Global Management and Innovation of Japanese Enterprises - The Strengths of Global Management and Further Challenges

A report titled, "Evolution of Production, Research and Development of Japanese Enterprises in ASEAN (Case Study of the Thai Automobile Industry)," was presented by OHKI Hiromi, Director, International Economic Research Division, Economic Research Department, Japan External Trade Organization (JETRO). He made the following points.

Automobile production in Thailand set a record of 1.14 million units in 2005, and Thailand now ranks number 14 among vehicle-producing countries. This is the first time vehicle production in Southeast Asia has broken through the million-unit mark. Thailand has no domestic automakers, and it is a highly unusual phenomenon for such a country to achieve production of more than one million units in such a short time and to export 430,000 units (making it the world's seventh-largest vehicle exporter). Automobile production in Thailand has been supported by the recent marked recovery on the part of Japanese automakers.

Pickup trucks represent more than half of vehicle exports from Thailand. The reasons for so many pickup trucks being produced in Thailand are that taxes are lower than for passenger vehicles and there is strong domestic demand from farming communities, leading to greater competitiveness and more exports. Looking to the future, overall production is predicted to reach 1.8 million units. In addition to creating a greater appetite for exports, this is likely to lead to fierce competition as Chinese and Indian manufacturers target the growing Thai market.

Another particular feature of vehicle exports from Thailand has been the emergence of products positioned as global strategic models as part of Toyota's IMV (Innovative International Multi-purpose Vehicle) project. Under this project pickup trucks (such as Hilux models) previously produced in various parts of the world are grouped in a single category, manufactured in Thailand and other ASEAN countries, and exported around the globe from there.

Another example of a global strategic model is Renault's X90 (Logan) project. This entails knockdown production of the Logan sedan in Renault's Dacia subsidiary in Romania and export to emerging markets. Unlike the IMV, the Logan project is basically a joint venture with a local company, which has the advantages of faster startup and lower initial investment.

Thailand became an export base after regulations requiring domestic production were abolished. This originated in measures to keep foreign capital in the country at the time of the currency crisis in the late 1990s. Coupled with the Thai government's abolition of regulations restricting foreign investment in the country, it had the merit of enabling foreign manufacturers to act freely. The step-by-step reductions in intraregional tariffs that accompanied Thailand joining the ASEAN Free Trade Area (AFTA) then enabled the building of a mutually complementary manufacturing structure within the region. Although they are currently limited, in the future there will be more FTAs with countries outside ASEAN, and we can hope to see various regulations eased or abolished, including the reduction of tariffs.

The environment for local suppliers in Thailand has altered dramatically with the currency crisis, AFTA and new models for the domestic market ("Asia cars"). Suppliers have to keep up with changes in many areas and there is increasing concern about whether they can provide the strong base needed to support expanded production in the future. To address this issue, human resource development projects are being set up within the framework of the FTA between Japan and Thailand. These involve dispatching highly skilled Japanese engineers to Thailand to train local staff and linking such training to national qualifications. Thus Japanese manufacturers are cooperating in fields where they can make the most of their particular strengths.

Another issue facing Japanese manufacturers is product development. Typically the product development process involves concept creation, basic product planning, production engineering, process engineering, and mass production. However, at present Thailand can only be asked to undertake tasks at the mass production level, and further efforts will be made to extend this down to the production engineering level. The basic aims of shifting development to Thailand would be to (a) speed up development; (b) reduce costs by localizing operations; and (c) compensate for a lack of engineers in Japan. In the future this would create a structure for simultaneous development around the world.

According to a survey of Japanese assemblers, the key human resource issues relating to product development are (a) starting from scratch; (b) the lack of university graduates (due to the small number of universities); (c) the quality of human resources; and (d) training of people needed for development work. From the supplier perspective, the biggest issue is securing personnel, with suppliers facing problems such as seeing personnel they have spent time training move to other companies.

What manufacturers want when they undertake product development in emerging markets is to make products at lower cost, and this requires personnel who are fully aware of this point. Several measures need to be taken in Thailand with a view to strengthening product development capability, including, (a) interregional/international exchange at the university level; (b) making use of highly skilled staff within the Asian region; and (c) pulling in skilled personnel by creating more attractive workplaces (localization efforts).

In human resources terms, the key to Japanese manufacturers building strong production bases and capabilities in ASEAN will lie in how well they develop local staff.

SUGIYAMA Yasuo, Associate Professor, Graduate School of Economics, Kyoto University, then offered the following comments.

I would like to make a few comments on Mr. Ohki's presentation based on a longer time span and from the perspective of today's theme of global management and innovation. I will then summarize the current situation and issues faced, and finally point out the key problems.

Looking at the history of Japanese automotive companies in ASEAN, local production began in the 1970s as a response to the protectionist import policies that were in place at that time, so at that stage production was focused on import substitution. In the late 1990s, the rise of a new middle class spurred a need to consider local adaptation of products. Following the Asian currency crisis and the establishment and coming into force of AFTA, since 2000 ASEAN has become a global production base. It has positioned itself as a base for global strategic models and switched direction to become a global export base.

Emerging markets have faced a number of dilemmas. Firstly there are the dilemmas of technology transfer and shifting to domestic production during the import substitution phase and the dilemmas of cutting costs and modifying products during the local adaptation phase. To resolve these issues, in undertaking product development for local adaptation such markets have utilized simplified versions of outmoded platforms and adapted outmoded technologies to minimize investment in plant. Such measures are no longer adequate in this era of globalization. The key issue for the future is how skillfully they can switch strategies.

Given that background, Thai affiliates currently dealing with global models like the IMV are likely to face a number of new problems as they globalize their operations. One is the rekindling of the "world car" problem; in other words, how many ASEAN markets are capable of becoming lead markets? At the same time, there is the problem of adapting a vehicle to the needs of non-ASEAN countries, which will mean it no longer meets ASEAN consumers' needs. Another more general problem is whether competencies can be maintained in local development facilities.

When an enterprise heads overseas to conduct R&D not because its home country's industry is in an inferior position in terms of the external environment, but rather regardless of it being in a superior position, the R&D involved should be the type that relies on using existing capabilities. However, this entails the dilemma that new competencies will also need to be created.

Finally, let me sum up the problems. First, will a locally-developed vehicle really work globally? Second, will projects like the IMV lead to a rekindling of the world car problem? Third, how can HR development and the building of capabilities in local affiliates be achieved?

Next, the session chairman HISATAKE Masato, Senior Fellow, RIETI, made the following remarks on the objectives of the session.

In contrast to the last session on metanational management, I think our discussion here relates to the step prior to the metanational stage. Sanbonmatsu (2005) identifies three developmental phases. First, utilizing profits accumulated from the home country's industries and economy. Second, going outside the home country to globally utilize profits accumulated from the industries and economies of other countries (involving three sub-stages). Third, the metanational management model, which goes beyond the first two approaches. The question here is in what situation is transnational or metanational management deemed necessary in the case of the automotive industry?

Metanational management has the following characteristics: In terms of environmental conditions, (a) the pace of change is rapid; (b) the amounts invested are enormous; and (c) the chances of success are not great. The features of the metanational world are that (a) intellectual assets are the key; (b) economies of scale are effective; and (c) the winner takes all. Therefore the prerequisites for success are (a) speed of management; (b) separation of risks taken and their impact; and (c) flexible corporate organization.

On the other hand, the following hypothesis can be proposed concerning the Japanese automotive and mechatronics industries. (a) The pace of change is relatively slow; (b) investment in new projects is manageable given the size of companies involved; and (c) there is a reasonable chance of success. Considering these points, metanational management is not necessary. Rather, as we have seen in the example of Thailand, the key issues are human resource development and the limitations of organizational culture.

In response, Mr. Ohki made the following comment.

The challenge in emerging markets is to make good, low-cost items and new products. The idea of simply introducing old technologies and products is no longer valid. Furthermore, overseas production of items for which there is no demand in Japan is a necessity. From the long-term perspective the concept of bringing together personnel in a particular plant to build a global strategic vehicle is a positive step, and developing people toward that end is the right direction to be moving in.

Yves DOZ, Professor, Global Technology and Innovation, INSEAD, added the following comment.

We have heard some interesting discussion on how multinational corporations can cooperate with developing countries, and in terms of multinationals' value creation efforts, I believe this is simply another way of discussing how they should proceed with incorporating developing countries into complementary relationships. In that sense, the point we have to consider as such activities progress is ultimately what will remain or what should be left in the home country.

Q: What are the benefits or disadvantages of a 50/50 investment structure like that in China?

A: (Prof. Sugiyama) While investment structure can also be discussed from the perspective of governance, in light of today's theme a possible benefit is being able to build capabilities that are different from those held in the home country and a disadvantage is that the capabilities thus transferred may flow out. However, sweeping statements cannot be made on the basis of investment structure.

Q: What prospect do you have of a global strategic vehicle priced at around ¥600,000?

A: (Mr. Ohki) I think it is very hopeful that the expansion of demand for pickup trucks will be followed by an increase in demand for small passenger cars. This will depend on how far the current efforts in organization building and human resource development can be built up.