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Sankyo Steel providing innovative braking systems for next generation vehicles

Interview - February 27, 2023

We sat down with Mr. Hideki Kawase, president of Sankyo Steel, to discuss the impact of the ongoing electrification of the automotive sector on his business and their plans for the overseas market.

HIDEKI KAWASE, PRESIDENT OF SANKYO KOGYO CO., LTD.
HIDEKI KAWASE | PRESIDENT OF SANKYO KOGYO CO., LTD.

In recent decades, Japan has seen the rise of regional manufacturing competitors which have replicated the Japanese monozukuri process but taking advantage of cheaper labor costs, pushing Japan out of mass industrial markets. However, we still see many Japanese firms being leaders in niche B2B fields. How have Japanese firms been able to maintain leadership despite the stiff price competition? 

The competitiveness of Japanese companies lies in its hierarchical structure, where automotive manufacturers like Toyota are at the very top, followed by multiple tiers, one through four companies, that support each other. This hierarchical pyramid is established within the local area is a typical structure in the automotive industry, not only in Japan, but also in the US and European markets.

As one of Toyota’s supporting companies located in Aichi, close to their research and development center, we can closely communicate with each other. When we understand what they want, we can propose more cost-effective ways of production. The close-knit communication between companies aids us in efficiently developing automotive components. Despite being in Toyota's hierarchical system in Japan, we are not automatically included in their overseas hierarchical system. Although it took time, we have recently successfully entered Toyota's market in the US. The depreciation of the Japanese yen has also improved our competitiveness. 

 

When we interviewed the president of Toyota Boshoku, he mentioned that the 21st century marks the beginning of the end of the keiretsu model. They have lost their share when it comes to dealing with Toyota. Even as a large corporation, Toyota is going abroad to find cheaper providers and labor costs, forcing SMEs to expand and find new opportunities overseas. What are you doing to mitigate these challenges? Are you looking to find any plausible customers and do you believe that the keiretsu model is coming to an end?

I do not agree that it is the end of the keiretsu model because despite Toyota Boshoku not being able to secure the contract with Kamuri, they acquired other big contracts from Toyota in the US. When the agreement with Kamuri did not move forward, it was replaced by JCI.

Toyota will continue to value Toyota Boshoku. Our overseas sales for Toyota and Honda are 50% and 40%, respectively. 100% of our production in Japan is for Toyota, and 50% is delegated to Toyota in our US factory. Meanwhile, in our Mexican factory, 40% is designed to meet the needs of Toyota, and Nissan, Honda and Mazda account for the remaining 60%.

We do not have any business dealings with the Big Three firms like GM, and we are not interested in expanding our business with them because they have a different mindset toward subcontractors. Nikkei companies are one of the reasons why the Japanese supply chain remains strong. However, if there is a change to a new model and our products might be discontinued, they will offer us a new type of product to keep our business relationship alive. It is crucial to foster our business relationships. In contrast, overseas companies are more likely to let us go when a model or product is discontinued. There are many ups and downs in working with many automotive manufacturers, except for Toyota. We have partnered with Aisin, which does some work for GM in the US, but the ups and downs are quite severe, just like Mazda. Toyota providing the most stable amount of production greatly helps us.

 

Mexico is a developing nation not like the US; hence, the considerable difference in skills, engineering and equipment can affect the outcome of the final product. How are you able to assure the same standard of quality in your products across your international operations?

We have run our factory in the US for over 20 years, and 10 years in Mexico. When we went to the US in 2002, many companies were going to Southeast Asia and to China, as it is only a one-hour flight from Japan. Even so, we did not pursue China because my approach to expanding depends on how much I like a country. I feel that Chinese and Japanese may look similar, but we do not get along very well. The dissimilarity of our mindset triumphs over our geographical proximity. I understand that China is less welcoming due to our history.

We tend to be more considerate when we go to the US because we know we are different. However, our American employees often do not listen at all to what we ask. Japanese manufacturers are struggling in the US. Although we have already invested and established a company there, it is still very challenging to operate a business there. One person takes care of two press machines in Japan, but in the US, a person deals with only one machine. I think instead of being on stand by while a machine is working, a person can simultaneously operate two machines. Since American workers were well subsidized by their government during COVID, they did not work and their productivity plummeted. Therefore, manufacturing in the US is not a viable option. Brought about by the lack of production in the US, we have delegated the manufacturing of our products to our Mexican factory to be sent back to the US. The labor cost in Mexico, about USD 100 per day, is one-tenth of that in the US. Perhaps in a few years, the production in the US will be transferred to Mexico. 

Because the labor force in the US is not very active, the quality and productivity we envisioned has not been attained. In addition, the quality of our production in Mexico is still not as high as we expect even though we have been there for a decade now.

 

Since your founding, you have been manufacturing components for braking systems, crucial in ensuring the safe driving of any vehicle. What makes your braking system components superior to more conventional ones?

We have been making braking system components for 30 years, just as long as we have been manufacturing our gaskets that prevent oil leaks. It is not something new to us. The oxidation process makes the gaskets flexible and a perfect fit for the screw. We are the only company that can produce this type of gasket.

 

The automotive industry is currently undergoing a major shift to electric vehicles and there is an increasing demand for lighter materials to offset the battery weight and adhere to environmental regulations. Many automotive manufacturers are looking to utilize alternative lighter materials such as aluminum, magnesium and CFRP instead of ferrous materials like iron. What opportunities and challenges does this change in the material present for your firm? How are you adapting to it?

With the shift from combustion engines to EVs, 80% of our components will remain because our products are used for automotive components like seatbelts and braking systems. The only components that may be discontinued are automatic transmission parts. Our products will not be replaced by aluminum, but maybe with high-tension materials for them to be lightweight. We can cater to 460, 480 or 590 high-tension materials. The harder the material is, the lighter it becomes. The 1,000-kilogram high-tension material requires too much energy to bend and process, and the press machine does not work. I feel that requiring very hard materials is asking for over spec. High-tension materials are expensive as well as the processing of such materials, which would mean that transitioning to lighter materials will also cost more. It will not be very effective. 

 

What do co-creation and collaboration play in your business? Are you looking for any co-creation partners in overseas markets?

We are a lone wolf. 

We do not need to worry about other companies because each company has a distinct approach and culture. The many hardships that we will need to overcome are unimaginable to me. We have invested 100% in our US and Mexican factories. We were contacted by the Sumitomo Trading firm about Mexico, but we refused as we find collaboration difficult. 

 

Could you share with our international readers your main competitive advantages as a firm?

SMEs are struggling to hire new employees, especially fresh university graduates. Many SMEs I have talked to have expressed the same sentiment, and those companies often do not have overseas bases. The advantage of having overseas bases is indirectly shown in our company operations. Having an overseas base makes it easier to recruit talented staff, but companies with factories in China cannot recruit good talent. Our company appears on recruitment websites with overseas branches. It is important to have staff who can communicate in Spanish and English. To be very honest, we are not interested in establishing an overseas base. We should operate within our capacity. We have 105 full-time employees in Japan, and we have 15 dispatched from Japan to the US and Mexico, showing that only 10% are dispatched overseas. The difficulty for a small company like us in having an overseas base is losing our talented employees to overseas facilities. 

In Japan, we now have JPY 10 billion sales turnover. Our ideal turnover for US and Mexico is JPY 3 to 4 billion, which we have already achieved before COVID. With only 5% of the profit margin, we get JPY 150 million from JPY 3 billion sales turnover. When we return that to our shareholders, our company is only left with JPY 50 to 60 million. Looking at that profit while having such a vast operation overseas, we wonder if it is cost-effective as a business for an SME. 

 

In the future, are you looking to increase your sales? How do you plan to do so?

Diversifying is important, but we are struggling with the overseas market due to the low quality as well as our experience with our US factory having low productivity and efficiency. Maybe we should turn our US factory into a trading firm and centralize our production in Mexico, since it is garnering more profit than the US. 

 

What will be your midterm strategy to continue your corporate growth?

I was 35 when I became the president. It has been a long time, 25 years. I am thinking of retiring soon and passing down the company to my eldest son. My approach may not be the best fit for the present society. I am planning on getting a resort home in Yatsugatake area. We want to shift our US base to a sales division and a warehouse facility. Even if we want all our production to be done in Mexico, transportation costs from Mexico to the US are quite high. We are trying to enter some company’s logistics framework where they collect products from Mexico to be transferred to their facilities in Northern America. In that case, we will still need our warehouse in Ohio. Canada, the US and Mexico do a collective purchase of materials, but Mexico cannot procure the same type of materials as Canada and the US. We are hopeful that Mexico will be able to do so in a few years. 

 

What opportunities do you foresee in Europe and Asia? Are you looking to penetrate these two regions?

Europe would soon stop producing automotives and companies would have their production elsewhere because it is expensive. Volkswagen has now moved its production to Mexico. Our factories in the US and Mexico are more than enough for our 100 employees to handle, so we are not thinking of penetrating other new markets. We are very fortunate that Canada, the US and Mexico have a big demand for automotives. Although their population of 400 million is only a third of China's, we get a continuous demand for cars. They do not have shinkansen like Japan, which makes cars a necessity for day-to-day activities. The automotives that we have in our US factory run over 300,000 kilometers, so only three or four years. Long-distance driving results in quicker wear out of vehicles. Mexico is seventh in the production of cars in the world, soon to surpass Korea. Nevertheless, only 20% of Mexicans own cars, and Mexico is 30 to 40 years behind Japan. It is important to target this growing market. Toyota will surely increase its production there.

 

What legacy would you like to pass down to your son? What goals would you like to have achieved once he takes over your position?

Strengthening the organization is the key to the growth of our company. Since it is very challenging to employ a strategy, especially with COVID, we are focusing more on educating and training our employees. I am discussing it with my son as well as increasing the capability of our human resources. I feel that the younger generation is highly dependent on smartphones and social applications, resulting in shallow communication. In our company structure, sales receive the order to be sent to the production site. Then, the products go through quality assurance before delivery. Teamwork and understanding the overall flow are essential; however, the current generation lacks in working as a team. During COVID, we did not have remote work because I believe that we can only be truly successful with face-to-face communication. 

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