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OM in the News: Toyota Shocks Its Keiretsu Network

November 6, 2015
Toyota's Akio Toyoda wants his firm's Japanese car-parts suppliers to be more globally competitive

Toyota’s Akio Toyoda wants his firm’s Japanese car-parts suppliers to be more globally competitive

Toyota launched a new Corolla in Japan this year that held a shock for its closely knit Japanese supplier network: a cutting-edge crash prevention system made by a German parts maker, reports The Wall Street Journal (Oct. 29. 2015). Until now, Toyota relied on Denso Corp., a major parts maker and key member of its traditional supplier network. The decision to go outside its traditional network highlights a growing concern within Japan’s auto industry: Parts suppliers, once considered the foundation of the country’s auto export prowess, are losing their edge, especially in next-generation software technologies for safety and autonomous driving.

The Japanese are lagging behind rivals in the innovation race in part due to their de facto control by the big auto makers, a system called keiretsu. This tight relationship enables close communications between car manufacturers and their suppliers, allowing them to fine-tune development of parts, but the insular nature of the groups may have stifled breakthroughs. “The globalization of Japan’s auto parts industry and competitive jockeying mean uncertainty and unpredictability” in a society that values stability,” says a U. of California prof.  Toyota is the last of Japan’s Big Three to fully maintain a keiretsu. Nissan dismantled its keiretsu about 15 years ago to slash costs.

“There is no Google, Apple or Uber in Japan to force a rethinking of mobility and the features in a car,” said an industry consultant. “So Mr. Toyoda really has no choice but to look outside of the keiretsu, which concentrates on traditional automotive parts.” Toyoda himself  adds: “If Toyota and its keiretsu members don’t get the best information and technologies and remain closed off to external influence, we won’t be able to survive.”

Classroom discussion questions:

  1. Describe the concept of keiretsu. Why is it widely used in Japan?
  2. Why is it not used in the U.S?
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