Honda Aims to Save $9.4 Billion by 2030 by Asking Suppliers to Cut Costs

• Honda expects losses tied to its cancelled EV program to mount to $12 billion.

• To make up for it and better compete with Chinese automakers, Honda wants its suppliers to drastically cut costs.

• These cuts will revolve around pressed and forged elements, electrical components, and software.

Reeling from its first-ever annual loss, Honda is about to embark on a massive cost-cutting campaign that should see it save U.S. $9.4 billion by the end of the decade.

As is often the case in the automotive industry, these cuts won’t be made by the automaker itself, but rather by its suppliers, who have been told to reduce the price they charge Honda for various parts by about 30%.

According to sources and internal documents cited by Reuters, the automaker met with its key suppliers earlier this year and provided them with personalized cost-cutting plans and objectives.

The company also asked its suppliers to look at their own supply chains for potential cost-cutting measures, such as shifting their procurement of materials and smaller components to China.

Honda also asked the suppliers to increase their use of standardized parts in order to benefit from economies of scale.

The Japanese automaker also announced it would look to source more parts from Chinese suppliers itself.

There are three areas which the automaker is targeting for these price reductions: forged and pressed components, electronic parts, and items related to software-defined vehicles.

While current suppliers are undoubtedly padding their invoices in search of higher profit margins, a 30% reduction in costs like that demanded by Honda will require massive structural changes from these suppliers in order to remain profitable.

In fact, the sources Reuters talked to weren’t sure this objective is even attainable over the next three to four years.

Of course, reducing costs by 30% is likely to lead to layoffs at those suppliers and lower-quality parts making it into Honda vehicles, which have enjoyed a good reputation for quality and reliability for years now.

In addition, shifting the consequences of its financial losses to its suppliers is unlikely to help Honda’s relationship with the companies it relies on to assemble cars.

Of course, many Chinese suppliers are proving they can create parts of equal or superior quality at a lower cost than legacy parts makers.

Therefore, Honda’s demands could be the shock needed for Japanese and North American automotive suppliers to review and transform their operations to become more competitive against their Chinese rivals and Chinese automakers.

The next few years will tell if these cost-cutting measures mean a reduction in Honda’s quality or a resurgence in productivity and competitiveness among legacy parts makers.

Source: Reuters