Are Toyota's Suppliers in Collusion? Antitrust and the Automotive Supply Chain

Earlier today, the news broke that government officials in the US, EU and Japan recently searched the offices of a number of Toyota suppliers that may be involved in cartel-like activities. According to The Wall Street Journal’s summary, “Investigators raided the offices of auto-parts suppliers tightly tied to Toyota Motor Corp. in recent days stemming from a probe in alleged anticompetitive practices.” A spokeswoman from the US Department of Justice (DOJ) quoted in the article further suggests that, “The Antitrust Division is investigating the possibility of anti-competitive cartel conduct of automotive electronic components suppliers … We are coordinating with the European Commission and other foreign competition authorities."

Suppliers said to be at the subject of the investigation include: Yazaki (whose transliterated name sounds ironically similar to “yakuza”, the name given to organized Japanese crime syndicates), Sumitomo Electric Industries Ltd., Furukawa Electric and Denso. But the important question to ask in this case is not “who” but “how” and “why” in the context of Toyota’s overall procurement and supply management strategies.

Toyota is known for a number of procurement practices. They pioneered, among other techniques, the preferred split of business approach amongst a small group of suppliers, awarding procurement volume based on an 80/10/10 or 60/20/20 rule or similar split percentages thereof. This model concentrates spend with a top supplier while giving just enough to others to create secondary options for the same part and component families.

The approach also helps to keep preferred suppliers, the ones receiving the largest percentage of business for a given part or component/bill of materials, on its toes. In addition, Toyota is also known for its deep category knowledge that leads to sourcing strategies as much based on target costing as price discovery through multi-round negotiations and other sourcing approaches (Honda also deserves credit for a similar knowledge-driven procurement approach).

While historically there have been numerous benefits to this model, including less adversarial supplier relationships compared with other automotive OEMS, one of the challenges of this approach is that it makes breaking into the preferred supplier mix at Toyota a tough thing for new suppliers. Our research in the area suggests that this may be one of the reasons why competitive suppliers to the ones targeted as part of the global collusion probe are raising their voices. In contrast to other automotive OEMs that rely more on market-driven competition in many negotiations -- an approach that requires as many competitors as possible -- Toyota focuses primarily on knowledge-based sourcing models that provide preference to existing suppliers with whom it is currently doing business with, provided these incumbents have met specific quality (e.g., PPM, escapes), on-time delivery and related metrics in the past.

The possibility also remains that actual collusion exists in the market as well. Given Japan’s past close linkages between companies and supply chains in keiretsu-driven relationship hierarchies and traditions, the possibility exists that Toyota’s supply chain may still have some remnants of this legacy way of doing business within specific corporate families and structures.

Jason Busch

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