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“Japanese manufacturing industry owes its competitive advantage and strength to its subcontracting structure.” — Ministry of International Trade and Industry1
Was Japan’s powerful Ministry of International Trade and Industry (MITI) serious when it made this statement? Is it possible that much of Japan’s competitive advantage can be attributed simply to its subcontracting structure? Indeed, evidence from an increasing number of industries and sources suggests that much of the Japanese success can be attributed to Japanese-style business partnerships. Consider the auto industry, for example. From 1965 to 1989, the combined Japanese market share of worldwide passenger car production jumped from 3.6 percent to 25.5 percent. In striking contrast, the market share of U.S. firms dropped from 48.6 percent to 19.2 percent.2 Moreover, by the early 1980s, Japanese firms had achieved a 20 percent to 25 percent cost advantage, per car, versus U.S. automakers, while receiving customer satisfaction scores 50 percent higher than those of competing U.S. cars. Can we attribute the astonishing Japanese success to their partnership approach? Consider the following:
- American automakers are more vertically integrated than their Japanese counterparts, with approximately 48 percent of parts manufactured internally as opposed to 25 percent for Japanese automakers (see Figure 1).
- Even though U.S. automakers are more vertically integrated, they contract directly with 1,500 to 3,000 parts suppliers for the parts they don’t make. Toyota, by contrast, works with approximately one-tenth that number, buying more — in many instances, entire subsystems — from each supplier.
- A study conducted by Bain & Company found that the total cost of components for a Japanese car was more than 30 percent below that of a comparable U.S. model in 1984 (see Figure 2).3 A similar comparison of component costs reported in Fortune indicated that, in 1985, U.S. automakers spent an average of $3,350 on parts, materials, and services for small cars (priced at $6,000), while the average Japanese company spent $2,750 — a cost savings of more than 22 percent that was achieved mainly “through more efficient vendor relations.”4 While the gap has narrowed, Japanese automakers still have a cost advantage over U.S. makers.
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1. Ministry of International Trade and Industry, White Paper on Small and Medium Enterprises in Japan (Tokyo: MITI, 1987), pp. 36–37.
2. World Motor Vehicle Data (Detroit, Michigan: Motor Vehicle Manufacturers Association of the U.S., Inc., 1991), p. 14.
3. Bain & Company, unpublished automotive study, January 1985.
4. A.B. Fisher, “Behind the Hype at GM’s Saturn,” Fortune, 11 November 1985, pp. 34–46.
5. “Shaking up Detroit,” Business Week, 14 August 1989, pp. 74–79.
6. K.B. Clark and T. Fujimoto, Product Development Performance (Boston: Harvard Business School Press, 1991), p. 40.
7. K.B. Clark, “Project Scope and Project Performance: The Effect of Parts Strategy and Supplier Involvement on Product Development,” Management Science 35 (1989): 1247–1263.
8. Bain & Company, unpublished automotive study, January 1985.
9. J. McMillan, “Managing Suppliers: Incentive Systems in the Japanese and U.S. Industry,” California Management Review, Summer 1990, p. 51.
10. Author interview with GM executive, 23 March 1991.
11. P. Ghemawat, “Sustainable Advantage,” Harvard Business Review, September–October 1986, p. 53.
12. Author interview with the sales vice president of a Toyota supplier, 9 September 1992.
13. S. Helper, “Automotive Supplier Relations: Results of 1989 Survey,” IMVP International Policy Forum, May 1989.
14. M. Walton, The Deming Management Method (New York: Perigee Publishing Group, 1986), p. 62. From Dr. Deming’s diary, “Travel Logs, Around the World by Air,” 1946–1947, p. 88.
15. J.P. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World (New York: Harper Perennial, 1990), p. 160.
17. Walton (1986), p. 64.
18. J.P. Walsh, “Top Management Turnover Following Mergers and Acquisitions,” Strategic Management Journal 9 (1988): 173–183.
Walsh finds that “turnover rates in acquired top management teams are significantly higher than ‘normal’ turnover rates, and that visible, very senior executives are likely to turn over sooner than their less visible colleagues.” [p. 173]
19. T. Nishiguchi, “Strategic Dualism: An Alternative in Industrial Societies” (Oxford, England: Oxford University, Neffeld College, Ph.D. Diss., 1989), pp. 154–227; and
McMillan (1990), pp. 46–47.
20. From the 1990 IMVP World Assembly Plant Survey, reported in Womack et al. (1990), p. 157.
21. Author interview with NEC supplier manager, 23 July 1991.
McMillan (1990, p. 50) notes that a small number of bidders does not necessarily create a bargaining/contracting problem. “The fierceness of bidding does not depend on just the number of bidders. There is a more subtle determinant of bidding competition. If each of the bidders is roughly equally efficient at doing the job, the bidding competition is aggressive even if only two bidders compete.” McMillan claims that this is why it is in the large Japanese manufacturers’ interest to provide technical assistance to its potential suppliers to keep them on roughly equal footing and ensure that each of them is using efficient techniques.
22. Author interview with Nissan purchasing manager, 22 October 1992.
23. McMillan (1990), p. 47.
24. D.L. Birch, Job Creation in America: How Our Smallest Companies Put the Most People to Work (New York: Free Press, 1987), pp. 6–22; and
J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Invention (New York: St. Martin’s Press, 1959).
25. T.J. Pempel, Policy and Politics in Japan — Creative Conservatism (Philadelphia: Temple University Press, 1982), p. 20; and
M.J. Smitka, Competitive Ties: Subcontracting in the Japanese Automotive Industry (New York: Columbia University Press, 1991), p. 206.
26. D. Friedman, The Misunderstood Miracle: Industrial Development and Political Change in Japan (Ithaca, New York: Cornell University Press, 1988), p. 35.
27. Nishiguchi (1989), pp. 84–151.
28. R. Dore, “Goodwill and the Spirit of Market Capitalism,” British Journal of Sociology 34 (1983): 459–482; and
McMillan (1990), p. 40.
29. B. Asanuma, “The Contractual Framework for Parts Supply in the Japanese Automotive Industry” and “The Organization of Parts Supply in the Japanese Automotive Industry,” Japanese Economic Studies 15 (1985a&b): 32–78; and
S. Kawasaki and J. McMillan, “The Design of Contracts: Evidence from Japanese Subcontracting,” Journal of the Japanese and International Economies 1 (1987): 327–349.
30. W.G. Ouchi, “Markets, Bureaucracies, and Clans,” Administrative Science Quarterly 25 (1980): 124–141.
31. M. Gerlach, “Business Alliances and the Strategy of the Japanese Firm,” Organizational Approaches to Strategy, ed. G. Carroll and D. Vogel (Berkeley: University of California, 1987), pp. 127–143.
32. M. Cusumano, The Japanese Automobile Industry: Technology and Management at Nissan and Toyota (Cambridge, Massachusetts: Harvard University — Council on East Asian Studies, 1985), p. 242.
33. Author interview with Mitsubishi manager, 14 October 1990.
34. Gerlach (1987), pp. 127–143.
35. Author interview with Mitsubishi manager, 14 October 1990.
36. J.B. Treece, “The Lessons GM Could Learn for Its Supplier Shakeup,” Business Week, 31 August 1992, p. 29; and
M. Blake, “The Evolution of an American Business,” Synergy, a publication of Toyota Motor Sales, 1991, pp. 4–7.
37. “Sitting Pretty,” Synergy, 1991, p. 13.