Daihatsu Unit Sheds Toyota’s Supply Chain System

Kosuke Shiramizu

Former Daihatsu Motor Co. Chairman Kosuke Shiramizu says the company has saved about $1,000 on some of its $7,000 minicars by abandoning the keiretsu network of interlocking suppliers pioneered by its owner, Toyota Motor Corp., Reuters reports.

The keiretsu system was widely acclaimed more than 25 years ago as a path to better vehicle quality. The informal structure replaces the often adversarial relationship between carmakers and their suppliers, encouraging both to share more information for the sake of reducing cost caused by product flaws.

But Shiramizu, now an advisor to Daihatsu, says the practice is expensive and declares it "doesn't work anymore," especially in emerging markets. Reuters notes that Toyota's lowest-price cars in China and India are being undercut by about 40% or more by models from such rivals as General Motors, Suzuki and Volkswagen.

Reuters says the keiretsu system worked in the past because the vehicles it produced were sold in relatively high-priced developed regions. Now the bulk of sales growth is in emerging markets, where consumers are far more price sensitive.

Shiramizu says the keiretsu system is bureaucratic and stifles the ability of new, lower-cost suppliers to gain business. He complains that, in Daihatsu's case, the system was full of middlemen who boosted costs. His cure is a new and more labor-intensive procurement system.