The Evolution of Japanese Subcontracting

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The authors trace the development of Japanese subcontracting from just after World War I when the labor market in Japan divided into two areas: large firms, especially heavy industries, and the rest of the economy. During World War II, the demand for munitions, cheap labor, changes in infrastructure and technology, and politics led to the further development of subcontracting. After the war, government protections aided its continued growth, until a major transformation in the 1960s during Japan's high-growth economy.

The modern form of Japanese subcontracting relies on distinct practices that have developed around the system of clustered control and joint problem solving:

• Target costing. Japanese manufacturers lower costs of new products at the design stage by first determining the sale price, decomposing the price into desired profit and costs, and then breaking down costs to evaluate and price every part. Throughout the process, suppliers provide input.
• Value analysis. In joint problem-solving with prime contractors and subcontractors, Japanese manufacturers decompose increasingly complex cost structures to identify cost-sensitive elements item by item.
• Bilateral design. Modularization, which leads to cost reductions and ease of design changes, results from suppliers' proposals.
• Subcontractor evaluation. The prime contractor continually evaluates subcontractors' performance on quality, price, delivery, engineering, management competence, and long-term viability.
• Purchasing agents' role. Purchasing agents are not mere negotiators but have the technical knowledge to evaluate subcontractors' competence and teach them new production systems.

Nishiguchi and Brookfield address several prevalent theories for the evolution and growth of Japanese subcontracting: dualism, flexible specialization, transaction cost economics, and cultural specificity. In their view, no single theory can fully explain the growth of subcontracting. Instead, they posit, it is the product of interaction among market demand, politics, technology, and producer strategy.

Toshihiro Nishiguchi is professor of management at Hitotsubashi University. Jonathan Brookfield is a Ph.D. candidate at The Wharton School, University of Pennsylvania.

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