Toyota is giving larger chunks of business to a smaller number of suppliers, and it is asking for cost cuts of 30 to 40 percent for some parts – in certain cases double that level.

A woman walks among Toyota Motor's cars at the company's showroom in Tokyo“Behind the recovery at the big carmakers is their pressure on suppliers to cut parts prices. It’s been hitting us like a body blow,” said a senior executive of a company that makes drivetrain-related parts for a major Toyota supplier.

At this small company based in Aichi prefecture, home to Toyota and much of its supply chain, orders have yet to recover from the global financial crisis, and profitability has actually fallen. Operating profit margin has fallen to below 2 percent from around 5 percent in 2008, largely due to pressure to cut parts pricing, said the executive.

Like other suppliers interviewed for this story, the executive declined to be identified for fear of jeopardizing the firm’s position in Toyota’s supply chain.

Toyota did not comment on details about pricing and cost arrangements with its suppliers.

Its president Akio Toyoda has acknowledged that “there are expectations on Toyota” to pass on the benefits of Abenomics to its workers, but he has not clarified how that would be done.

Toyota is under political pressure to raise wages as its union is set to demand a 1 percent base pay rise, which would be a modest hike by international standards but represent a watershed for Toyota workers who earn less every month on average now than they did a decade ago.

However, a Toyota wage rise would not necessarily represent a triumph for Abenomics – a mix of fiscal spending, economic reform and monetary stimulus designed to pull Japan out of a decades-long slump – in the broader auto industry.

Lower down the supply chain, many companies, especially the smaller ones, are unlikely to be able to raise base wages, partly because of the price and cost-cutting pressure. And given that the minnows of the industry account for the bulk of its jobs, that could be worse than a zero-sum game.

“Polarization between large automotive parts-makers and smaller ones is likely to intensify because the big ones have the resources to take their business overseas and the smaller ones don’t, and this could also become more evident in employee salaries,” said Seiji Manabe, professor at Yokohama National University and an expert on automotive suppliers.

To continue reading this article, please go to http://www.reuters.com/article/2014/02/03/us-toyota-abenomics-idUSBREA120GF20140203

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