DENSO
Corporate History & Strategy

In December 1949, Toyota Motor established Nippon Denso (now DENSO) by spinning off its electrical components division as part of a business restructuring prompted by a financial crisis. Following the end of World War II in 1945, Toyota lost demand for military truck production and decided on a restructuring that included laying off 1,600 employees. As various divisions were separated, the electrical components division and the Kariya North Factory were spun off as DENSO.

Hayashi Torao, who had served as factory manager of Toyota's electrical components division, became the first president, and the company launched with 1,445 employees. Initial capitalization was 15 million yen, but the company inherited 140 million yen in accumulated losses from the radiator division as borrowed funds from Toyota, leaving it with 150 million yen in debt and a fragile equity ratio of just 5%.

DENSO's spin-off was essentially the disposal of an unprofitable division for Toyota. At the time of establishment, Toyota did not hold a majority of DENSO shares and did not position the company as an affiliate or subsidiary. Toyota President Toyoda told President Hayashi, 'I didn't give this debt to Denso—I lent it. Don't forget that,' and prohibited the use of 'Toyota' in the company name. This was a hedge against the risk of DENSO going bankrupt, forbidding the use of Toyota's name.

As of 1951, DENSO's product lineup included electrical components such as dynamos and starters, radiators, and meter instruments. The company briefly entered the household electric washing machine market but withdrew after struggling to develop sales channels. The company's reputation at the time was that it would be 'the first to go bankrupt,' and Director Iwatsuki went so far as to publish an internal paper titled 'Will Nippon Denso Go Bankrupt?' in an effort to quell such concerns.

Just three months after the company's founding, in March 1950, DENSO's management reached an impasse, and a restructuring plan was announced that called for laying off 473 of approximately 1,400 employees. Remaining employees also faced a 10% wage cut, and conflicts arose between the labor union and management. The newly separated company was forced into workforce reductions immediately after its establishment—a harsh beginning.

However, the procurement boom triggered by the Korean War, which broke out in June 1950, proved to be a turning point. Orders from Toyota Motor surged due to increased demand for military vehicles, and DENSO's electrical components production thrived. In 1951, the company invested 160 million yen in importing state-of-the-art machine tools, gaining the capacity to expand its facilities. Although saved by the external factor of Korean War procurement demand, DENSO escaped its financial crisis and began its growth trajectory as an automotive parts manufacturer.

Since its establishment in 1949, DENSO had been manufacturing automotive electrical components, but quality control on the production floor remained a challenge. Competitors in electrical components included major integrated electrical manufacturers such as Hitachi and Mitsubishi Electric, and DENSO's inferior quality constrained its business expansion. DENSO's management visited automakers and parts manufacturers in Europe and the United States, studying the introduction of modern production systems.

Meanwhile, Germany's Robert Bosch had a track record of entering the Japanese market before the war and planned to re-enter Japan after the war, with its executives visiting the country. In this process, Bosch became aware of DENSO and approached it for a partnership, noting its equipment standards with newly imported state-of-the-art machine tools, its performance maintaining a 30% dividend, and its business relationship with Toyota Motor. For DENSO, the alliance offered quality control know-how and product technology; for Bosch, it provided re-entry into the Japanese market—aligning the interests of both parties.

On May 21, 1953, DENSO signed a business and capital alliance agreement with Robert Bosch. The alliance included acquisition of domestic sales rights for Bosch products, licensing of Bosch-held patents, and full disclosure of Bosch's technology. In return, DENSO allocated 800,000 shares to Bosch (a 10% equity stake) and agreed to pay sales royalties. Royalties were structured on a dividend-linked basis: 2.5% for a 15% dividend and 3% for a 20% dividend. The contract term was 10 years with an automatic renewal clause.

Leveraging the technology transfer from Bosch, DENSO rapidly entered new product areas beyond electrical components: car heaters in 1954, injection pumps in 1955, and spark plugs in 1956. Furthermore, in 1957, the company decided to make a full-scale entry into car air conditioning and amended its articles of incorporation to explicitly include the car air conditioning and car heater businesses. DENSO's product portfolio, which had been concentrated in electrical components, was significantly expanded with the Bosch alliance as its starting point.

Triggered by the Bosch alliance, DENSO began building a full-scale quality control system. In 1956, it established a Quality Control Office and adopted the internal slogan 'Good Products, Low Cost.' Quality improvement and cost reduction initiatives were implemented company-wide, and in 1961, DENSO became the first company in the machinery industry to win the Deming Prize. The Deming Prize was proof that DENSO had not only adopted Bosch's technology but had also developed its own quality control capabilities to a top domestic level.

Bosch continued to hold DENSO shares for approximately half a century thereafter, and the capital relationship was dissolved in 2012 when Bosch sold its entire 5% stake. The roughly 60-year period from the 1953 alliance to the 2012 dissolution of the capital relationship coincided with DENSO's growth from a small electrical components specialist into a global automotive parts manufacturer. The Bosch alliance formed the foundation for DENSO's growth in two respects: building a quality control system and expanding its product range.

In 1982, DENSO formulated a one trillion yen sales plan, setting three strategic pillars: 'developing customers beyond Toyota,' 'expanding overseas,' and 'electronics.' On the sales front, the company began reviewing its transaction structure, which had been heavily weighted toward Toyota Motor, and explored expanding business with automakers other than Toyota, such as Nissan Motor, which had strong ties with Hitachi in electrical components. For overseas expansion, the company began local parts production in North America in conjunction with the launch of Toyota's Kentucky plant, establishing a foothold for global operations.

In the electronics field, DENSO decided on large-scale investments, building a framework to capture the trend toward electronic control in automobiles. However, Toyota Motor grew wary of DENSO's rapid growth. In 1989, Toyota established its own Hirose Plant (an IC manufacturing facility) to avoid excessive dependence on DENSO in the electronic components domain.

Toyota's establishment of the Hirose Plant was a move to check DENSO's advance into the electronics field. While tensions arose between the parent company and the parts manufacturer over business domains, DENSO maintained the policies of its one trillion yen plan and continued investing in electronics. Ultimately, Toyota transferred the Hirose Plant to DENSO in 2020, meaning that the consolidation of electronic component operations represented Toyota's own revision of its initial policy.

The three pillars set forth in the one trillion yen plan defined the direction of DENSO's subsequent growth. Developing customers beyond Toyota enhanced the company's versatility as a parts manufacturer, and overseas expansion led to the establishment of production systems in North America and Asia. However, even in the 2020s, approximately 50% of DENSO's sales continued to come from Toyota Motor, and the challenge of breaking free from Toyota dependence remained unachieved even after 40 years.