In late November 2004, Nissan announced that due to a shortage of steel it would be shutting down three of its Japanese plants for a period of five days, thus postponing the production of 25,000 vehicles. It soon became apparent that more of the same was needed. The carmaker is now expecting to shut down for a further two days in March 2005, thus delaying the production of 15,000 more vehicles. Steel supplies should normalise in the future, but as Carlos Ghosn himself has recognised, the rising price of this intermediary good is likely to have a knock-on effect on automobile prices, despite cost-cutting efforts made in other areas.

Observers have generally interpreted this news positively, viewing the steel shortage both as a side-effect of the endless appetite for such products in China (a phenomenon that has the merit, at least for the moment, of driving global growth), and also as a result of the success of Nissan’s new models, for which orders have been higher than expected.

These explanations deserve a second look, however. After all, the same context does not appear to have had the same effects on Japan’s other carmakers. With the exception of Suzuki (also forced to stop production for a few days) and Mitsubishi (untouched by the shortage of steel due to a fall in sales), the country’s other manufacturers, especially Toyota and Honda (whose output has been rising faster than Nissan’s) hastened to announce that they would neither have to shut any plants nor, at least temporarily, even raise their prices.

Looking back in time, note Carlos Ghosn’s late 1999 announcement, as part of his draconian immediate cost-cutting programme, that he would in the future only ben choosing steel suppliers capable of low-balling their prices. A benchmark figure of - 17% was advanced.

At first, this downwards pressure succeeded beyond expectations, with prices plummeting by 20%. Except for Kawasaki Steel, all Japanese steelmakers ended up in the red in 2001 and 2002. By 2004 Nissan only had two suppliers: Nippon Steel and JFE Steel.

Over the past four years, however, the situation has changed completely. Global demand for steel, specifically from China, has exploded, as have spot prices. Most carmakers are taking this in stride, having negotiated long-term (3 to 5 year) sourcing contracts and thereby agreeing to work on an average-price basis. Nissan, on the other hand, appears to be operating differently, in a turn of events that may well reveal the limitations of a strategy based on constantly pressuring one’s suppliers into an immediate lowering of their prices. Like any strategy, Nissan’s approach can only become sustainably viable under certain conditions. Many analysts arrive a bit too quickly at the opinion that by subjecting suppliers to a generalised global competition, purchasers can free themselves forever from supplier -imposed price constraints, particularly in the case of a product like steel, which is reputed to be banal, over-abundant and in decline.

In this new environment, the two steel suppliers that Nissan chose have unsurprisingly decided to prioritise deliveries to those carmaker customers to whom they made a long-term commitment, and who have been less demanding in price terms. This has forced Carlos Ghosn to go knock on the Korean Pesco and the European Arcelor’s doors. For the moment, he has only received half of the tonnage ordered – at current market prices, of course.

Two temporary conclusions can be drawn from this affair. The first is the apparent confirmation of the need for a modicum of coherency between a carmaker and its suppliers’ strategies if both sides are to achieve long-term profitability. If a cost-cutting strategy is not part of some medium-term compromise, it will blow up as soon as the balance of power shifts between the two parties involved. A supplier is an essential actor in a carmaker’s « company governance compromise ». It is the harmony of the entire « value chain » that must receive attention, not just the interests of one company. This also means accounting for retailers and so-called service companies, in addition to suppliers.

The second conclusion to be drawn from this affair is that even if suppliers’ strategies do not have to derive directly from end-user demand, they will nevertheless be indirectly affected due to their customers’ own strategies. This can cause suppliers a few problems, since their carmaker clients might be pursuing very different profit strategies – raising a question as to whether suppliers are actually capable of internalising the coexistence of contradictory profit requirements. This offers us an analytical prism for viewing first-tier suppliers’ contrasting trajectories. It is not enough for them to merely book orders – they must also fulfil their obligations in a way that is coherent with carmakers’ diverging strategies. What we may have discovered here is a structural limitation of worldsourcing.