Indra’s Drishtikona (Viewpoint)

A “China Price” For Toyota

Posted : February 15, 2005 at 7:07 pm [IST]

Every time I talk of Indian manufacturing sector capability of competing with that of Chinese, my colleagues and experts of the profession think it as an impossible task. Perhaps, what we lack is the mindset to face a competition. Somewhere it appears we still get satisfied very easily, because of that age old Santosh Hee Paramam Sukham. I narrate below how Toyota is trying to use Chinas low price manufacturing as a benchmark to maintain its growth rate. It can be lesson for the Indian manufacturing sector. Toyota is taking its cost-slashing drive to a new level. It intends to make its suppliers match China’s cheaper parts. If it is done, why should Indian entrepreneurs nourish the excuse for not competing with China in manufacturing?

Five years ago, Toyota Motor Corp. (TM) stunned the auto world by embarking on a plan to slash costs 30% across the board for the car parts it buys — from air-conditioning ducts and door-assist grips to windshield wipers. The bold plan to squeeze its own network of traditional suppliers, known as a keiretsu, was designed to make sure the Toyota group would retain its competitive edge.

Toyota’s cost-cutting program — dubbed CCC21 (Construction of Cost Competitiveness for the 21st Century) attained a great success. Toyota aimed to achieve some $10 billion over its five-year time frame. Toyota is not only sourcing components more cheaply but in process, it has also improved the parts’ quality.

Toyota may be under more pressure now to cut costs than when it began CCC21. So the drive is on to replace expensive materials, benchmark Toyota’s auto parts against Chinese-level pricing, and squeeze its Japanese suppliers further by relying more on non-keiretsu parts makers.

And this is how Toyota does it. One Toyota CCC21 team disassembled the horns made by a Japanese supplier and found ways to eliminate six of 28 components, resulting in a 40% cost reduction. Another example is about the interior assist grips above each door. Now, Toyota’s entire 90-model lineup uses just three basic styles. Once there were 35 different grips. At Toyota, the process is known as kawaita zokin wo shiboru, or “wringing drops from a dry towel.” Cost saving is an unending, excruciating process, and the secrets essential to Toyota’s bottom line.One of the most pernicious threats is the surge in prices of crucial items such as sheet steel, where Toyota could do much to influence steel-makers, as the price rise was due to higher costs for raw materials like iron ore and coal. On Feb. 3 the company acknowledged its cost cuts 15% short of its annual target, in large part because of the surge in sheet steel prices.

Toyota is now striving to reduce the number of steel parts it uses in an average vehicle from 610 to about 500. Toyota will probably turn to more steel substitutes such as aluminum and heavy-duty advanced plastics and resins. The move will also cut the weight of its vehicles to increase fuel efficiency and rust related durability. Again, the strategy to switch over can only work if the prices of aluminum and petrochemicals move up to the point where those materials remain cost-effective substitutes.But more importantly, Toyota wants the parts to be procured at price competitive to what China offers. China is the benchmark. CCC21 program identified about 180 key parts, and figured out the world’s most competitive suppliers of those parts. Toyota then worked with affiliate Denso, for example, to consolidate production of air-conditioning vents to just four key styles, down from 27 previously. That resulted in a 28% cost reduction. However, Toyota wanted to keep the number to just three.

The boom in auto production in China is nurturing a car-parts industry — with both multinational suppliers and local companies — providing new data on how low prices can go. Toyota wants its keiretsusuppliers to push their prices toward the Chinese level to keep Toyota’s business. China has become an important new benchmark for Toyota

It may be a decade before the parts makers in China can compare with components made in Japan, South Korea, and the U.S. The ultra-low defect rates for parts made in Japan, for example, can be as important to cutting prices as cheap fixed costs. Even so,benchmarking against the Chinese price forces suppliers to come as close as possible to matching it without sacrificing quality. That involves rethinking everything, from the number of designers assigned to making any one part, to the supply chain involved in sourcing components, to the utilization rates of equipment at a parts factory.The China benchmark will increase the pressure on Toyota’s traditional suppliers. Along with its move to become the worlds number one car manufacturers, Toyota is also courting more non-Japanese suppliers to find the best price. And parts makers like Bosch and Delphi, which turn out everything from air bags to transmissions, are now more willing to meet demanding specifications and price for Toyota.

The auto components manufacturers in India have performed great in last few years. But the performance is great only till we compare the growth on year-to-year basis. The growth must match the volume of China or at least Thailandand Malaysia. India has capability. It is only to be demonstrated by the manufacturers duly facilitated by the government policy. The sector will have to concentrate on R&D, engineering design and innovations. It will have to be competitive not only in price, but it must go beyond and be better in quality and features. And I am sure it is doable. It will happen.

- Indra

Category: Manufacturing |