A new customer for Toyota Boshoku

by SR on January 24, 2012

Bloomberg carried a story on an interview with Toyota Boshoku‘s president Akio Toyoda in which he was quoted as saying that the company had acquired a new customer in Europe. This is positive at the margin for Boshoku, one of the world’s largest suppliers of seats and interiors and the primary supplier of those products to Toyota globally. (In that sense Boshoku competes with parts of Johnson Controls, with Lear and with Faurecia, plus a number of smaller rivals.)

Conclusion: good news for Boshoku. I see this as confirmation that Toyota Boshoku’s efforts to gain traction in Europe are finally beginning to pay off.

Kind of a big deal, but only longer term

This has no immediate impact on Boshoku’s business. Due to the length of time it takes to launch new models in the auto industry, a design win from a new customer means that sales will not materialise for another two years at least. As auto OEMs usually take a conservative approach to ramping new suppliers, so initially the level of sales is likely to be small. An untried parts supplier usually gets given part of a small volume vehicle first and watched to see how they perform. So the impact on Toyota Boshoku out to most investment horizons (say three years) is going to be negligible.

Europe is nothing, but that’s not the point

Toyota Boshoku sales and operating profit by region
This will be customer No. 6 globally for Boshoku, after Toyota and GM. The GM business is in Shanghai, the US and Mexico and until the Polytec acquisition GM accounted for only 3% of Boshoku’s revenues. Polytec added BMW, Daimler and Volkswagen in July 2011 – which I think makes it a sensible deal (the cost of the acquisition was not disclosed but probably 5bn yen or so). Polytec takes up maybe 3% of total revenues, so non-Toyota customers probably account for 6-7% of Toyota Boshoku’s total revenue. Although the part of Polytec that Boshoku bought isn’t really profitable, it does have the engineers with the links to European customers, or potential customers and that’s what has been lacking at Boshoku. From the perspective of Polytec’s staff, Boshoku probably looks like a pretty good employer: a large, stable supplier that is only going to disappear if Toyota itself disappears.

Who is this new customer? It hardly matters. Any of the obvious candidates (PSA, Renault, Audi, Fiat, perhaps GM’s Opel brand) would be a positive. As the chart above shows, Europe (which is included in the ‘Other’ region) didn’t contribute more than 5-10% of profit even in the good times, and the region’s auto market is understandably under pressure. The point is that to get new business from the European OEMs outside Europe in South America, or India, or China, you still need to have eyes and ears in Europe itself. You need the connections in Munich, or Wolfsburg, or Paris, or Milan. It will likely be years before Boshoku can properly monetise the potential at BMW, Daimler and Volkswagen, let alone the business at this new customer.

Why now?

As I see it there are two issues here. First, Boshoku has not had any significant seat component, rather than assembly, production capacity for seats in Europe until very recently, which has left it handicapped versus its competitors. Its new seat frame factory in Poland (ramped in late 2011) is designed to supply its own factories and thus indirectly Toyota’s assembly plants in Europe, in the UK, Turkey, Hungary or France. For example, Boshoku operates a plant at Somain that supplies assembled seats for the new Toyota Yaris that was launched in 2011 and is assembled nearby at Toyota’s Valenciennes facility.

Toyota Boshoku and Toyota facilities in Europe

Although the Poland frame plant will likely have its hands full for the time being with the Yaris and other Toyota models (perhaps the Aygo in Czech, Corolla in Turkey), it does offer to potential customers some local production capacity on the doorstep of those customers. This is a crucial step towards getting orders: first you build it, then they come and emphatically not the other way round. You have to show your commitment to local production.

The second issue is that the Polytec acquisition may also have had something to do with the new customer. Perhaps Polytec was able to provide introductions to a customer to which they were already talking. Or perhaps Polytec’s engineers allowed Boshoku to crack an account that it had been pushing for a while. Who really knows? The point is that Boshoku has another customer.

 America, for better or for worse

As I said, this is a longer term story and one that is largely unappreciated by the street. Boshoku tends to be ignored by investors, even those who like the secular theme of the undeniable added-value growth potential in car seats and interiors. One reason may be the liquidity, which is certainly limited compared to that of JCI or Lear. It is also the case that Boshoku is less adept at public relations than those two, or Faurecia. A third reason is that investors worry about the quality of management. It is true that until the current company was formed by a three-way merger in 2004 Toyota Boshoku had largely distinguished itself through not doing anything very well. Sister companies like Denso or Aisin Seiki hurled themselves overseas early on, experiencing the thrills and spills of life outside Japan, while Boshoku sat quietly at home. But the company has been showing signs of a more aggressive and international approach since 2004.

The problem was that during the global financial crisis the management panicked and cut personnel in North America too aggressively. Instead of cutting fat, it cut muscle and bone which meant that it was left with a shortage of experienced and competent workers. When Toyota Boshoku had to ramp new products to support Toyota in late 2009 the whole thing basically fell apart. Fixing the problems that kept bubbling to the surface took a lot of direct intervention from head office in Kariya near Nagoya and cost wince-inducing amounts of money. That the firm lost money in North America during the financial crisis is understandable. The problems that caused a further expansion of the loss in the December 2009 quarter were self-inflicted.

Toyota Boshoku Americas financial performance
This performance worried those investors that liked the Boshoku story and confirmed to those that did not like Boshoku that management was weak. I called one investor when all this came to light and concluded with the comment: “it looks like they shot themselves in the foot.” There was a short silence. “Actually” mused the investor “I’m kind of surprised that Boshoku was even able to find its foot.” That typifies the views of some fund managers.

What now? It seems to me that Boshoku needs to pump out about 45bn yen per quarter in the Americas region to break even. That’s nearly 40% higher than the 32.8bn recorded in the second (September) quarter but I think that’s easily achievable given the surge in output that Toyota expects for 2012 now that the impact of the Tohoku earthquake and the Thailand floods has finally ended. If it could break even for that year, that would add 15-20% to operating profit compared to the previous year, so this could be significant. But please, please don’t let it all fall apart again, Mr. Toyoda.

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