Toyota Recall Highlights Reliance on Suppliers

They may have the Toyota badge, but a big chunk of each vehicle made by the Japanese giant -- from screws to pedals and sometimes even the engine -- are produced by a vast network of suppliers.

A safety recall by Toyota of 2.3 million vehicles due to a problem with accelerator pedals made by U.S. firm CTS Corp. has highlighted the Japanese giant's growing dependency on components that are not made in its factories.

Toyota is famous for its close contacts with suppliers in Japan, where it effectively owns many parts makers, enabling engineers from both sides to be in constant communication over product development.

But as it expanded its production aggressively overseas over the past decade, Toyota has turned to foreign suppliers with which it has looser ties. As a result, some experts say, its legendary quality may have suffered.

"Toyota is obsessed with cost-cutting, halving costs here and there. That has put a big burden on suppliers," said Zenjiro Imaoka, visiting professor of risk management at the Tokyo University of Agriculture and Technology.

"The pressure on suppliers in turn could damage quality control," said Imaoka, who has authored several books on supply management, including Toyota's famous "Just-in-time" inventory strategy.

The Toyota group owns dozens of companies in Japan's industrial and automotive sectors, including a steel company, precision equipment makers, and auto parts producer Denso Corp., itself a Fortune 500-listed company.

But that intimacy with suppliers has become frayed over the years as the carmaker's appetite for revenue grew and it failed to develop equally strong ties with suppliers overseas, analysts said.

"Toyota's supply management in Japan was confined to within its group. But in the U.S., relations with suppliers are limited to a contract and there's a lack of communication and working together in the field," said Imaoka. "The US is such a lucrative market that Toyota threw away its management strategy, hell-bent on boosting its total market value," he added.

The Japanese manufacturer declined to say what proportion of a Toyota car is typically made up of components produced by external companies. A car has parts provided by "too many suppliers to count," said Toyota spokesman Yuta Kaga. He said the accelerator problem did not relate to Toyota's dependency on suppliers because "each part is inspected for safety before it is built into the car."

Fierce global competition and a severe global economic downturn have spurred automakers to cut costs, scale down research and development activities and outsource component production, assembly, and sometimes quality testing.

"A carmaker can have tens of thousands of suppliers making things including even the smallest bolt," said Atsushi Ishii, a supply chain analyst at auto consulting company CSM Worldwide.

"A carmaker like Toyota often designs the general layout and the structure. That's why it's crucial to maintain a close relationship with your suppliers. It's difficult to lay the blame on the supplier if a problem with one part emerges. The issue likely lies more with how it was assembled," he said.

Analysts said that Toyota's accelerator problem may have less to do with the pedal itself but more with how it was assembled as part of the car. "Generally speaking, one defective part does not necessarily equate with a defective car," said SMBC Friend Research auto analyst Shigeru Matsumura. "It could be that the problem emerged when it was put in contact with, for example, an overheated or leaking part," which may be a reason why quality inspectors failed to spot any defects, he said.

CTS Corp. has said that Toyota accounts for only three percent of its annual sales and stressed that the pedals at the centre of the recall were manufactured based on the Japanese company's own design specifications.

Its other customers include Honda, Nissan and Ford -- which said on Jan. 28 that it was suspending production of a commercial vehicle sold in China that uses a pedal part made by the same supplier.