JAPAN TOYOTA WAY: Members of the media are shown beneath the Toyota logo at the annual auto show in Detroit this week. The interlocking relationships between carmakers and their suppliers were the basis of Japan’s vaunted “keiretsu” system pioneered by Toyota. REUTERS/MARK BLINCH The keiretsu system, pioneered by Toyota, was once acclaimed as an ingredient in Japan Inc’s success. Could its days be numbered? Daihatsu dismantles ‘Toyota Way’ in changing auto market BY NORIHIKO SHIROUZU SPECIAL REPORT 1 DAIHATSU DISMANTLES TOYOTA WAY IKEDA, JAPAN, JANUARY 14, 2015 hen Daihatsu Motor Co launched the Mira e:S mini- Wcar in 2011, the Toyota affiliate thought it had found a model for emerging markets. The Mira e:S - e for eco, S for smart - was capable of going 30 kilometers on a liter of gasoline (72 mpg) for a sticker price of just 795,000 yen, or $6,637. And indeed, the car was a hit, super-charging Daihatsu’s earnings. A number of improvements – in manu- facturing, engineering, procurement – went into the car. But the real secret to success, says Kosuke Shiramizu, Daihatsu’s chair- man at the time, lay in taking something out of the company’s business model: the vaunted Japanese “keiretsu” system. Shiramizu, now a Daihatsu advisor, says BURNISHING IMAGE: Daihatsu’s redesigned Mir e:S was cheaper and more economical than many of Daihatsu shaved off roughly $1,000 in the its rivals in the micro-minicar market. REUTERS/YUYA SHINO manufacturing costs of the car by disman- tling its keiretsu - an informal but close interlocking business relationship between The Toyota way is the deal with the global auto market’s seismic a manufacturer and its suppliers, cement- high-cost way. shift toward emerging markets. ed by cross-shareholdings and personnel In China, Toyota lags rivals such as exchanges. Kosuke Shiramizu General Motors Co and Volkswagen The automotive keiretsu system, pio- Former Daihatsu chairman AG. Toyota lacks no-frills cars such as neered by parent Toyota Motor Corp. and the Wuling Hong Guang, a 43,800-yuan widely adopted by rivals, was acclaimed demise for years, Daihatsu, along with ($7,050) workhorse van GM designed across the world in the 1980s and 1990s as Nissan Motor Co have gone further than and sells jointly with its Chinese partners. an ingredient in Japan Inc’s success. Keiretsu, any Japanese automaker in scrapping it. Toyota’s cheapest model is the 69,800-yuan pundits preached, defused adversarial rela- “The Toyota way is the high-cost way,” Yaris subcompact car. tionships between assembler and supplier, says Shiramizu, 74, in an interview at In India, Toyota’s “strategic volume car”, allowing them to share information and cre- Daihatsu headquarters in the Osaka suburb the Etios, has failed to ignite demand, ate better product quality. Hence Japanese of Ikeda. “Keiretsu doesn’t work anymore. chiefly because of its relatively high price automakers were able to leap ahead with If we stick with it, Daihatsu won’t survive. tag of 570,000 rupees ($9,118), even as ri- vehicles such as the Toyota Corolla, the leg- Toyota might face a similar fate, too.” vals such as Suzuki Motor Corp. sell cars endarily sturdy and reliable family car. for as little as 240,000 rupees. TOYOTA WATCHING Today, after two decades of stagnation “Daihatsu could potentially offer Toyota in Japan, the dramatic shift in growth to As Shiramizu reforms the way Daihatsu de- a number of important lessons on how to emerging markets and revolutions in auto- velops and buys components, Toyota, which effectively use suppliers to come up with motive technology, Shiramizu says the days has maintained a 51-percent majority stake in a viable low-cost small car for markets of the keiretsu are numbered. Companies, Daihatsu since 1998, is watching Shiramizu’s like India,” says Shiro Sakamaki, a Daiwa he says, are competing for price and value experiment with interest, he says. Securities analyst in Tokyo. by using market mechanisms instead of That’s because Akio Toyoda, the 58-year- And not just lessons but actual cars. relationship-based arrangements. While old founding family scion who became Struggling to crack the no-frills end of analysts have been predicting the system’s Toyota president in 2009, has struggled to India’s car market, Toyota earlier this year SPECIAL REPORT 2 DAIHATSU DISMANTLES TOYOTA WAY called on Daihatsu for help in designing af- fordable cars that could be sold under the Toyota name and through Toyota’s sales channels in India - an arrangement similar to one the two companies have in Indonesia. Shiramizu, who became advisor to Daihatsu’s board and technical executive after stepping down as chairman three and a half years ago, says his parts procure- ment reform isn’t meant to be a template for Toyota. But it is being taken seriously there, he says. “Mr. Toyoda is carefully aware of what we’re doing,” Shiramizu says, when asked whether Toyoda is considering a similar reform. “He views our parts procurement reform as one experimental way.” Toyota has been making early moves towards a post-keiretsu system on its own. SUCCESS MODEL: A worker is shown cleaning a Daihatsu display in a Jakarta showroom. The Mira Toyoda, for example, has told affiliated e:S was aimed at meeting exploding demand in emerging markets, including Indonesia. REUTERS/ group suppliers, such as Toyoda Gosei and BEAWIHARTA Toyota Boshoku, not to always count on business from Toyota. He has given them the green light to do business with Toyota’s as Brazil, Russia, India, China, Indonesia, Japanese and foreign competitors, accord- South Africa and Turkey. These economies ing to two board members who spoke on already collectively buy half of the automo- condition of anonymity. Toyota has also biles sold worldwide today. They will ac- begun encouraging the company’s keiretsu $6,637 count for an estimated two-thirds of over- Sticker price of the redesigned suppliers working on similar technologies all global demand by 2020, when sales are to merge or combine resources in order for Daihatsu Mira e:S expected to reach 100 million cars annually. them to better compete with major global For Daihatsu, whose business is most- suppliers such as Robert Bosch GmbH and Source: Daihatsu Moto Co ly in the lower end of the market both in Continental AG. Japan, as well as markets in Southeast Asia, Ryo Sakai, a Tokyo-based Toyota less mechanical and are controlled more the keiretsu system was especially oner- spokesman, declined to comment. “As a electronically. Competition thus shifted ous. As it began buying more components matter of policy, we do not disclose details to who could offer more value to the cus- from Toyota-group suppliers such as Denso of our individual dealings with suppliers or tomer: the highest fuel economy, the sexiest and Aisin Seiki over the years, it was also our purchasing strategies in general.” look, and the most compelling functions stuck with Toyota’s lofty quality standards. for the lowest price. Shiramizu says Toyota’s specs are often too COMPETITIVE SHIFTS The other competitive shift came from high for vehicles that some Daihatsu offi- Two major shifts over the past two decades the emerging world. cials describe as “sandals,” as opposed to the in the competitive landscape have been Keiretsu worked beautifully for Toyota dress shoes that Toyota makes. working against Japanese car makers and because an overwhelming majority of the “Do we need parts and cars that their keiretsu systems. finely engineered cars it made were sold in withstand the desert heat in Arizona?” First, Western rivals dramatically closed the high-priced developed markets of the Shiramizu asks. the gap with the Japanese. That was partly United States, Europe and Japan. Consumers in Daihatsu’s key markets due to the fact cars have become easier to That began changing in the early 2000s, outside Japan - Indonesia and Malaysia - design and manufacture, because they are with the rise of emerging economies such are also used to driving under brutal road SPECIAL REPORT 3 DAIHATSU DISMANTLES TOYOTA WAY conditions, which often force them to re- last straw, he says. Those back-to-back moves took down place parts quickly. They don’t expect parts to By resetting the Mira’s design direc- the two biggest obstacles preventing last for five to 10 years, so they are more will- tion, Shiramizu unleashed the program of Daihatsu from looking beyond the Toyota ing to sacrifice durability for price, he says. keiretsu destruction that is still playing out group for parts. inside Daihatsu. Most important, it allowed Shiramizu to FOREIGN PRESSURE His first move was to send agents of deploy his new procurement leaders in the Shiramizu is an unlikely scourge of the change - manufacturing engineers like hunt for lower-cost parts across Japan - and Toyota tradition. A career Toyota man, Saburo Yagi, Fumiaki Fukunaga, and beyond to China, Indonesia and India. he was known inside the company as “the Yoshiki Inoue - into the company’s pro- Inoue, who was plucked out of the pro- emperor” because of his command of the curement office. duction engineering division by Shiramizu, business - and his imperious temper. He Until then, Daihatsu’s purchasing office and his team focused on China. The team reached the high post of executive vice was staffed by non-technical types with lit- quickly found Chinese suppliers of wind- president before being sent over to run tle knowledge on how components are de- shields, mirrors, speakers, and aluminum Daihatsu as chairman in 2005. But there, signed and produced and, says Shiramizu, wheels at savings up to 50 percent.