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With oil prices tanking and resin and other commodity prices declining dramatically in sync, Toyota Motor thinks it an opportune time to ask its suppliers to pull their belts in according to a report in Japanese business daily Nikkei. And this at a time when the automaker is forecasting a record operating profit for the year ending March 2016. The company made $5.2 billion in net profit in the April to June quarter alone.

August 24, 2015

2 Min Read
Amid record profit run, Toyota asks its suppliers to cut prices

With oil prices tanking and resin and other commodity prices declining dramatically in sync, Toyota Motor thinks it an opportune time to ask its suppliers to pull their belts in according to a report in Japanese business daily Nikkei. And this at a time when the automaker is forecasting a record operating profit for the year ending March 2016. The company made $5.2 billion in net profit in the April to June quarter alone.

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Flush with cash, Toyota prods its suppliers to cut part prices.

The company refrained from asking for price cuts in the second half of fiscal 2014 over two negotiation rounds to help parts makers cushion the impact of rising wages and raw material costs, Nikkei said. But it has reportedly already started talking to suppliers and is proposing cuts ranging from 0.5 percent to slightly less than 1 percent for the six months starting October.

Toyota apparently urges its suppliers to cut costs in good times and bad it would seem. When the automaker was facing operating losses in 2011 and 2012 on the back of a strong Yen, it asked suppliers for 3% cost cuts.

Toyota typically negotiates with its hundreds of primary suppliers, some of them major plastics processors in their own right. Cost cutting requests the filter down through the supply chain, impacting local processors.

Separately, Nikkei reported that suppliers of sheet metal to Toyota have agreed to cut prices for the April-September period by about 6 percent, or 6,000 yen ($48) a ton, from six months earlier, as prices for iron ore and coal declined.

As my colleague Clare Goldsberry alluded to in an article published earlier this month, as the auto industry continues to make greater demands for technology sharing, added capacity and reduced costs, it forces those further down the supply chain to thoroughly review their product portfolios and consider, "Is it worth it to continue supplying this part?" In Japan, supplier relationships tend to be more conservative and long-term in their outlook, and in some cases the automakers retain equity stake in their part supplier so this might limit their scope for portfolio rationalization. But one thing remains a constant: the cutthroat nature of the business.

Moving forward, let's hope that continued downward pressure on costs does not compromise vehicle safety and reliability. The industry has suffered a mass of recalls and safety-related issued over the past several years and cost pressures must have bene a factor in at least some of them.

Recalls are classic cases where taking shortcuts or making design errors leads to much greater financial cost in the long term. The more savvy option could be to pay suppliers their fair share and place quality and safety at a premium.

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