What Does Toyota’s Softening Stance with Suppliers Really Indicate?

According to a recent IHS Supplier Business editorial, Toyota plans to be less aggressive in seeking price cuts from suppliers in the first half of FY 2014/2015, in order to reward companies that stood by the OEM during difficult times. Toyota will seek a price cut of just 1% during that period, compared to a typical reduction of 1%-1.5%.

While short term support by OEMs is nice, the larger trend we have been seeing is that while there may be less pressure on cost, there is far stronger pressure being put on suppliers to move to localization and regionalization. This might be the most significant trend in today’s auto manufacturing landscape. The cost savings Toyota and other OEMs can generate by operating through regional manufacturing hubs is far greater than the reduced price cuts it seeks from suppliers.

For example, Toyota is urging suppliers to setup in both Japan and North America, driven by two key factors:

1)   Cost – Take Toyota’s Mexico presence as just one example of cost savings in action. Toyota’s on-the-ground presence in Mexico results in cost savings for the OEM, thanks to a local NAFTA presence and savings in transport/logistics too. Hence the pressure from Toyota to have more suppliers set up locally in Mexico.

2)   Diversified Risk – As we saw following Japan’s typhoon and nuclear accident, Toyota wants to expand their supply chain to include international manufacturing hubs outside of Asia, to relieve pressure on the region should another natural disaster occur.

What is unstated in the IHS editorial is that while Toyota may be putting less pressure on its key suppliers situated in Japan, it is putting more pressure on those and other suppliers to setup in Mexico and have a North American presence, allowing the OEM even greater cost savings. Toyota isn’t putting pressure on pricing in Japan – they are applying it elsewhere.

Source: IHS Supplier Business

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