Denso drives ahead: A plan to double global sales by 2005 has Japan's supplier giant thinking...

Watch your rearview mirror, Robert Bosch. The big supplier behind you is preparing to pass. Nearly six years ago, Hiromu Okabe became president of what was then Nippondenso Corp. He charged into his new position with an aggressive growth plan firmly in hand. It was called Denso Vision 2005,

"I started by changing the corporate name to Denso, which reflected our new vision to be a global company," Okabe recalls. "Then we set the sales target for 2005--2.7 trillion Yen ($27 billion, at a [yen]l00/dollar exchange rate)."

Okabe says Denso is on track to hit its target. Sales for the fiscal year ending March 2001 were [yen]2.01 billion, or $16.25 billion. Only Robert Bosch GmbH, Visteon Corp. and Delphi Automotive Systems Corp. are larger. Okabe believes his company will pass Bosch as the world's number-three auto supplier in the process.

The Vision 2005 strategy is to extend Denso's business deeply into overseas markets, spearheaded by new product technologies and surrounded by the company's traditional quality. Over half of last year's consolidated sales were still in Japan. That means stepping further away from Toyota Motor Corp., of which Denso was a part until going independent in 1949. Toyota remains Denso's largest customer (much like the General Motors/Delphi and Ford Motor Co./Visteon relationships) and still holds roughly 25 percent of the company's stock. Ironically, Bosch also is a Denso shareholder, with five percent.

"World Number One Share"

Denso's four primary automotive product segments are Thermal systems (34.3 percent of FY01 sales); Powertrain Controls (20 percent); Electronic systems (17.6 percent) and Electric systems (12.4 percent). Small motors, telecommunications, environmental and industrial systems -- the company is a fast-growing supplier of small robots -- comprise most of the remainder. Achieving marketshare leadership in each segment, everywhere in the world, is the driver behind Okabe's plan, which he calls World Number One Share.

"Starters, alternators, fuel pumps, air conditioners, small electric motors, instrument clusters...we now have 14 products that we have world number-one share in," he claims. For 2005 we are trying to raise that number to 25." Currently, several Denso products hold number two or three marketshare status, including Navigation systems, oxygen sensors, variable-camshaft-timing systems and windshield wiper systems. The company will focus on those product areas in the push to be market leader.

Although many of the items can be considered commodity parts, Denso's Toyota-honed production system and reputation for extremely high production quality allows the company to maintain healthy margins. "In things like starter motors, alternators and [O.sub.2] sensors, for example, Denso is the industry standard," comments a General Motors purchasing executive who prefers anonymity for this story. "Our benchmarking and warranty costs tell us they're the best. I wish I could say the same for their competitors' equipment"

Enviable PPM (said to be in the low single digits in some of its 60 major plants) helps drive the consistent quality. Over the past decade that's earned Denso plenty of Lexus business - which has been a strong calling card at other prospective customers.

"You've got to jump through hoops at Toyota to win Lexus work," asserts Greg Janicki, vice-president of Northville, Mich.-based auto industry forecasters CSM Worldwide. "When you've got it, other OEMs know you've really done your homework"

Recently Denso reorganized its sales structure to better respond to industry globalization and the World Number One Share plan. The former geographic-region-based structure is now a customer-centric set-up, serving as outlet for an wide-ranging network of 73 Denso Group companies in Japan and 78 global affiliates in 28 countries.

Okabe's global game plan has the attention of his competitors, including Delphi CEO J.T. Battenberg, who earnestly lauded his Japanese counterpart during a business conference in Tokyo last fall. "Denso is one of our toughest, most respected competitors in quality and technology;" Battenberg told Automotive Industries. "You can't take your eye off them for a second."

Japan's suppliers have known that for years, and Okabe himself is known as one of the country's sharpest CEOs. He joined Denso's accounting department in 1960, armed with an Economics degree from Nagoya University. Before his promotion to company president in 1996, he was managing director of the company's Electronics group. A voracious reader (nearly 300 books per year), he is rated as a near-professional at "Go," a popular Japanese board game.

Okabe cites new opportunities for Denso; including telematics, hybrid and fuel cell systems and even the aftermarket (service parts) segment, which he intends to build into a significant revenue source in the next five years. "Changing Denso" is a recurrent theme of Okabe's recent speeches, and many of the company opportunities will come through new "linkages" within the existing supply chain and outside as well.

"We have a wide range of products and as you know, there are the trends of systemization and modularization," he notes. "Like it or not, we have to deal with products we have no experience with. In that case, we have to think of alliances and doing business with other suppliers. Our basic stance is, we do not expand through mergers and acquisitions."

A recent example is Denso's venture with Magneti-Mareill's Thermal systems business in Italy. According to Okabe, Marelli's operation was superb at producing low-end to medium-grade A/C systems at low cost. "Our strategy is to attack those categories in Europe," he explains. "We have installed know-how and technologies into the venture, to make them understand the 'Denso way' of manufacturing."

Denso currently plows 10 percent of its annual revenue into R&D, a level of investment Okabe believes is critical to stay technologically competitive. Environmental drivers - from advanced diesel and DI gasoline fuel systems to hybrid drives and fuel-cell system components - and telematics hardware and software (Denso develops its own laser diodes for adaptive cruise control and recently completed a multi-story, dedicated software R&D facility in Japan) will eat up much of the research funds, he explains.

The company's R&D outlays are already driving component cost down in hybrid-electric drive systems. Denso supplies major elements of Toyota's hybrid drives -- the integrated starter-generator system for the Estima minivan, the motor assist system for the Crown, and the battery ECU for the Prius. Denso's aim is to further slash those system costs by two-thirds (See pg. 30).

Facing Competitive Challenges

The closer you get to the top of the supply chain, the more you face the two Godzillas of the industry Delphi and Visteon. And it is against their immense resources and scale that industry experts say Denso must clearly define its mission. The American giants are much more experienced systems integrators and both have broader product portfolios that include trim pieces.

"Does Denso want to pitch itself as an integrator, or a technology company?" asks CSM Worldwide's Janicki. Delphi, for example, has moved somewhat towards the latter, because it can look more like a technology company than a traditional automotive supplier to Wall Street. But in the long run, OEMs are still looking for competent parts-suppliers that can deliver quality products in a timely fashion.

"Denso can continue to be the high-quality component supplier it is now--HVAC is probably the biggest "system" it currently supplies, and it's vertically integrated on that," he notes. A further move could be aligning with a trim supplier to become a cockpit integrator.

"They're not on the short list at GM for interior integration -- could they be? Demo needs to make that decision," says Janicki. "The Tier 1 suppliers that will be given all this new engineering responsibility (if it really does happen) are still going to have to rely on the experts in components. Demo can be that 'mega-Tier 2', the expert in heat exchangers or HVAC or instrument clusters. There's no problem with that as long as you do it well, and Denso does."

Remaining a Tier 2 has its risks, chief among them are losing the regular direct interface with the OEMs, and relying to an extent on former competitors -- the Delphis and Visteons of the world.

Even with new production facilities in eastern Europe, Denso's growth opportunities don't appear to be as dramatic within the E.U. as they are in North America Here, most of Denso's business is with the Japanese New Domestics -- Toyota, Honda and Nissan. These companies are driving most of the market's production growth. But industry analysts say the relative newcomer is also vulnerable from another side.

As arch-rivals Delphi and Visteon continue to grow their sales beyond former owners GM and Ford, they're not only swapping business with one another (Delphi being sourced on traditional Visteon components at Ford, for example), they're going after the New Domestics with gusto.

"Denso's relationships, though still very strong with the Japanese, are facing tremendous competitive pressures," observes Janicki. He explains that Delphi and Visteon are aggressively pursuing the extra business that's coming out of Nissan's new Canton, Miss., light truck plant, plus additional capacity coming on at Honda in Alabama.

"It's payback time," he notes. "Denso has taken some GM business from Delphi's Harrison Thermal and other divisions. Now it's watching its core customers being usurped by Delphi and Visteon."

Industry analysts agree that Demo will have to push its technology even further, if it wants to realize its growth plan and prove it's not just a\Toyota kieretsu company. Okabe believes that his company will continue to be differentiated by its product development and manufacturing skills.

"High quality products at low cost and in time. If we focus on our strengths, we will be able to compete with those companies," he says with grin. "Our major competitor is Bosch; we're neck and neck with them in being Number 3."

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RELATED ARTICLE: Telematics: Infotainment vs. Safety

Mitsuharu Kato is director of Denso's ITS Product Division and a company Board member. He's in charge of Telematics development and growth.

Q: What percent share of the Japanese navigation system market does Denso have?

A: About l5 percent. The market is about one-Third of the 6 million total vehicles sold in Japan in 2001. As for telematics, such as the OnStar system, the market in Japan is still very small, about 20,000 such systems so far. People will pay money for entertainment and convenience but they won't pay for safety. They believe Japan is a safe country!

Q: And North America?

A: In the U.S. this year, 300,000 units -- 25 to 30 percent market share of OEM installed equipment.

Q: Does Denso consider Nay systems to he part of Telematics?

A: Yes. From now on it will be integrated as a platform. In the future, the installation of telematics will go up, even in China. Besides Navigation, we need another business model in Japan, We've started a study, the Internet ITS Project, which connects the vehicle with the Internet It puts 2,000 telematics units on the road, through March. Wireless handset is one method being studied and DSR (digital short range) is another.

Q: Which system will emerge as dominant?

A: DSR is free; you don't pay money for communication. It needs infrastructure -- localized antennas. But the investment is small and already beginning in Japan. The handset will be the major communications method to start, but once DSR is identified as being convenient, it will be a very good method.