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Nissan is turning to cheaper labor as it reduces costs

Nissan Motor Co, Japan's second-largest automaker, is aiming to cut costs by 15 percent over the next three years by buying more parts from suppliers in China and other low-wage countries.

Nissan, which builds the Teana and Tiida sedans in China, will buy more components in emerging markets for vehicles assembled locally, said executive vice president Hiroto Saikawa in an interview last Thursday.

Nissan chief executive officer Carlos Ghosn has cut costs at the Tokyo-based carmaker by about ?1 trillion (US$9 billion) in the past five years, helping the company post successive record earnings. Nissan is trying to offset higher raw material prices as it aims for a sixth consecutive year of record earnings.

"Local Chinese suppliers are improving their quality and are very cost competitive," Saikawa said. "We are finding more suppliers in China and this is just the first step. We can expect more of this to take place in other markets including Thailand and India in the next three years."

Shares of Nissan fell 1.1 percent to ?1,149 in Tokyo. The shares have risen 3.1 percent this year, lagging behind the 7.2 percent gain in the benchmark Nikkei index.

The company doesn't immediately plan to import parts made overseas for assembly in Japan. When quality improves, the company may use parts from China in Japanese-made cars.

Nissan buys parts from Chinese local suppliers and also from Japanese, US and European suppliers in the world's third-biggest vehicle market, Saikawa said.

Wages in China are about one-thirtieth of wages in Japan.

Nissan's Dongfeng Motor Co venture buys audio system from Shenzhen Hangsheng Electronic Holding Co, electric equipment from Hitachi Ltd's unit in China and seating systems from a venture of Visteon Corp and Dongfeng, according to Liu Xilu, the venture's purchasing chief.

The automaker expects global production to rise by 5.9 percent to a record 3.6 million units this year.

Saikawa helped set up Nissan and Renault SA's joint purchasing organization in 2001. The venture now handles about 70 percent of the two automakers' combined US$50 billion in purchasing. Renault owns 44 percent of Nissan.

Nissan has reduced the number of suppliers by more than 40 percent and sold its stakes in about 1,400 banks and companies.

As a result, the automaker eliminated its ?2.1 trillion in debt by March last year, a year ahead of its initial plan.

The carmaker cut costs by 20 percent during the three-year period ended in March 2002, followed by another 15 percent during the three-year plan ended in March, which meant it trimmed costs by between ?130 billion to ?240 billion every year in the period.

In the quarter ended June, Nissan has been "in-line" with its purchasing costs goals, Saikawa said.

"Nissan has been very successful at cutting costs," said Yoshihiro Okumura, a general manager at Chiba-gin Asset Management Co, which manages the equivalent of US$365 million in assets, including auto shares. "Finding new suppliers is the next step for them to further lower costs."

Nissan assembles Tiida compact car at its Dongfeng venture in Wuhan and at its Oppama plant in Kanagawa prefecture.

The Tiida costs about 20 percent less to build than the ones assembled in Japan, intensifying internal competition within Nissan, according to Koji Endo, an analyst at Credit Suisse First Boston in Tokyo.

Nissan's March compact car and Renault's Clio small car share the same basic structure and major parts, reducing development costs. The companies expect to share 10 common vehicle structures by 2010.
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