Radical cost reduction produces record profits for Japanese auto-manufacturers

The art of rigorous cost reduction has seen Japanese auto-manufacturers Honda and Toyota publishing strong…...

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The art of rigorous cost reduction has seen Japanese auto-manufacturers Honda and Toyota publishing strong profit forecasts, defying the headwinds of rising steel and aluminium prices, alterations in Chinese import tariffs and the risk of additional tariffs on cars exported to the USA.

While US car manufacturers have posted one profit warning after another, Honda’s net profit forecast grew by 7.9% while Toyota posted record-breaking Q1 profits.

Toyota CEO Akio Toyoda has presided over a vast cost reduction programme that effectively reboot’s the company’s famous “kaizen” (continuous improvement) philosophy. While waste reduction is central to this, it’s a sure bet that the firm has pushed spend analytics, tail spend management and sourcing savings to their limits to achieve this result.

Cost reductions in Q2 2018 totalled ¥65bn ($583 million/£454 million), significantly offsetting the ¥50 billion impact of climbing raw material costs and delivering a year-on-year net profit rise of 7.2%.

Exemplifying the firm’s cost reduction programme, its senior managing officer Masayoshi Shirayanagi said: “It’s important to create a climate where every employee has a strong awareness for costs boiling down to the use of a single pencil.”

Toyota’s first quarter results were also hugely aided by a 40% surge in its Asian market’s operating profits which were largely generated by strong sales in Thailand.

Honda, too, said that its profits were assisted by strong cost reduction efforts which allowed them to absorb the effects of climbing raw material prices. The group also saw strong increases in the sale of its motorcycles in Vietnam, Indonesia and India.

But the prospect of a chill wind is haunting the minds of Japanese auto executives: specifically, the continuing uncertainties surrounding current trade negotiations with the US. Japanese officials are this week holding trade talks in Washington, during which they hope to counter the 25% tariff on imported vehicles under consideration by the Trump administration. If the tariff is applied, Toyota estimates that it would add around $6,000 to the cost of each car.

Ed Cross

Ed founded Odesma in 2014 with the explicit intent of creating a new kind of procurement consultancy founded entirely on cloud principles. Deploying best-of-breed subject matter experts alongside the best on demand technology to deliver rapid and effective change for customers.

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