JTEKT Back to Making Money

Analysts claim anticipated synergies have yet to be realized, but President and CEO Motohiko Yokoyama contends the global economic slump that has sapped earnings has made those gains difficult for outsiders to see.

TOKYO – It remains too soon to tell whether 4-year-old JTEKT Corp. can fulfill the potential seen when it was spun from two of Toyota Motor Corp.’s keiretsu suppliers.

The supplier got off to a fast start with sales in fiscal 2006, its first full year of operation, surpassing ¥1 trillion ($10 billion) and profit margins exceeding 6%.

Then the bottom fell out of the market.

Born from a January 2006 merger of Toyoda Machine Works Ltd. and Koyo Seiko Co. Ltd., Toyota’s main driveline and steering suppliers, JTEKT ran up nearly ¥26 billion ($280 million) in operating losses in the 12 months following the start of the global economic slump in September 2008.

But management, which a year ago had forecast a ¥20 billion ($212 million) shortfall for the fiscal year just-ended on March 31, now is projecting a much smaller ¥4 billion ($42 million) deficit, meaning the supplier, the world’s leading manufacturer of electric power steering and all-wheel-drive systems, is back making money, albeit considerably less than before.

Analysts claim anticipated synergies have yet to be realized, but President and CEO Motohiko Yokoyama contends the global economic slump that has sapped earnings has made those gains difficult for outsiders to see.

Yokoyama, who turns 66 next month, rose through the ranks of Toyoda Machine Works before being named JTEKT president in January 2007. He recently sat down with Ward’s to talk about the state of the company. Following is an edited transcript of that interview:

Ward’s: Is JTEKT profitable at 30% reduced operating levels?

Yokoyama: The simple answer is yes. We had previously forecast a ¥20 billion operating loss for the fiscal year ending March 31. Then in February, we revised our estimate upward to ¥4 billion, still in deficit, but considering that we reported a ¥14.2 billion ($150 million) loss during the first six months, April through September, we were profitable during the second-half period.

Against this backdrop, we are currently operating at around 70% of capacity in our main automotive business.

Ward’s: Despite having significant excess capacity in Japan, North America and Europe, Toyota, JTEKT’s main customer, closed no plants in Japan and only one overseas (New United Motor Mfg. Inc. in Fremont, CA). Has this created operational problems for JTEKT as you attempt to cost-effectively allocate your manufacturing capacity?

Yokoyama: No major problems. Toyota shifted NUMMI production to Canada and Texas and some back to Japan. Since we had no plants near NUMMI, the effect on our operations was minimal.

(Note: JTEKT currently operates three steering plants in the U.S., in Ennis, TX, and Morristown and Vonore, TN.)

We divide our operations into four regions – North America, Europe, Japan, and Asia outside Japan. Of the four regions, the North American market was hit hardest by the recession. This was not only due to a drop in sales at Toyota but also at the Big Three (to which JTEKT supplies both steering and driveline systems). The entire North American industry suffered losses.

In March, we closed one of our four U.S. steering plants – JTEKT Automotive Virginia – to bring capacity more in line with demand.

Ward’s: Did you implement any similar streamlining measures in Japan?

Yokoyama: As one example, we shifted steering-gear production from our Okazaki plant to Toyohashi. The result is that our Okazaki plant now concentrates on driveline production including proportional control valves, propeller shafts and oil pumps for transmissions.

Ward’s: Have you prepared contingencies for the dollar remaining permanently at $1:¥90 levels?

Yokoyama: We feel that we can handle $1:¥90. But if the dollars falls below ¥90, that will be profitable.

Ward’s: What is JTEKT’s strategy in China, now the world’s largest and fastest-growing market?

Yokoyama: We have already invested in steering plants in China, as well as in India, Brazil and other emerging markets. I believe we can handle whatever growth comes along. Keep in mind that our success in emerging markets will involve developing low-cost components.

(JTEKT also has two Chinese development centers in Dalian and Shanghai.)

Ward’s: JTEKT posted a record operating profit of ¥77 billion ($815 million) in fiscal 2007. At the time, management indicated that you might reach ¥100 billion ($1.1 billion) by fiscal 2010. Obviously, you won’t reach that target this year. When do you think you might?

Yokoyama: We don’t have a clear long-term target. For the time being we’re focused on improving technology and cost-competitiveness of our products.

Ward’s: Then just to clarify, you can’t say when sales and earnings will recover even to fiscal-2007 peak levels?

Yokoyama: When we announced our mid-term business plan we based it on economic conditions at that time. Everything has changed since then, and at this juncture it’s difficult to know what the market will look like three to four years out.

Ward’s: Some analysts say your merger, joining Koyo Seiko and Toyoda Machine Works, Toyota’s top steering and driveline suppliers, has not been a good merger and that expected synergies haven’t come about. What is your view?

Yokoyama: When analysts look at synergies, they tend to look at profits. Of course the economic crisis negatively impacted our operations as it did other suppliers. So I can understand their point of view. On the other hand, some of the synergies I see are difficult to observe from the outside.

Take steering as one example. The old Koyo Seiko produced column, pinion and hydraulic-electric (power steering) systems. Toyoda Machine made rack-type. Resulting from the merger, we expanded our product lineup.

It is true that if we only look at earnings, Toyoda Machine’s machine tool business has had a negative impact. On the other hand, we are constantly introducing Toyoda Machine’s advanced control technology throughout our component lineup. Thus, synergies are being realized even if they’re not readily observable.

Ward’s: With respect to JTEKT’s automotive business, are you satisfied with your current corporate makeup centered on steering and driveline systems, including 4-wheel-drive, electronic couplings and propeller shafts. Or might you need to add something in the future?

Yokoyama: We don’t have brake products. But in terms of steering, we acquired an equity stake in Fuji Kiko (Co. Ltd. in 2001) and are working with them to develop steering columns and intermediate shafts. We have no plans for further acquisitions.

Ward’s: What will be the impact of hybrid and electric powertrains on your business?

Yokoyama: More electronics, more controls.

Ward’s: What about steer-by-wire, when might you introduce it to the marketplace?

Yokoyama: That will depend on the OEMs.

Ward’s: But you have the technology?

Yokoyama: Yes.

Ward’s: In the medium-term, which markets do you envision enjoying the greatest sales growth?

Yokoyama: Asia, including China and India.

Ward’s: Does that mean you will add manufacturing capacity there, particularly for steering systems?

Yokoyama: We have a solid base in North America and Europe, with eight plants, including component plants. Elsewhere, we operate three plants in China, including JTEKT Steering Systems (Xiamen) Co. Ltd., which makes EPS, and we recently began production of column EPS in Haryana, India, jointly with our local partner Sona Koyo Steering Systems Ltd.

Ward’s: Does JTEKT need more business outside the Toyota group?

Yokoyama: We would like to grow our non-group business. Our goal is 50% of sales with Toyota and the other 50% outside the group.

Ward’s: Looking at your business as a whole, what are your main concerns?

Yokoyama: Many things, including material costs, particularly rare metals, exchange rates and, of course, oil prices. All impact the global car market. Against this backdrop, population will surely continue to grow, thus the need for more cars. We hope to be part of that growth and believe that our technology will make it possible.

Ward’s: And specifically which technologies?

Yokoyama: Anything to do with the environment and reducing (carbon-dioxide) emissions. As an example: Our high-output, 13,000-15,000-Nm (9,600-11,000 lb.-ft.) electric power steering system improves fuel efficiency (over hydraulic types) for pickup trucks, thus reduces CO2 emissions.

Ward’s: Is 13,000-15,000 Nm the industry’s top level?

Yokoyama: We believe so.

Ward’s: With respect to bearings, what new technologies are you working on?

Yokoyama: Our third-generation LFT, or low-friction torque tapered roller bearing, has 80% less rotational torque and is 40% smaller than conventional tapered roller bearings. This theme of reducing torque to achieve better fuel economy runs through our product lineup. In the case of our LFT, we estimate fuel savings of 2%.

Another example of this concept is our new involute (continuously variable transmission) chain, which results in up to 5% fuel savings.

Meanwhile, our VGR, or variable gear ratio, steering system improves safety. Toyota introduced the technology on the LS 460, its top-of-the-line Lexus sedan, and we are now working to develop a VGR attached to the column. The LS system is a rack coaxial type.

And in our hub business, we developed a drive-wheel hub with a built-in (antilock-brake) sensor that reduces weight and simplifies axle assembly.

Our corporate mission is to integrate vehicle controls in the areas of moving, stopping and turning.

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