Supplying Honda

Manila, PHILIPPINES ** Honda Parts Manufacturing Corp. NOTES: (1) Automatic transmissions (2) engines (3) engine and brake parts (4) manual transmissions

2003

US$22 mil

140,000 (4)

HONDA PURCHASING STRATEGY & RELATIONSHIP WITH SUPPLIERS

Traditionally, the standard metrics used by Japanese automakers in choosing suppliers are quality, cost, delivery and technology. In the case of Honda, three other factors drive the automakers purchasing strategy. First, the automaker depends on suppliers for slightly more than 80% of components in its cars. This means that the in-house manufactured ratio is slightly under 20% and consists mainly of engines and transmissions plus bulky, capital intensive components such as body stampings and large plastic mouldings, primarily instrument panels and bumpers. Second, Honda procures components from an estimated 400 tier one suppliers in Japan. Globally, the automakers supplier total approaches 1,000 including more than 600 in North America. There are two reasons for the comparatively large number of North American suppliers: Honda produces full-size pickup trucks and SUVs at Honda of Canada Manufacturing and Honda Manufacturing of Alabama. It has no model in this segment in Japan. Thus, since the Ridgeline, Pilot, MDX and North American Odyssey were all substantially developed by Honda Engineering North America, there is an unspecified number of non-traditional suppliers such as BorgWarner Automotive, which until recently delivered the 4-wheel-drive system for the MDX, though it still supplies the Pilot system. The distance between Hondas main assembly plants in North America is sufficiently long 650 km between Marysville, OH, and Lincoln, AL, and another 400 km from Marysville to Alliston, ON - to make logistics a critical cost issue for suppliers wishing to serve all six Honda plants from a single location. Prior to the 2001 opening of Hondas Alabama plant, 60% of the automakers suppliers were situated within a 450-km radius of Marysville and nearby East Liberty, OH, where Honda has been building cars for nearly 20 years. Many of those same suppliers now produce components for Hondas three-month-old plant in Greensburg, IN.

Three of four Honda vehicles sold today are so-called global models. These include the Civic, Accord, CR-V and Fit. Note that Honda produces the Civic at 15 plants in 14 countries and the Accord at seven plants in seven countries. Where possible, the automaker prefers to use global suppliers for global cars. Note also that these four global models constitute four global platforms on which Honda has engineered a series of derivatives. Examples are :

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Supplying Honda

The North American Civic, built at the automakers Alliston, East Liberty and Greensburg plants, is a four-door model The European Civic, assembled at Honda of the UK Manufacturing in Swindon, has three doors and is equipped with both gasoline and diesel engines. In the case of the North American model: gasoline and CNG. Honda estimates that differentiation between the two cars is 20%.

In addition to the four global platforms, Honda has several regional or market-specific platforms including the North American light truck platform from which the Ridgeline, Pilot, MDX and Odyssey were derived and two 660cc minivehicle platforms in Japan. The automaker is currently developing an all-new platform below the Fit for emerging markets in Asia. Planned launch date is 2010. In the case of these regional or market-specific platforms, the supplier base includes a greater percentage of nonglobal suppliers. An example in Japan: Yanagawa Seiki, which makes manual transmissions for Hondas 660cc minivehicle line-up. Unfortunately, many of the automakers domestic suppliers do not have operations outside Japan. This is partly because Honda is a relative latecomer to auto production. It then took the lead when it set up a manufacturing base in North America, for years the industrys most lucrative market, with its Marysville auto plant in 1982. As a result, Hondas largest group suppliers in Japan - TS Tech Co., Ltd. (seats and headrests), Keihin Corp. (fuel injection systems and ECUs) and Showa Corp. (steering systems and shock absorbers) are dwarfed by Toyotas Big Three: Denso Corp., Aisin Seiki Co., Ltd. and JTEKT Corp. In fiscal 2007, TS Tech reported sales of US$5.4 billion (479.2 billion) while Keihin and Showa registered US$3.8 billion (339.3 billion) and US$2.7 billion (283.4 billion) respectively. This compares to US$45 billion (4 trillion), US$30.2 billion (2.7 trillion) and US$12.9 billion (1.2 trillion) for Toyotas Big Three. Moreover, earnings margins of Honda suppliers have tended to be smaller in recent years although that could change when fiscal 2008 financial results are announced in April. Honda defines group suppliers as affiliated companies in which it holds a larger than 20% equity stake or which depend on the automaker for 70% or more of their sales; or conversely: which Honda turns to for more than 70% of purchases of a particular system or component. Thus Denso Corp., Toyotas leading group or keiretsu supplier, is also a Honda group supplier as it manufactures an estimated 95% share of the automakers heater requirements in Japan and 60% of air-conditioners. Denso is also the principal supplier of several sensors (oxygen, for instance), alternators and igniters for ignition systems. In fact, Honda is Densos second largest customer with a 7% share of consolidated sales. Other suppliers in this category include Nippon Seiki Co., Ltd., instrument clusters; Stanley Electric Co., Ltd., lighting; Mitsuba Corp., front and rear wipers and power window motors; and Sumitomo Wiring Systems, Ltd., wire harnesses for both standard cars and hybrids. These four suppliers hold dominant shares in several component categories in the Japanese market at least and, in the case of Stanley, Nippon Seiki and Mitsuba, for motorcycles as well. Of the major independents, NOK Corp. qualifies as a group supplier for oil seals as do Nichirin Co., Ltd. for power steering and other hoses and Bando Chemical Industries Ltd. for transmission belts.

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Included in the suppliers in which Honda holds a greater than 20% equity stake are Keihin, Showa, TS Tech, Nissin Kogyo Co., Ltd. (braking systems), Musashi Seimitsu Co., Ltd. (gears and camshafts), FCC Co., Ltd. (clutches), F-Tech Inc. (chassis and suspension parts), and Nihon Plast Co., Ltd. (trim and airbags). There seems to be no set rule on whether Honda doubles or triples sources or what even constitutes double or triple sourcing. For most components, Honda relies on multiple suppliers. But on a model base, it tends to single source. Examples are : in the case of high-voltage cables for hybrid cars, Honda has two main suppliers: Sumitomo Wiring and Yazaki Corp. But they divide the contract by model with Sumitomo supplying the Civic Hybrid and Yazaki the Accord Hybrid. No word yet on the new Insight. Similarly, the automaker has three navigation system suppliers: Mitsubishi Electric Corp., Pioneer Corp. and Alpine Electronics Inc. Mitsubishi supplies the Civic, Accord and Airwave while Pioneer was awarded the contract for the Odyssey (Japanese version), Elysion and Edix and Alpine the Legend. And while Stanley Electric supplies the great majority of headlamps to the automaker, Koito Industries Ltd. is responsible for passenger vans including the Step Wagon, Odyssey, Air Wave and Stream. Hondas core suppliers have largely followed the OEM into North America and Asia. TS Tech, for instance, has set up operations in ten countries to deliver seating and trim products to Honda plants. In the US, TS Tech has plants in Ohio, Indiana and Alabama. Keihin, Hondas main group supplier of car electronics, has set up 16 plants outside Japan including four in the US, while Stanley Electric has lighting plants in London, OH, and Battle Creek, MI. The supplier, which supplies an estimated 80% of Hondas head lamp requirements in Japan and more than half of the automakers rear-combination lamp needs, is believed to have a much smaller share in the US. In general, there is a feeling (though not supported by industry data) that Honda depends more on non-Japanese suppliers at its overseas plant. Example: Honda of Canada Manufacturing turned to Visteon Corp. for the Acura MDXs instrument panel module last year. In Japan, Visteon has no tier one business with Honda for this component. Meanwhile, the automaker continues to make steady progress in expanding local content at plants outside Japan. Honda has six vehicle and three dedicated powertrain plants in North America, one vehicle plant in South America, two in Europe, and 11 in Asia including three in China. And with the 2007 start of automatic transmission production at a new plant in Foshan, China, the automaker now has five powertrain plants in Asia. In North America, local content for the Civic and Accord stands at 81%. The Odyssey and CR-V are slightly under 80% while the UK-built CR-V and Civic are below 65% due to the fact that Honda still imports transmissions from Japan. However, the automaker produces engines, both diesel and gasoline, in Swindon. Elsewhere, local content of Civics and Fits assembled in Brazil stands at 60% while the Turkish-built Civic is under 40%. In India, the newly launched City stands at nearly 80% while the lower-volume Accord is below 35%.

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