Mastering the Japanese auto supply game
After 25 years of trying, Western automotive suppliers have little to show for their efforts in Japan's OEM industry. Among the top Western OEM suppliers, none earns more than 10 percent of its revenue from Japan, and most see less than 5 percent (conversely, top Japanese suppliers earn 20 to 30 percent of their revenue in North America and Western Europe). While key Japanese players claim they remain open to doing business with any supplier that meets their needs, something is apparently getting lost in the translation.
To better understand the issues surrounding this ongoing situation, McKinsey took an in-depth look at entry strategies into Japanese automakers. It included a comprehensive survey of 122 respondents, rigorous industry research, and interviews with experts, practitioners, and stakeholders in Japan's automotive industry.
The research identified eight key factors—or attributes—of success for suppliers hoping to enter Japan's OEM auto industry. Two focus on the product itself, three involve process, and three concern the OEM/supplier relationship. When selecting suppliers, all OEMs tend to seek a globally common set of these attributes, focused mainly on the product and process areas. Another key finding of McKinsey's research demonstrates the critical importance of OEM-specific requirements. Overcoming these explicit company hurdles usually makes or breaks a supplier's prospects for doing business in Japan.
If given another chance, unsuccessful Western suppliers said they would need to be "on the ground" early in order to work flexibly with the OEM, better understand Japanese business approaches and mind-sets, and build effective partnerships and access. Conversely, three typical situations were observed in which Western suppliers were successfully deployed by Japanese OEMs: leveraging outstanding technology, teaming up with existing Japanese OEM suppliers (possibly pursuing an M&A strategy with a Japanese supplier that has strong connections to a major OEM), and pursuing a low-cost country (LCC) strategy first to gain experience.
After looking at how Western suppliers can successfully enter the Japanese OEM automotive industry, some managers may ask, "Is it really worth it?" The analysis shows that Western suppliers may need to demonstrate significant amounts of patience in order to generate real value from serving OEMs in Japan. A cash flow and net present value (NPV) model reveals that the typical Western supplier would experience an extremely long wait to achieve a positive cumulative NPV, compared with a Japanese supplier. When this model is overlaid with any of the three successful entry strategies—technology, M&A, or LCC—Western companies can break even earlier, but still, these strategies at best require seven years to reach the breakeven point.
The critical challenges a supplier needs to overcome relate largely to some very OEM-specific requirements, as opposed to Japanese "cultural" factors. Successful suppliers strive to fully understand what the OEM requires during the initial selection and joint predevelopment stages, while unsuccessful players fail because they simply don't know what counts. Ultimately, though, suppliers have to face the fact that it may not even make financial sense to serve the Japanese automotive industry.
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