By Johannes Hellstrom
STOCKHOLM (Reuters) - Swedish car safety equipment maker Autoliv (ALV.N) could capitalize on the crisis engulfing its rival Takata Corp (7312.T) by finally extending its global leadership to the one major auto hub it has been unable to dominate - Japan.
Autoliv is the world's top maker of equipment such as air bags and seat belts, but it has struggled to break the ties between Japanese carmakers and main supplier Takata in a country where the "keiretsu" corporate culture sees businesses closely bound together in relationships cultivated over decades.
The ground has shifted, however; a string of Japanese carmakers have ditched Takata's air bag inflators in recent days after U.S. regulators said they used a chemical that they suspect causes the bag to explode with too much force, spraying metal shards into the car.
Takata is the only supplier to use the volatile chemical - ammonium nitrate - in its inflators, which have been linked to eight deaths and have led to the recall of more than 40 million cars worldwide.
Its rejection by carmakers including its main customer Honda Motor Co <7267.T>, Toyota Motor Corp <7203.T> and Nissan Motor Co <7201.T>, could reshape the auto safety business in Japan, where it has been the biggest player for years.
"What is sensational here is that Honda, where Takata has been the supplier par excellence, is saying they won't buy (inflators) from Takata in future," said a source with decades of experience in the car safety industry.
"These are two companies that have grown up together, it would be like Volvo saying this to Autoliv."
The Swedish company is already on the move.
Autoliv is investing around 1 percent of sales this year, about $90 million, most of which it expects to eventually recoup from customers, in boosting capacity to replace the Takata inflators in models subject to recalls.
The company expects to deliver up to 20 million replacement units, mainly to Honda, most of them this year and next.
"Autoliv's opportunity to take market share has never been as good as it is right now due to what is happening to Takata," said Handelsbanken Capital Markets analyst Hampus Engellau.
The company has already seen new business coming its way, with its global share of new orders for frontal airbags hitting 50 percent over the past two quarters, compared with about 30 percent previously.
But it could face hurdles such as rapidly ramping up output without jeopardizing quality, and assuaging carmaker concerns it will become too powerful, with too much control over pricing.
Autoliv's 2014 market share in so-called passive safety equipment is around 20 percent in Japan but roughly twice that in Europe and North America and more than 35 percent in the rest of Asia, company data showed. Its air bags business, including steering wheels, passive safety electronics and inflators, accounted for about two-thirds of overall sales.
Takata was the second-biggest global player last year, followed by German-U.S. firm ZF TRW - formerly TRW Automotive - with other companies including Toyoda Gosei (7282.T), Nihon Plast (7291.T), Ashimori <3526.T> and Daicel <4202.T>.
Takata said last week it would phase out ammonium nitrate in all its inflators by the end of 2018, but analysts say the brand could remain tainted for long after that.
The potential scale of the opportunity for its rivals is huge - Valient Market Research expects Takata's market share for inflators will drop to 5 percent in 2020, from 22 percent in 2014.
Replacing Takata's air bags and inflators in models already in production, but not subject to the past year's wave of recalls, is likely to be prohibitively expensive for carmakers.
The bigger opportunity may lie a few years ahead, in supplying equipment for new models - with Autoliv in pole position, because it is the global industry giant and has managed to build up its No.2 position in Japan over the past two decades through acquisitions of smaller local suppliers.
"After companies have had such trouble with Takata, they really want things to work this time," said DNB analyst Christer Magnergard. "In that situation, they are more likely to move to a safer option than an untested player."
Expanding production capacity for equipment such as airbags is cheap compared with other manufacturing industries, the industry source said.
"If you have local production running, as Autoliv has in Japan, and the volumes are not too big you just add a few shifts or install a new assembly unit in the existing plant," the source added.
"If that is not enough, you expand the factory building, and that doesn't cost much. It is really just adding floor space, a roof and a bit of heating or cooling."
Valient CEO Scott Upham, who has worked at Takata and TRW, said spare capacity at Autoliv's Chinese plants could also be tapped to meet demand.
But the Takata crisis highlights the potential hazards facing suppliers. As Autoliv ramps up volumes, it must retain its standards, said Mathias Leijon at Nordea Investment Management, which owns a 5 percent Autoliv stake.
"They must safeguard quality across the production chain. That is the challenge here."
(Additional reporting by Helena Soderpalm; Writing by Niklas Pollard; Editing by Alistair Scrutton and Pravin Char)