, surpassing the level of the United
Kingdom and Germany, but the number is unlikely to increase to the level of the U.S. (0.78), amuch larger country.
Development Bank of Japan Research Report/ No. 8

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Almost 80% of households now own a car. Furthermore, the percentage of households
owning two or more cars exceeds 30%, and decreased for the first time in 1997. By income
bracket, the car-owning percentage in the high-income households, which has led automobile
consumption, leveled off in 1997, and furthermore, multiple car-ownership declined. As the
younger population shrinks due to the falling birth rate, car demand in Japan will increasingly
depend on replacement demand, as is already the case in other developed countries.
Recently, sales volume and unit price have remained low as employment conditions andincome prospects have worsened due to the prolonged recession. The diversification of personalvalues has diminished the role of automobiles as a status symbol: more consumers consider themas mere commodities and do not replace them quickly, considering that older cars will suffice forshort drives. Indeed, total travelling distance has leveled off. Moreover, cars have become lessvulnerable to shocks largely due to improved quality. According to the Automobile Inspection
and Registration Association, the average age of automobiles had risen to 5.6 years at the end of
fiscal 1998.
The “Survey on Passenger Vehicle Market Trends” and other statistics indicate that the lifeof old cars previously owned by new car buyers (i.e. replacement cycle) has also become longer.
This trend is particularly marked for mini automobiles, which are mostly used for daily life.
As regards the age of automobiles, those used for seven or more years now account for
more than 40% of the total, and a high 23% of automobiles are used for nine or more years.
In light of this mature demand, domestic auto sales in Japan will mainly come from
replacement demand and therefore are not likely to grow substantially in the future.
1.3 Worsening profitability
Numerous manufacturers with overcapacity are struggling to increase share, while consumers are
opting for cheaper cars. The main growth markets are the developing countries as in Asia (India
and China in particular), where demand will be for small cars due to affordability. Demand forsmall cars is also rising in environmentally-conscious countries in Europe. Thus, the unit price ofautomobiles will remain low. Light automobiles and certain models of small passenger cars, withexcellent cost-performance and improved functions, are now popular not only with first-timebuyers but also experienced consumers. Manufacturers of finished cars must therefore ensureprofitability in small cars.
Car manufacturers will also have to step up R&D and capital spending on technologies
related to the environment, safety and information. However, the higher costs of developing
strategic technologies coupled with the decline in unit sales price makes it more difficult for car
makers to secure profits.
To improve investment efficiency, finished auto makers are working to universalize
platforms and parts and to pursue scale merits by forming “world strategic automobile” initiatives.
Such strategies, however, may result in homogeneous products that do not attract consumers due
to lack of differentiation.
In view of the deteriorating business environment, automobile manufacturers have recently
embarked on strategic alliances to innovate and rebuild their business portfolio.
2. Developments in International Reorganization in the Automobile Industry
2.1 Difference of economic environment between Japan, the U.S. and Europe
The enormous U.S. car market was controlled by the Big 3 until the 1980s, when cheap, highperformance small cars made in Japan began to capture a substantial share. In response, the U.S.
auto manufacturers started major reorganization in the late 1980s, based on detailed studies of2

Development Bank of Japan Research Report/ No. 8

Japanese manufacturers as benchmark cases.
The U.S. economy has expanded since bottoming out in 1991, and is now enjoying robust
growth. New car sales in 1999 increased 9% on the previous year to 16.96 million vehicles,
boosting the cash reserves of manufacturers. As share prices have risen, M&As have increased
rapidly since the late 1990s through stock swaps and other methods.
In Europe, car manufacturers firmly kept their distinctive brands under a fixed hierarchy. In
general, car makers in northern Europe specialized in larger high-end cars while those insouthern Europe were mostly family-owned SMEs producing smaller vehicles. The production
systems of individual manufacturers remained within national boundaries.
With the recession in the early 1990s, European manufacturers undertook substantial
restructuring, and following monetary union, the European Commission is trying to reduce theprice differential among EU members for same types of cars. And other major changes are taking
place. For example, the transition of East European states to market-based economies has not
only enlarged peripheral markets but also provided a cheap, high-quality labor force forEuropean companies. European auto parts makers are small and traditionally have expensive
production structures with high personnel costs due to strong labor unions. Companies thatcannot cope with such changes have been taken over by U.S. and other suppliers to increase theirglobal presence.
Backed by the buoyant economy, new car sales in 18 European countries (15 EU members
plus Norway, Switzerland and Iceland) rose 5% on the previous year in 1999 to 15.07 million
vehicles, exceeding the 15 million mark for the first time. This represents the sixth consecutive
annual increase in new car sales (with record sales for the last two years).
In Japan, automobile makers have restructured through consolidation of production lines,
plant closure, asset disposal and personnel cutbacks to cope with stagnant demand anddeteriorating economy, and some companies have even formed capital and business allianceswith foreign companies.
2.2 M&A development among Japanese companies
International reorganization is progressing worldwide, and M&A has become an importantmeans of maintaining corporate vitality and growth. Whereas money has accumulated in
American and European companies, stock prices in Japan remain low, and foreign companies are
rumored to be seeking to acquire Japanese firms at rock-bottom prices.
The number of M&As involving Japanese companies declined temporarily after the collapseof the bubble economy but has resumed recently, surpassing the level reached during the bubble
economy to a record 1,169 cases in 1999.
Looking at the parties involved in M&As, most of the increase has come from M&As
between Japanese companies (In-In). However, M&As of foreign companies by Japanese firms(In-Out) have declined since the bubble while M&As of Japanese companies by foreign firms(Out-In) have increased every year. The increase in Out-In M&As also applies to the transport
equipment industry as a whole.
According to the Bowles Hollowell Conner, the M&A department of First Union, thenumber of M&As in the auto parts industry worldwide increased from 32 cases ($2.5 billion) in
the first quarter of 1998 to 82 cases ($13.7 billion) in the first quarter of 1999. The rise is largely
attributable to the increase in large-scale M&As such as the acquisition of Lucas Varity by TRW($6.5 billion).
These developments may be partially explained by the creation of support systems, such as
the establishment by a foreign investment bank of a specialist team for M&As in Japan.
Recent M&As are different in character than those conducted in the 1980s as part of theDevelopment Bank of Japan Research Report/ No. 8

3

money game: most of them are intended to reinforce core businesses or for divestment of noncore businesses.
2.3 Reconstruction of business portfolio
As shown by the capital participation of Renault in Nissan, the Japanese automobile industry has
been undergoing successive reorganizations; current strategic alliances are shown in Figure 1-1.
The list, although complex, only includes major relationships involving Japanese auto makers, but
actual relations are actually much more complicated as many alliances are not disclosed.
Figure 1-1. Major Strategic Alliances Involving Japanese Automobile Manufacturers

Daihatsu

Japan

Europe & U.S.

Toyota

VW

Hino
Isuzu

GM

Honda

Opel

Suzuki
Fuji Heavy
NissanRenault

Nissan Diesel
Mazda

Ford

Mitsubishi

Volvo

Capital relationship
Business alliance

DaimlerChrysler

Most of the recent strategic alliances in the automobile industry are intended to achieve“mutual complementarity” through rebuilding the company’s business portfolio, thereby
expanding vertically (expansion of auto types) and horizontally (area composition) anddeveloping strategic technologies. As regards vehicle types, the alliances allow a mix of multiple
products and brands to be marketed, such as high-end and popular cars, sedans and recreational
vehicles, thus overcoming fluctuations in popularity among different types of vehicles. As regards
marketing areas, the alliances reduce the risk of local economic fluctuations in ways such as
making profits in the U.S. when the Japanese economy is down and selling more in Europe when4

Development Bank of Japan Research Report/ No. 8

the U.S. economy falters. In addition, automobile manufacturers are being forced to acquire
technologies related to the environment, safety and information in order to survive. Strategic
alliances also help share investment risk and improve investment efficiency.
2.4 Complementation of vehicle types (vertical alliances)
The first aspect of complementation concerns the types of vehicles.
During the period of rapid economic growth when full product ranges were effective,
individual manufacturers tried to increase product variety on their own. Recently, however, theeffect of introducing new models has become short-lived as demand has become more volatileand consumer preferences for design and performance have changed. Automobile makers must
therefore identify the short-term needs of consumers when creating new products. However,individual manufacturers cannot offer a full product range under the current economic
conditions because this would require exorbitant investment in development, production andsales. Indeed, the performance of some companies with a full product range has deteriorated. In
contrast, American and European companies have concentrated managerial resources on theircore businesses while adding other vehicle types through M&A.
The merger between Daimler and Chrysler is a good example. High-end passenger vehicles,
large trucks and vans for commercial use produced by Daimler-Benz are complemented by
Chrysler’s main products: popular passenger cars and small trucks. Daimler-Chrysler’s investment
in Mitsubishi will add mini automobiles and other compact vehicles to its product portfolio.
Also, Suzuki, which is highly cost-competitive in mini automobiles, Isuzu (trucks) and Fuji
Heavy (AWD: All-Wheel Drive) are now partially owned by GM, which is strong in medium andlarge passenger cars. In terms of environmental protection and progress in motorization indeveloping countries, mini automobiles are an important strategic product due to their low fuelconsumption and price. Following GM’s investment in Fuji Heavy, Suzuki and Fuji Heavy
entered into a capital alliance to eliminate duplication in mini automobile development.
Renault’s product portfolio mainly consists of small vehicles of 1,200 to 1,300cc while
Nissan has a full product range from high-end cars to small cars of 1,000cc, and this match was
one incentive for capital participation.
2.5 Complementation of marketing areas (horizontal alliances)
The second aspect of complementation concerns marketing areas.
Thus far, manufacturers have gone global independently, but starting a business overseas
from scratch involves significant risks as well as time and costs. The fastest way to expand sales
areas is through acquisition, by which existing sales channels of the bought companies can also
be acquired. This is an effective way of gaining access to emerging markets in Asia, East Europe
and Latin America as well as reducing the risks of foreign exchange and economic fluctuations.
Japanese automobile makers have established strong business bases in Asia, for Asian
countries tended to restrict imports of finished cars to promote their own national models. Local
operation through plant transfers and technical guidance has given the Japanese manufacturers an
overwhelming share in the Asian car market, and it is this solid sales base established by Japanesecompanies in Asia that is particularly attractive to European and American manufacturers seeking
access to this growth market.
For instance, GM, with solid bases in North America and Europe, has increased its
ownership in Suzuki and Isuzu, both of which are strong in the Asian market, and invested in
Fuji Heavy, thereby acquiring strong bases in Asia. Suzuki has good experience in developing
countries including India, China and Hungary. GM also plans to market strategic models for Asia
under its own brand name through the sales channels of Suzuki and Fuji Heavy.
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Renault sold off its sales branches in the U.S. when it experienced financial difficulties, andthe company did not have bases in Asia, either. On the other hand, the U.S. market is very
difficult to enter due to strict exhaust gas regulations. Nissan was therefore an ideal partner for
Renault for area complementation, because the Japanese manufacturer has plants and sales
establishments in both the U.S. and Asia.
Similarly, the merger between Daimler-Benz and Chrysler was convenient as the former hasbases in Europe while the latter is based in the U.S. Furthermore, having invested in Mitsubishi,
Daimler-Chrysler can now utilize its sales channels in Asia.
2.6 Complementation of strategic technologies
The third aspect of complementation concerns strategic technologies.
Investment costs will rise further as technologies related to the environment (low-pollution
vehicles including fuel cell cars), safety (tighter safety regulations in various countries andrequirements as standard equipment) and information (ITS: Intelligent Transport Systems)
progress. Recent alliances are intended to reduce this investment burden by combined efforts.
Environmental standards in Europe, already strict, are likely to converge toward German
standards or other highest standards in the region as market integration proceeds.
In this context, mergers have enabled Chrysler to utilize the leading technologies of DaimlerBenz for fuel cell cars and the low fuel consumption of diesel, while Mitsubishi is strong in low
fuel consumption gasoline engines.
Similarly, GM increased its investment in the diesel-oriented Isuzu to improve its
development and production systems for diesel engines which emit relatively low amounts of
CO2. Having been forced to abandon its unprofitable passenger car department, Isuzu will
specialize in diesel engines under the guidance of GM. Also, Isuzu and Honda are combining
forces, with Isuzu supplying low fuel consumption diesel engines to Honda, and Honda
providing low pollution gasoline engines for GM.
For Fuji Heavy, environmental technologies would be too expensive to develop without apartner. The company will provide the GM group with AWD and CVT technologies in exchange
for investment from this world-leading car manufacturer with huge financial resources. Demandfor AWD vehicles is expected to rise in Europe and the U.S., and related technologies will be
useful in Asia where there are many swamped roads.
Renault has found it difficult to meet stricter environmental regulations on its own, and so
one purpose of investing in Nissan is said to be to acquire leading next-generation environmental
technologies developed by the Japanese company, including catalysts.
2.7 Direction of technological development and orientation of strategic alliances
The future direction of environmental technologies is still unclear. Fuel cells are still very
expensive, on the order of several million yen, and it is not certain whether the price can be
reduced to an acceptable level as the next-generation power source, or whether gasoline engines
and other internal combustion systems will remain dominant due to existing infrastructure
restrictions. At the 1999 Frankfurt Motor Show, diesel engine vehicles attracted attention asenvironmentally sound cars, but it is still not clear whether environmental protection efforts inthe coming decades will focus on diesel and other internal combustion engines or electricvehicles or hybrid cars.
Fuel cell vehicles derive electric energy from chemical reactions between hydrogen andoxygen to produce water, and this energy supplies power to the motor. Some argue that fuel cellvehicles are the most promising for next-generation automobiles as they emit only water (andtrace carbon dioxide in the case of methanol reforming models). However, the development of
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such revolutionary automobiles requires companies to work together to share the inherent risk.
In the field of fuel cell vehicles, Daimler-Chrysler has already linked up with Ballard Power
Systems, a Canadian venture company with numerous key patents, and intends to start a joint
development project with Ford. Elsewhere, Toyota has been working with GM. The two
corporate groups are battling for leadership in establishing de facto standards. According to apress release of Ballard and Daimler-Chrysler, however, the percentage of fuel cell vehicles in2020 is estimated to be 25% at most, and maybe even as low as 5% (Nikkei Sangyo Shimbun
Nov. 30, 1999).
Given the uncertain direction of future technological development, auto makers should
perhaps retain autonomy rather than fixing partners through M&A involving capital. Makers
could choose to build a loose network of alliances with different partners in different fields toensure a flexible response to future technological innovations. As regards fuel cells, a company
could maintain relations to enable it to use technologies developed by other companies, rather
than commit itself to risky independent development.
Although some argue that only the “4 million sales club” will survive, Prof. Fujimoto ofTokyo University estimates that the minimum optimal production scale in the car industry is
200,000 to 300,000 vehicles. Consumer preference for automobiles differs significantly between
geographical areas, and mass production of homogeneous vehicles for everyone does notnecessarily bring success. It may be more effective to market differentiated products under
original brands to promote long-term product recognition.
3.

Changes in Purchasing Policy

3.1 U.S. and European manufacturers
By continuously improving production systems, Japanese auto makers became a serious threat to
U.S. and European manufacturers in the 1980s. The U.S. manufacturers in particular undertook
substantial reforms from the late 1980s through the early 1990s, based on detailed studies on theefficiency of Japanese systems including keiretsu and just-in-time delivery.
The U.S. auto manufacturers focused on the high ratio of outside orders, and decided thatthey could reduce procurement costs and improve investment efficiency by contracting out the
production of parts traditionally manufactured in-house to take advantage of the labor costdifferential between auto makers and parts manufacturers. Thus, downsizing and outsourcing
were their solutions.
Also, U.S. automobile manufacturers introduced a Japanese-type pyramid structure in theirrelationships with parts suppliers, limiting their direct business partners to a smaller number ofprimary suppliers. The primary suppliers thus selected were given more business as well as
responsibility under long-term contracts, while secondary and tertiary suppliers were positioned
below the primary suppliers.
In addition, the number of auto parts has been reduced by integration of platforms,
common use of parts and modularization. Modularization and other breakthroughs are
particularly necessary in Europe, where profits are becoming elusive as demand shifts toward
smaller cars. There is no established definition for modularization, but the term usually refers to
the delivery of parts from suppliers to auto manufacturers in the form of partially assembled units(modules). Systemization refers to the delivery of parts in the form of functionally integrated
units, with parts suppliers assuming responsibility for design and development as well asassembly.
Car manufacturers aim at “worldwide purchasing”, which is to optimize global procurement
Development Bank of Japan Research Report/ No. 8

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through bulk purchasing from the best suppliers transnationally.
In the United States, in-house parts manufacturing departments of car makers have been
spun off as part of the outsourcing efforts, and Delphi and Visteon were created in this process.
GM spun off Delphi when restructuring its production system. Delphi has consolidated its
own production system through repeated disposal and acquisition of businesses to become theworld’s leading auto parts manufacturer dealing in a wide range of products including brakes,
suspension systems and electrical equipment. Following its IPO, the company is now planning to
reduce its sales dependence on GM’s North American Business to become a fully independentparts manufacturer.
Ford also spun off its in-house parts production department to create Visteon. In addition to
air-conditioners and electronic parts, Visteon is expanding through acquisition, and plans to
reduce its sales dependence on Ford.
3.2 Japanese automobile makers
With the resumption of the yen appreciation in 1999, the Japanese finished automobile
manufacturers are being forced to review their production systems on a global level. Procurement
has been overhauled to optimize global purchasing, and transactions with unaffiliated suppliers
have become common as has the adoption of foreign parts. Some companies are reviewing theircapital relationships with parts suppliers, while drastic reforms have taken place at companies
affiliated with car manufacturers that received foreign capital.
Under its “Revival Plan”, Nissan is overhauling relations with its parts suppliers: primary
suppliers will be slashed from 1,145 to 600 companies, and parts suppliers are being urged toreduce prime costs by 20% on average.
Nissan will also dispose of shares in affiliated companies to reduce liabilities. Reorganization
efforts have intensified among affiliated parts makers, such as the merger between Calsonic andKansei, the establishment of Jatco Transtechnology, the capital alliance between Tachi-S and Fuji
Kiko and the joint venture of Unisia Jecs and Valeo.
Under Ford’s guidance, Mazda will introduce the Full Service Supplier (FSS) system tocontract out the development, design and quality guarantee of auto parts to suppliers. Byordering out all parts except engines, transmissions and body frames, the company plans toconcentrate development expenditure and human resources on the core components ofautomobiles.
Mazda is reviewing its capital relationships with local suppliers to improve its balance sheet
through stock disposal. Thus, its shares in Naldec, an electronic parts maker, were sold to
Visteon, and its shares in Delta Kogyo, a sheet maker, were also disposed of.
3.3 Impact of information technology (IT)Information technology (IT) can have a strong impact on the reorganization of the automobile
industry.
The assembly process, which has been considered the core function of auto manufacturers,
is only a part of the value added to automobiles. The work of producing and selling an
automobile involves many other sectors including parts procurement, product development,
assembly, sales, financial services (car loans, leasing, insurance), spare parts and used auto sales,
and the money spent on such peripheral services is estimated to be several times the cost of theautomobile itself. Ford and GM envisage moving away from being merely simple assemblycompanies to providing integrated services related to automobiles. The two companies will
rationalize their assembly lines through modular delivery to concentrate financial and humanresources on core activities such as engine development.
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As regards parts procurement, efforts have been made to accelerate office work concerning
ordering, delivery and inventory management by using the Internet. The ultimate goal is to
reduce procurement costs through competitive on-line bidding among parts suppliers. GM and
Ford have taken the lead by planning to integrate their respective on-line procurement networks,
and are inviting Japanese auto makers to participate. For parts manufacturers, integrated on-line
procurement has the merit of simplifying specifications and billing forms, which differ from
customer to customer. In Japan, investments have been made in response to the different
procurement networks of individual keiretsu, so the integration of such networks may consolidate
and simplify procedures. This trend toward B2B electronic commerce between companies
transcends traditional affiliations.
The major challenge in product development is to respond quickly to changing market needs
by reducing the lead time before starting production, i.e. the time for product planning, design,
blueprint creation, prototype evaluation, die and cast design, etc. One solution is simultaneous
engineering, which relies on three-dimensional CAD/CAM/CAE (Computer-Aided
Design/Manufacturing/Engineering) to produce electronic drawings. By sharing this information,
departments can simultaneously design products and related production processes.
As regards sales, it is becoming increasingly important for automobile makers to sell theirproducts directly without intermediate dealers and thus to directly obtain customer information
for product development. The automobile industry is thus changing from the traditional supplypush method to a demand-pull mechanism. “Production-on-demand” is also envisaged in the
future, whereby orders will be taken directly from customers over the Internet. Customers could
then search for desired vehicles and check prices on-line, thus obtaining less expensive cars more
quickly. This is a movement toward B2C electronic commerce between companies andconsumers, and so-called “net dealers” that specialize in intermediary and agency functions on
the Internet are already operating not only in the United States but also in Japan. Some
automobile manufacturers have tied up with independent net dealers that sell multiple brands,
but others are developing their own systems.
Regarding used car sales, large display forecourts are needed to hold inventory, so sales
efficiency must be improved. Recently, however, some Internet dealers specializing in used cars
have been reducing inventory period by putting information on second-hand cars on-line. A large
market for spare parts has emerged in the U.S., and companies dealing in spare parts have set upon the Internet accordingly.
Will such IT trends also continue indefinitely in the Japanese automobile industry?
In Japan, there are close consultations on parts procurement from the initial stage between
automobile makers and parts suppliers to reduce the development period, which is one of thereasons for the competitiveness of Japanese automobiles, along with strict inspections after
delivery. Highly sophisticated parts are particularly difficult to handle on-line. The just-in-time
delivery system has also been established. In this light, on-line procurement is not likely toincrease substantially for key parts for product differentiation, even though it may reach the levelof the United States for bolts, nuts and other parts for general use as well as for low value-added
materials.
As regards sales, U.S. consumers tend to welcome the convenience of the Internet andregard buying a car as a “waste of time” involving tedious and unpleasant negotiations. Suppliers,
too, are positive about introducing Internet marketing. In Japan, young consumers are
increasingly only visiting car dealers to look at the products found on the Internet before making
a decision. However, many people still believe it is important to talk with auto dealers, and many
dealers still do not have e-mail addresses and so have to send inquiries from customers via
conventional methods such as facsimile and telephone. It is also difficult for Japanese auto

Development Bank of Japan Research Report/ No. 8

9manufacturers to market their products on the Internet over the heads of their many affiliateddealers.
Information technology will certainly encourage industrial reorganization, but the impact inJapan may be somewhat limited due to the circumstances.

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Development Bank of Japan Research Report/ No. 8

II International Reorganization in the Auto Parts Industry
1. Comparison of Sales among Mega-Suppliers
Huge auto parts manufacturers are emerging in the world market with sales amounting to several
trillion yen. Delphi and Visteon are former in-house parts manufacturing departments of GM
and Ford, respectively. Bosch has obtained various patents due to its excellent development skills,
and has established solid bases around the world including Japan. Denso and Aisin Seiki are thetwo Japanese manufacturers ranked among the top 10 parts makers in the world. Lear, Dana,
TRW and JCI are all based in the U.S. and, along with Valeo of France, have rapidly boosted
sales through active M&As.
In contrast, sales of Japanese parts makers are on the order of only several hundred billion
yen, with the exception of Denso and Aisin Seiki. This gap in sales compared with American andEuropean counterparts could cause a gap in international competitiveness. The overall picture isnot so simple however, because such mega-suppliers deal in various parts and may not be able tocompete with specialized suppliers in some areas.
This chapter examines the conditions of competition by product area.
2. Survey of Business Sentiment of Japanese Auto Parts Manufacturers
In September 1999, we surveyed the views of Japanese auto parts manufacturers on international
reorganization. Questionnaires containing multiple-choice questions (multiple answers allowed)
and descriptive questions were sent to manufacturers, and the collected responses were tabulated.
The survey covered 19 major Japanese parts makers; this section outlines the results.
The first question concerned the reasons and background for the rapid increase in M&As by
American and European parts manufacturers. Many companies cited intensification of global
competition, modularization/systemization, and increasing burden of investment in technologicaldevelopment. As finished automobile makers expand production overseas, parts suppliers arebeing forced to supply their products to automobile plants all over the world. As a result,competition is intensifying in the whole automobile industry as suppliers compete among automakers.
As regards the purpose of M&As by American and European parts manufacturers, many
cited scale advantages, the response to globalization, modularization/systemization andtechnological development. The Japanese parts suppliers are concerned that U.S. and European
suppliers are seeking to improve competitiveness through expansion.
The largest number of companies answered that American and European parts
manufacturers are improving competitiveness in response to modularization/systemization, andto supply the global market. Thus, the primary objectives of such M&As are vertical integration
for modularization of products and horizontal integration to widen marketing areas. Manycompanies cited the ability of technological development and cost competitiveness, while somemanufacturers also selected corporate strength and profitability.
The next questions concerned the impact of the reorganization and enlargement of parts
suppliers in the U.S. and Europe on overseas and domestic markets. As regards overseas markets,companies expressed concern that Japanese manufacturers will lose out to American andEuropean competitors in terms of costs and customers. Attacks on Japanese companies byforeign manufacturers including by M&A will increase competition in the domestic market,
leading to the demise of weak Japanese parts suppliers.
As regards future changes in keiretsu relationships, most companies believe that relationships
will only be maintained and reinforced with specific major suppliers. Thus, Japanese parts
suppliers recognize that selection and concentration will also apply to the relations between
Development Bank of Japan Research Report/ No. 8

11

affiliated companies. Some companies envisage more drastic changes, and answered that “keiretsu
will be disbanded or substantially weakened.”A more specific question asked about likely changes in the keiretsu relationships resulting
from industrial reorganization including alliances of finished auto makers with foreign capital.
Many companies answered that relationships will diverge greatly between suppliers that areadmitted as partners and those that are not. That is, relations will strengthen with partners thatcan contribute to joint development of products or technologies, while business with othersuppliers will simply depend on price.
As regards possible changes in the structure of auto parts procurement induced by industrial
reorganization including alliances of finished autocar makers with foreign capital, Japanesesuppliers believe that competition will become borderless, prices will converge worldwide andglobal optimal procurement will become the norm.
How will industrial reorganization proceed in Japan? Multiple-choice answers indicated thatmany companies foresee drastic changes, including a substantial number of M&As. The mostcommon answer, however, was that reorganization will tend to be through business alliances(collaboration) than M&A.
The companies were also asked to describe the possibility of M&As and business alliances ofparts manufacturers in Japan, and the responses varied: some view that business alliances will
dominate given the traditional Japanese managerial culture and affiliations, while others consider
that such obstacles will be cleared, paving the way for rapid M&A in Japan.
Finally, the survey asked what strategy Japanese auto parts manufacturers should adopt. The
companies replied that they should focus on their core businesses and what they do best, andcompensate their weaknesses through tie-ups to improve responsiveness to modularization, costcompetitiveness and technological ability. In practice, strategies will vary among companies
according to individual circumstances.
3. Developments in International Reorganization and Conditions of Competition by
Product
From October to December 1999, we conducted interviews with major auto parts manufacturers.
Based on the results, this section examines the conditions in individual product areas.
Figure 2-1 outlines the characteristics of the whole auto parts industry.

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Development Bank of Japan Research Report/ No. 8

Figure 2-1 Comparison of Competition in Individual Product Areas
Product area

World share of
top 3 makers (%)

Seats

50

Instrument panels(of which: meters)

30
40

Change inlast 5 years

World top 3 makers
No.1
JCI

DelphiSlight increase Denso

No.2

No.3

Lear

Magna

TextronVisteonVisteonMannesmann VDO

Brakes50

Continental Teves

TRW

Bosch

Air bags

50

Autoliv

TRW

Toyodagosei

Fuel injection systems
・ gasoline
・ diesel

60
70

Slight increase Bosch
Bosch

Delphi
Delphi

Denso
Zexel

Power steering

50

Increase

TRW

Koyo Seiko

Delphi

Wiring harnesses

50

Increase

Yazaki Corporation

Delphi

Sumitomo Electric

Pistons
Piston rings

50+
N.A.

Mahle
Federal Mogul

Rheinmetall
Dana

Federal Mogul
Riken

Oil seals & engine gaskets

60

Large increase Freudenberg-NOK

Federal Mogul

Dana

Air-conditioners

50

Slight decrease Denso

Delphi

VisteonLamps

40

Koito Manufacturing Valeo

Stanley Electric

Shock absorbers

60

DelphiTennecoMannesmann Sachs

Valeo

Mannesmann Sachs

Bridgestone

Michelin

Clutches

60

Tires

50

Note:

Slight increase LuK
GoodyearAll numbers are estimates from interviews.

Looking at the top three companies in each category, it is clear that mega-suppliers including
Delphi and Visteon are ranked highest in many product areas. However, some companies are
particularly strong in specific areas. Japanese companies are ranked among the top three suppliersin such areas as power steering, air-conditioners, wiring harnesses, lamps, meters, fuel injection
systems, air bags and piston rings.
The level of oligopoly by the top three companies is generally high, and is highest in fuelinjection systems for diesel engines and lowest in instrument panels. Fuel injection systems fordiesel engines constitute a capital intensive industry and require processing technologies for highpressure as well as sophisticated electronic control technologies. These constitute entry barriers,
but the market scale is small, therefore the level of oligopy is quite high. In contrast, the level ofoligopoly in instrument panels is lower than in other areas because it is difficult to generalize its
use or to rationalize related installation works.
In the last five years (mainly from 1993 to 1998), the level of oligopoly rose in many productareas due to international reorganization. Oligopoly progressed particularly in oil seals and engine
gaskets as the top three companies were actively involved in acquisitions. Oligopoly in airconditioners by the top three companies was reversed slightly as European manufacturers raised
their rankings backed by expansion of the regional market.
Individual product areas have the following characteristics.
International reorganization in seats has progressed in line with expansion of outsourcing by
car makers as parts suppliers acquired the in-house production departments of auto
manufacturers and other seat makers. In particular, major suppliers in the U.S. and Europe have
expanded from seats to interior equipment in general. In Japan, many small suppliers havecompeted for share under the keiretsu system. The reorganizational movement has just begun.
Development Bank of Japan Research Report/ No. 8

13

Typically, seats are expensive to transport and production facilities must be located inconsumption areas in line with the worldwide strategies of auto makers. This is a major burden
for parts suppliers. As the merit of scale has become important in the U.S. and Europe due tostiff price competition, reorganization has advanced rapidly for seats. Faced with lower
profitability, manufacturers now mass-produce the capital-intensive structural parts while
producing the labor-intensive cover parts in developing countries for assembly in consumption
areas. Related technologies have matured, making production management technologies more
important than research and development.
Seat prices in Japan are traditionally higher than in other developed countries, reflecting
consumers’ preference for quality. This, along with the practice of supplying to affiliatedcompanies, has allowed the coexistence of numerous parts manufacturers. Recently, however,suppliers have been increasingly requested to lower prices.
Instrument panels and meters are cosmetic parts that affect the image of the automobile. It
is difficult to devise general-use products because different models have different specifications.
The large number of component parts and the need for manual labor in installation have allowed
lower-ranked manufacturers to survive in the market. For the same reason, the top companies
hold only about 10% of the world market, considerably lower than for other auto parts. Although
there are scale benefits in the development of instrument panels, mass production is unlikely tobe advantageous since the panels are bulky and fragile and should be produced near automobile
plants. It is also difficult to rationalize assembly lines.
Modularization of instrument panels has been promoted, but in practice system design isdifficult, integrating all components including resin, air-conditioners and electronics. Other
challenges for modularization include the reduction of weight and cost.
As for brakes, huge suppliers are emerging due to reorganization in the U.S. and Europe aspart of complementation for systemization. Related technologies have almost matured, butbrake-squeaking remains a problem for this important safety component as do the different
requirements of individual markets.
Regarding air bags, related suppliers are progressively restructuring to meet tighter safety
standards in the U.S. and Europe. All of the major module suppliers intend to become safetysystem manufacturers.
The air bag market has been oligopolized through corporate acquisitions. Technical expertiseis required for the inflater rather than the air bag, and gunpowder/gas generation technologies
are required. Such technologies are supported by the munitions industry in the U.S. The
excessively strong impact of explosion needs further improvement.
Oligopolization has reached a substantial level for fuel injection systems for gasoline engines.
Since prices have declined due greater competition, manufacturers must pursue scale advantages,
and so must boost production volume through globalization. The fuel injection system is a key
component in meeting fuel consumption regulations. Although direct injection development has
progressed, some problems remain.
The fuel injection system for a diesel engine requires processing technologies including
vibration control under high pressure as well as sophisticated electronic control systems. Being acapital intensive industry, large-scale investment in plant and equipment is required, and so scale
merits are essential. Oligopoly by large companies has become entrenched as the market issomewhat smaller and unattractive for newcomers compared with fuel injection systems forgasoline engines. Existing market shares would not change if traditional techniques remained
dominant, but in practice there have been new entries as the common rail method becomes thenorm.
As regards power steering, there has been a transition from hydraulic to electronic control to

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Development Bank of Japan Research Report/ No. 8

reduce the environmental impact, and this has been a major objective of international
reorganization. (Hydraulic power steering entails excess pumping, whereas electric power steering
uses less energy, and is also lighter and more compact as there are fewer parts.) The diffusion ofelectric power steering is led by Europe, with its strict environmental regulations, as well as byJapan, where small cars are common. Technically, it is necessary to combine electronics with themechanical technologies of power steering gear manufacturers (i.e. application of mechatronics).
International reorganization in power steering is encouraged by the transition to the electric
method. An important safety component, power steering requires not only basic development
skills but also suitable production technologies, and in this sense, Japanese manufacturers cancompete against mega-suppliers.
The wiring harness is a component related to electronics and requires a fine balance between
quality and cost. Its production is labor-intensive. Sufficient quality can be achieved by workers
in developing countries. Wire harnesses used to be produced near the plants of car manufacturers.
Yazaki Corporation led the shift to overseas production by utilizing low-cost labor in Southeast
Asia to reduce cost, but recently U.S. and European manufacturers have been closing the gap in
quality and cost by using cheap labor in nearby developing countries. The future depends onelectronic and even optical technology development skills as well as on innovative ideas.
Modularization of wiring harnesses has been addressed by American and European
manufacturers, although there has been little progress because sophisticated know-how isrequired to integrate the electrical system of automobiles.
Reorganization and oligopoly have advanced in the piston industry to achieve a design that
integrates the piston ring with the piston pin. In order to address environmental problems, it istechnically necessary to reduce the weight of the piston under high pressure to improve the
combustion efficiency of the engine, so design improvements will inevitably become necessary.
Regarding piston rings, large-scale acquisitions were made in the past mainly for integrated
design with the piston. Already reorganized and highly oligopolistic, the manufacturers are now
enjoying benefits of scale.
The oligopolistic nature of the oil seal and engine gasket market is increasing with further
acquisitions. Japanese manufacturers excel in quality and have the technological edge. In terms ofcost, however, the U.S. leads with lower material (rubber) and personnel costs, followed by
Europe and then Japan.
As regards air-conditioners, these have rapidly become popular in Europe, a market
traditionally focused on heating. With the expansion of the regional market, European
manufacturers are gaining strength to the detriment of Japanese firms.
Due to their considerable weight and size, air-conditioners are not profitable if exported andtherefore must be produced in the consumption area, so alliances and other measures arenecessary to achieve global operation. In Europe, the market is expanding as automobiles
become equipped with air-conditioners as standard. In the U.S., auto manufacturers are
increasingly outsourcing production, as a result of which air-conditioner makers are struggling formarket share in this newly-created market segment.
Air-conditioners are relatively easy to outsource because they are a luxury feature rather thana core function for running, turning and stopping. Japanese manufacturers have a competitiveedge in air-conditioning systems. Costs must be reduced by increasing scale and pursuing global
supply as related technologies have matured. Parts manufacturers must increase output to reducethe burden of fixed costs.
In terms of technology, Japan and the U.S. have the advantage over Europe, a relative
newcomer. Japanese manufacturers have the edge over their U.S. counterparts in weight
reduction and downsizing, which are important for environmental protection, and are particularly

Development Bank of Japan Research Report/ No. 8

15

competitive in the high precision processing required to produce variable capacity compressors.
Lamp production is capital-intensive, and plant and equipment investment constitutes abarrier to entry, especially since frequent die and cast replacement is necessary due to modelchanges. The market is mature, with manufacturers having established shares in the world market,
so the front-end module is the only remaining part for reorganization. HID (high intensity
discharge) lamps are likely to be used in the next generation of lamps. Cost competition isparticularly intense in Europe, where small vehicles are common. While European manufacturers
have scale merits with facilities that have largely depreciated, Japanese companies are struggling
in terms of cost due to the excessive quality of their products.
In shock absorbers, reorganization has progressed mainly through acquisitions; the market istechnically mature and competition is now focused on price. The world market for shock
absorbers is highly oligopolistic as a result of past reorganization, and price competition is also
intense in the domestic market. Entries from foreign companies are unlikely as they have nofoothold in Japan.
The trend toward automatic transmission (AT) in Japan and the U.S. gives European
manufacturers a competitive edge in clutches. The clutch market has not been expanding due tothe advent of AT vehicles. Further demand, if any, will come from commercial vehicles as well asfrom Asia including China and India. ATs are mostly produced in-house in North America.
Scale merits are important in producing clutches, but substantial reorganization is unlikely as
the market is highly oligopolistic and not expanding, forcing many OEM manufacturers towithdraw from the market. Although potential demand for replacement will ensure the survivalof the market for spare parts, new entry into this after-sales servicing market is difficult becausesale channels are already controlled by the major three European firms. As the link between theengine and transmission system, the clutch cannot be easily integrated into the modularization
process, either.
Technically, Japanese and European manufacturers are at similar levels. Emerging
technologies include automatic clutches and electric MT (Manual Transmission). In order tomake up for the substantial loss in hydraulic ATs, those technologies will create an evolved typeof MT that simplifies driving in congested traffic while saving fuel and keeping driving enjoyable.
Research in automatic clutches and electric MT is particularly advanced in Europe. New entry
might be possible as electronic control technologies will be necessary. In Japan, future
development will be focused on CVT (continuously variable transmission) as AT-related
technologies have already reached a substantial level.
Though tires are classified as a rubber product rather than a car component, let us mention
to the tire industry because international reorganization began in the 1980s, earlier than in otherparts industries. Tire production is a capital intensive industry, and scale merits through intensive
production are necessary to increase cost competitiveness. In response to the globalization of the
car companies, tire makers must secure orders through overseas operations, and so international
reorganization has been encouraged.
4.

Views of Automobile Manufacturers

We conducted interviews with seven automobile manufacturers in November and December
1999 concerning international reorganization.
Although the answers varied regarding the changes in procurement policy and its future
direction, some companies indicated that they would seek global optimal procurement. In general,companies have been reducing the number of suppliers, some even advocating global singlesourcing. However, no company actually intends to select only one supplier for each product area.
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Development Bank of Japan Research Report/ No. 8

In principle, they are planning to deal with two or more suppliers to ensure competition amongparts manufacturers and to avoid risks such as supply stoppages and instability due to plant fire.
As auto makers themselves are facing fierce competition, attention is increasingly focused on
price. The traditional procurement policy will certainly change as global competition intensifies.
As in the past, changes in the relationships among affiliated companies differ in individual
corporate groups, but are becoming looser in general. Although some auto makers are trying in
the long term to develop affiliated suppliers into core partners with joint technologicaldevelopment, most auto makers cannot afford to support other suppliers as auto makers
themselves face increasingly fierce competition.
Nonetheless, companies prefer some sort of preferential relationship to ensure the highquality that is a lifeline for Japanese cars. Auto makers are increasingly focusing on the merits
provided by parts manufacturers.
The companies cited severe demands on Japanese parts suppliers. The first is lower prices.
As automobile prices are falling mainly due to the shift toward smaller vehicles, cost reduction is
top priority for the survival of many auto makers, and parts manufacturers are similarly affected.
Next comes global supply capacity and enhanced ability to provide flexible suggestions. As
regards the latter ability in particular, auto makers require suppliers not only to produce single
products, but to voluntarily provide flexible and ambitious ideas, as happens with American andEuropean parts manufacturers.
Some companies strongly believed that slow-moving Japanese parts manufacturers will beforced out of the market. Japanese suppliers will have to cease or change businesses unless they
respond seriously to the structural changes of recent years, such as by enhancing global supply
capacity, expanding scale, and reinforcing core competencies. If they fail to do this, the Japanese
automobile industry as a whole will lose competitiveness in the world market. Whereas Americanand European parts manufacturers are taking risks in initiating voluntary reforms, Japanesesuppliers are still currying favor with their customers.
As regards the strategy of parts manufacturers toward international reorganization, many
companies stated that concrete action for business restructuring is needed. In particular, theymust set their own strategies before structural change restricts the available options, otherwise
suppliers will be forced to cease or change business. (In contrast, M&As in the U.S. and Europe
have strategic purposes. Even if a department is disposed of, it can expect to develop under theacquirer.)
Reorganization methods include acquisition, merger and business alliances. Regardless of themethod, auto manufacturers generally welcome such restructuring because suppliers will be able
to obtain far more information, although auto makers are worried about the increased negotiating
power of enlarged suppliers. Companies consider that Japanese suppliers will losecompetitiveness against foreign counterparts unless they collaborate more among themselves byforming alliances composed of two or three companies. In the case of modularization, loose
collaboration entails litigation risk as the responsibility for quality guarantee is not clear. Automakers demand that Tier 1 (primary) suppliers take responsibility in this respect. Auto makers
also stated that mere capital alliances would not be satisfactory and that fixed costs needed to be
reduced by consolidation of plants or other streamlining methods.
As regards the relations with foreign capital, the companies warned that suppliers should bewary of being used by American and European parts manufacturers, which are experienced in
M&As, and should maintain autonomy in contracts and be ready to take the majority stake.
One auto manufacturer criticized the departmental alliances of comprehensive auto parts
manufacturers with foreign capital, as such a piecemeal approach would hinder functioning as abusiness. Suppliers operating in various fields with no strength in any particular field will be

Development Bank of Japan Research Report/ No. 8

17

absorbed by foreign capital, because their individual divisions do not have independent plants ordevelopment systems and therefore are unable to take leadership. In short, alliances originallyintended to boost business may end up weakening them. It was also indicated that general parts
makers are more likely than specialized manufacturers to adopt a defensive attitude in existing
fields.
From the viewpoint of technological development, the survey results suggested that smaller
Japanese suppliers have a disadvantage chiefly in terms of available financial resources comparedwith their larger American and European counterparts. However, the direction of technologicaldevelopment is changing constantly, and there are various possibilities in combining elementary
techniques, where smaller suppliers may have an advantage because larger companies tend to be
slow and rigid in their response. It is important to take advantage of strength in commonlyneeded elementary techniques.
In product areas whose progress is led by electronics, a certain scale of development isrequired to catch up with state-of-the-art technologies. On the other hand, simple products suchas window frames undergo little technological innovation and do not require further investment
until the manufacturer withdraws from the market or changes business. Due to the different
development investment required among product areas, some companies predicted bipolarizationof the auto parts industries.
In general, the finished automobile makers highly evaluate the QCD (Quality, Cost andDelivery) of the Japanese suppliers and want this remarkable strength, particularly quality, to be
maintained. They believe that Japanese suppliers excel by far in delivering quality products at aknown cost on time. However, the companies are not satisfied with this alone, and many gavehigher marks to European and U.S. makers in terms of their ability to offer ideas and for theirforward-looking development approach.
One of the auto makers pointed out that Japanese manufacturers in general are dedicated totheir work and almost too meticulous about producing goods. Since old habits die hard, it might
be better to stick to traditional practices than to forcibly adapt themselves to hypotheticalconcepts such as systemization. High quality should not be abandoned too easily.
On the other hand, another auto maker noted that even among Japanese parts
manufacturers, basic techniques traditionally handled by skilled workers in factories have notbeen passed on effectively to the present workers. Basic mistakes related to product quality are an
ominous sign, pointing to a possible loss of vital strength of Japanese manufacturers.
Companies consider that the ability to make creative suggestions depends on the ability ofJapanese manufacturers and their managers, who must voluntarily make efforts in this regard.
One of the auto manufacturers expressed the following opinion: although it is sad to see
Japanese companies acquired by foreign capital, it may be a welcome move to help improve
competitiveness, also due to the fact that the Japanese market has far less foreign capital
penetration than the European and U.S. markets. Although Japan excels in manufacturing goods,
it lags behind in the internationalization of human resources and capital as the competition has
moved from the domestic market to the world market. Even if Japanese companies are forced todispose of their businesses now, they may be able to buy back those businesses when they regain
strength.
Another auto manufacturer also stated that acquisitions by foreign capital should be
accepted provided the development cost can be shared and employment and corporate names
can be maintained.
Thus, the auto manufacturers have severe views regarding Japanese parts suppliers as
procurement policies change along with the relationships among affiliated companies. Industrial
reorganization appears unavoidable if the Japanese auto industry is to remain competitive.

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5.

Improving the Competitiveness of Japanese Auto Parts Manufacturers

As discussed above, individual companies face different conditions and so must adopt different
strategies. During the period of rapid economic growth, parts manufacturers could expand theirbusinesses on their own, but under the current harsh economic environment, it seems more
effective to specialize and concentrate on core businesses when comparing businesses
performances.
There is thus a growing need to rebuild business portfolios. If quicker response is theprincipal requirement, the traditional autonomous development policy should be replaced by
M&As and alliances. However, Japanese companies are still not accustomed to M&A, in contrast
with American and European firms which consider this normal practice. Indeed, Japanesecompanies lack expertise concerning post-acquisition management. U.S. and European
companies are aware of the difficulties in acquiring Japanese companies including theimpracticability of mass lay-offs and other drastic rationalization measures as well as the heavy
burden of pension liabilities. Schemes such as stock swaps are only just becoming established. In
Japan, different methods may be required from those established in the U.S. and Europe throughtrial and error. Many companies indicated that partial business tie-ups will be the main
reorganization method in Japan rather than M&A.
What are the pros and cons of business alliances compared with M&A? A business allianceinvolves less conflict in employment and between organizations, and therefore is more acceptable
to Japanese corporate culture. With uncertainty in environmental and other strategic technologies
as well as the direction of modularization, business alliances are convenient because they give acompany flexibility to enter into contracts with two or more partners at the same time andconsider various possibilities. On the other hand, the level of secret information disclosure isnecessarily lower in a business alliance than in M&A, which involves capital participation. Also, abusiness alliance may create a mutually irresponsible regime mainly in terms of quality guarantee,
unless leadership is clearly defined, and also may not be sufficient for implementing fundamental
reform.
Within the framework of modularization and systemization, the key concern of parts
manufacturers is whether to become Tier 1 (primary) suppliers or survive as Tier 2 (secondary)
suppliers. Tier 1 suppliers will have more sales opportunities and substantially increased
information, but will assume greater risk in terms of quality guarantee, technological development
and capital investment. They will be also required to undertake complex coordination with otherparts manufacturers as well as with related department and divisions of finished auto
manufacturers. Meanwhile, Tier 2 suppliers can concentrate on core businesses under existing
policies, and additional investment will not be necessary. However, they face lower sales or evenloss of individual products during the product integration process. Also, Tier 2 manufacturers are
more likely to be the target of M&A due to their smaller size, and so must maintain absolutecompetitiveness in related technologies and prices to survive as specialized manufacturers.
What strategies have been adopted by Japanese parts manufacturers? Although there havebeen some cases of acquisition of foreign affiliates, M&A of U.S. and European manufacturers isdifficult for SMEs in general. Many of the recent cases involve the acceptance of foreign capitalor joint ventures to utilize the excellent development skills of foreign firms. Alliances between
Japanese manufacturers are also possible if a relationship with foreign capital is difficult, andmany such alliances have been formed. Some manufacturers have been involved in mergers orbusiness alliances in view of modularization. Some argue that alliances between Japanesemanufacturers do not lead to fundamental reorganization and have little meaning if
Development Bank of Japan Research Report/ No. 8

19complementary or synergistic effects are insufficient. It is also true, however, that financiallyweak Japanese parts makers must take emergency measures as demand continues to stagnate.
One of the reasons why modularization was adopted in the U.S. and Europe was to simplify
assembly processes due to the shortage of skilled workers required to produce automobiles withconsistent quality. In Japan, the merit of modularization is not so significant because parts plants
are already located near assembly plants to ensure just-in-time delivery.
Nonetheless, American and European parts manufacturers are actively promoting
modularization to gain access to the overseas production plants of Japanese auto makers.
Japanese parts manufacturers are therefore likely to be required to offer modular deliveries when
supplying products to overseas auto manufacturers or overseas plants of Japanese auto makers,
and should be prepared for this eventuality.
To win orders from auto manufacturers, it is effective to make suggestions at an early stageof development, and to demonstrate technological superiority. Some American and European
manufacturers are planning to establish technological centers in Japan.
With the maturity of the domestic market, the traditional long-term corporate relationshipsthat have supported the high quality of Japanese products are being replaced by relations
focusing on cost and based on market principles and contracts. In response to the current
structural changes, Japanese auto parts manufacturers must reinforce their strengths andovercome their weaknesses as quickly as possible. However, there is no simple solution, andindividual companies will have to choose strategic alliances or other relevant measures according
to their individual conditions.
[Masahiko Komori <makomor@dbj.go.jp>]

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References
Car Inspection and Registration Association. (1999) “Waga Kuni no Jidosha Hoyu Doko (Trendsof Car Ownership in Japan).”Fourin. (1999) “Nippon no Jidosha Buhin Sangyo (The Japanese Auto Parts Industry).”――. (various months) “Kaigai Jidosha Chosa Geppo (Monthly Report on Overseas
Automobiles).”
Japan Automobile Manufacturers Association. (1999) “Jidosha Tokei Nempo (Annual Report on
Automobile Statistics).”――. (1999) “Shuyokoku Jidosha Tokei (Automobile Statistics on Selected Countries).”――. (1998, 1997) “Joyosha Shijo Doko Chosa (Survey on Trends in the Passenger Car
Market).”――. (1998) “Kei Jidosha no Shiyo Jittai Chosa Hokokusho (Survey Report on the Use of Mini
Automobiles).”
Recof. (1999) “MARR.”

Development Bank of Japan Research Report/ No. 8

21

List of Back Numbers (Including JDB Research Report)
No.8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries (This
Issue)

No.7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No.6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology and Market for
Underground Remediation, May 2000

No.5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No.4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No.3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations, the Debt
Burden and Other Structural Factors, January 2000

No.2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No.1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other AsianCountries, November 1999

JDB Research Report
No.96

Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999

No.95

Efforts to Protect the Natural Environment in the United States and Germany: Environmental Mitigation
and Biotope Conservation, July 1999

No.94

Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999

No.93

Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO sector
through comparison with Germany, June 1999

No.92

The Impact of Demographic Changes on Consumption and Savings, March 1999

No.91

Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March 1999

No.90

Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999

No.89

Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japanand the U.S., December 1998

No.88

Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998

No.87

Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998

No.86

Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998

No.85

Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998

No.84

R&D Stock and Trade Structure in Japan, August 1998

No.83

Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998

No.82

The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptance isEssential, May 1998

No.81

The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and 1998
Conducted in August 1997, March 1998

No.80

Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998

No.79

Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January 1998

No.78

Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series andEnvironmental Cost, January 1998

No.77

Current Conditions and Issues of Computerization in the Health Care Industry : For the Construction of a
Health Care Information Network, January 1998

No.76

Household Consumption and Saving in Japan, December 1997

No.75

The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to Support
Diverse Consumer Choices, November 1997

No.74

Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International Trade,
October 1997

No.73

The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on the Effects
on Productivity and Employment, October 1997

No.72

An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997

No.71

Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of Economic
Recovery, August 1997

No. 70 Corporate Fundraising : An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm Date fromJapan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March 1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulation of theElectric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key, October
1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of the Current
Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the UnitedStates and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY 1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and 1996
Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995 and 1996
Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October 1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October 1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY 1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part2, July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995

No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry,
June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and 1995
Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March 1995
No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private Level, May
1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994 and 1995
Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY 1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and 1994
Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration, December
1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993 and 1994
Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and 1993
Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992 and 1993
Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and 1992
Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February 1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991 and 1992
Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and 1991
Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990 and 1991
Conducted in August1990,September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment andTechnology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and 1990
Conducted in February 1990, March 1990

No. 18 Petrochemicals In Japan, The US, and Korea an Assessment of Economic Efficiency, February 1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989 and 1990
Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing
Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years 1988 and1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and 1989
Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEANCountries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987