Takata Corporation received another significant hit to its corporate reputation this week as its two flagship customers — Honda Motor Co. and Nissan Motor Company, Ltd. — both publicly stated their unwillingness to financially bail out their long time safety systems partner.
This revelation signals a landmark change in Japanese OEM-Tier 1 Supplier relationships that has no precedent. Over the past 50 years, troubled Japanese “keiretsu” suppliers always received financial bail out packages, debt forgiveness, equity stakes by their OEM customers, price-friendly preferred supply agreements, forgiveness for contract price fixing and even assigned their own executives-on-loan to assist in supplier resuscitation efforts.
So why is Takata not receiving the traditional bail-out package from its long time Japanese customers?
Let me count the ways….
Failure to Accept Complete Responsibility: In its sworn public testimony before the U.S. Congressional Energy & Commerce committee in December 2014 and June 2015, Takata repeatedly refused to accept complete legal and financial responsibility for the series of systemic failures that have led to 9 deaths thus far – 8 in the U.S. and 1 in Malaysia from ruptured Takata inflators. Takata’s executives had prepared talking points that openly blamed their car maker customers for failing to properly validate and test the ammonium nitrated-based airbag inflators before production approval throughout the 2000-2012 time period.
Falsifying Records to OEM Customers & Investigators: Last week, it was revealed that Takata repeatedly manipulated inflator test data before submitting it to its worried OEM customers throughout the mid-2000’s. Internal memos from concerned American Takata engineering executives openly contested and debated the Japanese practice of data falsification and manipulation but the company continued this practice until its discovery several years ago.
Refusing to Accept Factual Evidence: Over the past two months, several major Japanese vehicle manufacturers have publicly implemented a complete ban on the usage of Takata’s ammonium nitrate-based airbag inflators for future vehicle platform contracts. Until recently, Takata stubbornly refused to admit that the chemical characteristics of ammonium nitrate (i.e. sensitivity to humidity and in-vehicle thermal cycling issues that change the crystalline structure of the base chemical) had anything to do with these catastrophic inflator ruptures. After commissioning an independent scientific study with the highly respected German technical research organization – Fraunhofer Institute that revealed several critical issues with its chosen propellent, Takata finally backed off its stance and publicly admitted that it will change its airbag propellant to a non-ammonium nitrate-based formulation after 2018.
Crisis Communications Failure: When the massive Takata inflator issue became front page news in the early spring 2014, Takata’s senior management – including its CEO Shigehisa Takada – were slow to react and properly address the growing crisis with its worried OEM customers, nervous investors and the driving public around the globe. During the early days of the controversy, a series of Japanese news stories chronicled the refusal of the company’s executives to address the crisis and provide timely updates of their internal investigations into the root cause of these inflator ruptures. In late 2014, Takata finally retained the well respected crisis communications / public relations agency – Sard Verbinnen & Co. – to represent the company and properly address the lack of proper communications between the company and the press, public and its customers. Only a year too late to have a significant impact on their corporate reputation.
So where does Takata go from here? I see three possible paths for this large global automotive supplier – Implosion, bail out or metamorphosis.
Implosion (10% probability): With the considerable global consolidation of automotive safety systems suppliers over the past 20 years – from 25 airbag module companies in 1995 to just 8 major suppliers today – the auto industry might not be willing to let Takata fail. Encouraged by vehicle manufacturers, large Tier 1 auto safety suppliers including Autoliv, TRW Automotive (now part of ZF Friedrichshafen), Takata and Key Safety Systems acquired 58 smaller supplier companies during that timeframe. What has resulted is a highly concentrated supply base with Autoliv, Takata and ZF/TRW constituting 85% of the global market for airbag modules. Despite the massive global inflator recall, the chances that Takata completely implodes is remote.
Bail Out (70% probability): Despite Nissan and Honda’s refusal to assist Takata financially, the company still has significant assets and will likely receive a bail out package from a consortium of Japanese banks.
Metamorphosis (20% probability): Takata’s global airbag inflator market share will tumble from 22% in 2015 to just 10% in 2020 according to Valient Automotive Market Research. Without the highly profitable inflator components within its airbag modules, Takata may have to transition to other product categories in order to survive long-term. Takata’s seatbelt business will see little impact from this controversy as most OEM vehicle manufacturers still view Takata as a solid supplier of these largely commoditized components.
Scott Upham is the founder & CEO, Valient Market Research, guest contributor to CNBC Asia & publisher of the daily airbag industry publication – Valient Airbag Alert.
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