Comco Corp. employees work on the production line at the company’s plant in Toyota City, Aichi Prefecture, Japan, on April 13.

Hironori Minezawa, a private detective, spends his days investigating struggling autoparts makers in Toyota City as cuts by Toyota Motor Corp. end a seven-year expansion for the city’s thousands of parts suppliers.

“A rumor of a possible bankruptcy gets out, and we are called in to find out what’s going on,” said Minezawa, who works for Tokyo Shoko Research, based in nearby Nagoya. “These companies aren’t getting any work and are at the end of their tethers.”

Failure of the weak links in the chain may force Toyota to turn to suppliers outside its traditional network, ending the company’s stranglehold over a procurement system that has driven down profit margins at subcontractors to 1 percent or less, said Takeshi Miyao, a Tokyo-based supply chain analyst at CSM Worldwide, which advises the auto industry.

“This would change the balance of power and could become reflected in prices,” Miyao said.

Toyota’s supply network consists of two groups: the 217 primary partsmakers that deal directly with the carmaker and their subcontractors. Toyota spokeswoman Ririko Takeuchi declined to comment on the company’s pricing practices or negotiations between its suppliers and their subcontractors.

Minezawa expects bankruptcies to mount over the next six months, particularly in the lower ranks of Toyota’s supply chain.

Toyota’s grip

“Profit is next to nothing,” said Kazushi Kawabata, president of Comco Holdings Inc., a maker of machine tools, which supplies Toyota. “The suppliers are totally in Toyota’s grip.”

Nationwide, bankruptcies in the auto sector surged 52 percent to 41 cases in March compared with last year, according to Tokyo Shoko. The number of newly registered unemployed in Aichi prefecture, which includes Toyota City, jumped 88 percent in February.

About 80 percent of the labor force in Toyota City serves the auto industry, according to Norio Seki, the head of the city hall’s industrial affairs division. Domestic production of Toyota and Lexus cars fell last year to four million vehicles, the first decline in seven years.

The cuts have rippled through the local economy.

In the Meitetsu Toyota Hotel, opposite Toyota City rail station, occupancy rates have halved since October to as low as 30 percent, said front desk manager Chiharu Suzuki. Foreign suppliers, who used to make up more than half the hotel’s guests, are gone, leaving the once popular samurai swords untouched in the gift shop, she said.

Hello Work

At the Hello Work employment agency, Satoru Tsuda, a 31-year-old Japanese-Brazilian from Parana in southern Brazil, is trying to find work to meet his family’s 41,500 yen monthly rent. He, his two brothers and his parents worked for 12 years at an engine-parts factory until they were fired in March, he said.

Toyota may post a 227 billion yen (US$2.34 billion) loss for the year ending March 2010, according to the median of 20 analyst estimates compiled by Bloomberg.

The company forecast a loss of 350 billion yen for last fiscal year. It reports earnings on May 8th. The carmaker said it may cut global production by 12 percent this fiscal year to about 6.2 million vehicles.

As Japanese companies report earnings for the fiscal year ended March, more bankruptcies may come to light, said CSM’s Miyao.

Dry towel

Nihon Koshuha, a maker of car-door parts for Toyota affiliate Toyota Boshoku Corp., halted operations on

March 3 after orders dropped and the company couldn’t service debt on a new plant built in 2007. Taishin Kasei Inc., a maker of plastic car interior and body parts in Nagoya, ceased production in April and filed for bankruptcy.

Former President Eiji Toyoda, great-uncle to incoming President Akio Toyoda, once said “water can be wrung even from a dry towel if you put your mind to it,” to explain how the company overcame the economic crisis following the 1973 oil shock, according to the company. This philosophy permeates the supply chain, Miyao said.

Sub-suppliers’ profit margins are restricted because they are expected to open their books and show their costs to customers, he said. The price of their products is then typically decided after delivery, Kawabata and Miyao said.

“Part of Toyota’s success is based on its ability to squeeze parts makers,” said Bob Sliwa, advance design director at Nagoya -based Cobo Design Co., which works with Toyota suppliers such as Denso Corp., the world’s largest listed auto-parts maker.

Tied to Toyota

Toyota group companies like Denso and Aisin Seiki Co., Japan’s largest maker of car transmissions, in which Toyota has equity stakes, sell to automakers around the world. Sales to carmakers other than Toyota make up about half of Denso’s business. In contrast, most secondary suppliers in Toyota City make parts only for Toyota.

Denso set up a taskforce in January to help sub-suppliers cut costs, said spokesman Goro Kanemasu.

Comco’s Kawabata said the company’s relationship with Toyota “shocked” him when he joined his father’s business in 1981, leading him to diversify his company from being completely dependent on the Toyota group to getting 80 percent of sales from other companies.

Subcontractors “are pushed to cut costs in units of hundredths of a yen at times,” Tokyo Shoko’s Minezawa said. “It’s that kind of world.”

Source: Bloomberg