(The original article in Japanese was posted on February 18, 2022)

 

The financial results of all the seven leading domestic passenger car manufacturers for the first nine months from April to December 2021 have been announced. While four companies including Mazda, Honda, Nissan, and Mitsubishi Motors, revised their operating profit forecast upward for the fiscal year ending March 2022, Toyota kept the current forecast unchanged, though its operating profit for the April-December period reached a record high. It is almost certain that the company will achieve the annual plan set at the beginning of the current fiscal year. Although the automobile industry still suffers from a difficult business environment due to semiconductor shortage, soaring raw material prices, stagnation of the international logistics network, and prolonged spread of COVID-19 pandemic, successful progress of the business structural reform taken by respective companies has been working effectively to offset the business slump coupled with the multiple effects of depreciation of the yen.

In the context of the present industrial circumstances, a leading automobile parts manufacturer, Marelli Holdings Co., Ltd. (formerly Calsonic Kansei Corporation) requested financial assistance. The total amount of debt is estimated to be about 1 trillion yen. It is reported that the company is looking to apply for a system called "Turnaround ADR (an alternative dispute resolution)." Under the ADR process, Marelli would be allowed to negotiate with creditor banks and business partners for exploring the possibility of debt relief and concessions on repayment via an out-of-court resolution.

What lie behind Marelli’s financial crisis are the structural factors such as the delayed effect of the business integration with Magneti Marelli S.p.A. (Italy) and the fast-growing movement of EV (electrical vehicle) conversions. However, it may be said that the above-mentioned “severe business environment” has further exacerbated the company’s fundamentally vulnerable financial management property. Amid the impact of the stagnation, automobile manufacturers have repeated inconsistent production adjustments, while proposing plans for production increase concurrently to make up for the business reduction. As a consequence, Marelli’s production plan appeared to be disturbed and the business recovery was delayed, which accordingly led to a tight cash flow situation.

The impact of production adjustments is not an exclusive problem of Marelli. Facing the current tough situation, subcontracting automotive suppliers, having no way of foreseeing the production plans, must have been prepared to respond to the irregular request of production increase. In addition to soaring raw material prices, declined production efficiency will put further pressure on the management.

What is worse, not a single subcontractor can raise a loud voice against the cost increase pushed by the soaring raw material prices as well as the cost burden of excessive inventories. In fact, subcontractors do nothing but accept the intolerable reality. Prolonged production adjustments and rising prices of materials may expose one after another the negative aspects of the industry which is traditionally composed of a spiral of subcontracting transactions.

In June last year Japan Fair Trade Commission (JFTC) released the results of the survey on the suspected violation of the Subcontract Act identified in FY2020. According to the results, out of the 8393 suspected cases, 8111 cases were corrected by JFTC with recommendations or guidelines issued. This is the highest number recorded since 1956, when the Subcontract Act was enacted. By industry, the manufacturing industry conspicuously accounted for 40%, and 84.5% of which were related to a delay in payment, a reduction of payment, and coerced reduction in prices.

On February 10, the Ministry of Economy, Trade and Industry announced the enhancement of measures to promote proper corporate transactions, such as facilitating appropriate price setting in proportion to cost increase, strengthening monitoring of subcontracting transactions, establishing a new system of IP (Intellectual Property) G-Men (watcher), and delivering notices for the preparation of the future abolishment of promissory notes. Improving the added value of the entire supply-chain network is the fundamental and essential factor to bottom-up the Japanese economy as a whole. Hopefully, “parent companies” will step out for a constructive approach to build a fair relationship with subcontractors based on the proper distribution of not only risks but also profits.

 

This Week’s Focus, February 18

Takashi Mizukoshi, the President