2002/06 Research & Review
Thinking of the Chinese Manufacturing Sector in Architecture Context
Faculty Fellow, RIETI
Overreaction to "mood-driven manufacturing pessimism"
Diagnoses and prescriptions for the Japanese manufacturing sector abound. Some elaborate on ways to counter the hollowing out of industry, while others insist that Japan should adopt U.S. standards or that Japan should take advantage of the ongoing China shift to reform economic structure. What is conspicuous about all those proposals is the prevailing sense of pessimism. It is surely necessary to have the sense of crisis. But we cannot derive any constructive future vision from such mood-driven pessimism with no consistent logics.
Over-simplified diagnoses of the Japanese industry are especially problematic. Simplification sometimes goes as far as to generalize Japan's whole industry as if it were monolithic. This is tantamount to ignoring the intrinsic differences among banks, personal computer manufacturers and automakers. The result is overreactions that swing from one extreme to another, i.e., overly bullish optimism in good times and complete pessimism in bad times. Overconfidence syndrome in 1990 (an illusion that all the Japanese companies and their business segments were as efficient as a Toyota factory) and the syndromic lapse of confidence in 2002 (an illusion that all the Japanese firms are just as troubled as banks and construction companies) both stem from the same root cause of uniform thinking.
It appears that Japan is once again falling in the same trap in its reactions to the rise of China. Some media reports on the remarkable development of the electronics and electrical appliance industry in the Zhujian Delta generate impression that the whole manufacturing sector of China is just as impressive. Even non-experts on China can tell simplification to this extent is ridiculous. No detailed analyses are given as to the regional diversity of China's labor market and differing competitiveness from one industry to another. To draw a vision for a sound work division between Japan and China, Japanese companies should make rational assessment of the strong and weak points of each country and work out a win-win business model that combines the strong points of the both sides. Excessive reactions do not provide right answers.
In this column, I would like to take up "architecture," a basic design philosophy for products, organizations and various processes, as one approach for assessing the strength and weakness of certain industry or company. In particular, I will focus on "two-front strategy in architecture" which gets back to the very basics of strategic theory of "maximizing the strength and learning from others to cover the weakness."
What is product architecture?
Let me first briefly explain about the conceptual framework of "architecture," a way of looking at an industry focusing on design information embodied in products.
Generally speaking, when we say product architecture, we are talking about a basic design concept for the product, that is, how we split the product into modules, then, how to allocate functions to each module, and how to design and coordinate interfaces (a linkage through which information and energy are taken in and out) among different parts, or modules.
Product architecture is broadly divided into two types: an "integral type" and a "modular type." When a product has integral architecture, the design of parts composing the product must be adjusted to each other and optimum coordination must be sought for that particular product to fully elicit its potential performance. In contrast, modular architecture provides standardized interfaces linking different parts and modules. Thus, one can produce various products by selecting and putting together existing parts as long as they are compatible with these interfaces. "Open architecture" is a kind of modular architecture with an industry-wide standardized interfaces, under which parts and modules can be gathered across corporate borders.
Architecture and the strength of the Japanese and U.S. manufacturers
The strength of postwar Japanese companies, which had established a system based on long-term employment and long-term business relations, generally lied in their ability of integration. This ability has been demonstrated, for instance, in subtle adjustment of parts designs, coordination of development and production, consistent process control, dense communication with suppliers, quality control and assured quality of customer interface. Japanese companies still remain competitive in such fields as automobiles and mini home appliance, in which integrating and coordinating ability directly leads to product competitiveness.
Meanwhile, American companies, fostered in a country with more than 200 years of history of a national policy to take in immigrants as ready workforce for production activities, tend to have superiority in systemizing ability, that is, working out a theoretical conception beforehand, then, making rules, establishing a de-facto industry-wide standard, and flexibly reorganizing business structures. This kind of strength is best demonstrated in a product with an "open modular" architecture, for which an overall architecture is pre-designed in a way to eliminate the need of coordinating parts designs so that parts and business segments can be flexibly mobilized to launch mass production or innovation. This pattern is repeatedly observed throughout the history of the U.S. industry, ranging from the development of compatible parts by Ford Motor Co. in old days to the Internet of the recent years.
Deformation and transformation of architecture in China
What's about the Chinese manufacturing sector? Here again, I believe that architecture concept provides a new viewpoint. Let me focus on Chinese manufacturers' ability of "deforming and transforming product architecture through copying and remodeling existing parts." This practice has been repeated with the production of TVs, white goods (home appliances), motorbikes, tractors and pickups.
Let's take a look at the Chinese motorbike industry. China has grown into the world's largest motorbike manufacture with annual production of more than 10 million units. This industry provides a typical case of the deformation and transformation of established architecture. The process goes like this:
- A Chinese company copies a foreign product, for instance, an established model of Honda motorbikes;
- The Chinese authorities give an ex pot facto approval for the copied product, effectively paving the way for the production of "versatile parts," followed by the expansion of domestic production of the parts;
- Several hundreds of Chinese manufacturers sprout in clusters to assemble and remodel the versatile parts;
- Fierce competitions and oversupply occur, undermining those companies' profitability and hurting embroiled Japanese firms;
- Powerful Chinese firms, a survivor of the cut-throat competitions, emerge. Japanese companies, embroiled in confusion, tend to find themselves in an inferior without knowing exactly to whom they are losing.
Cars, home appliances and motorbikes - a product with integral architecture which Japanese companies developed into higher sophistication - are being copied, deformed and transformed by Chinese companies into a product with an open-modular architecture, or a collection of a number of versatile parts. This kind of transforming ability of Chinese firms is a key to explaining China's industrial competitiveness. The rampant spread of imitation products as well as the Chinese government's ex post approvals or general attitude to give little respect to intellectual property rights have been subjected to much criticism. But we should be aware that the mechanism of transforming architecture is working deep underneath. And this mechanism, which is far more important than the surfacing problems, probably explains why Honda Motor Co., the world's leading motorcycle maker, has only 3 percent share in the Chinese market.
In China, imitation-turned-versatile parts are being gathered and assembled by numerous companies and this is different from a full-fledged open architecture based on a carefully worked-out plan as seen in various digital products made by American companies. Still, the Chinese pattern can be described as a kind of "quasi-open architecture."
China's strength lies in modular products, single-skilled workers and mass production
When mass production takes place under this quasi-open architecture, it gives a full play to competitive advantages held by some regions of China in production and labor conditions. In the case of the electronics industry in the Huanan region, the government provides young female migratory workers from inland areas a permission to stay in the region for three years or so. Those young workers, typically aged between 18 and 20, are the selected and quite capable ones and in three years they can earn enough to build a house back in their home village. When they return home after their permission expires, they will be replaced by another group of young workers. This way, average age of workers in the region remains around 19 and the wage level (less than 800 yuan or ¥12,800 per month) is kept unchanged. Labor costs in the region are said to be one twentieth or less than those in Japan. Short-term labor contracts for migratory workers also allow flexible adjustment of labor force in accordance of product demands. This type of labor system works well with a large-scale mass production, especially of those with a module-type architecture for which no complicated integrating procedures are required.
Products with an integral architecture, varying production volume and multi-skilled workers
In a field where a wide variety of items with an integral architecture need to be produced in a small or varying volume (as is the case with automobiles for developed countries), the Japanese type production system fostering flexible and multifunctional workers has a competitive advantage. The aforementioned Chinese labor system relying on single-skilled migratory workers would not fit for this kind of field.
According to my long-term research partner Lee Chunli, associate professor at Aichi University, wages and labor costs at a local leading autoparts maker in Zhejiang Province are respectively estimated around 1,500 yuan and more than 2,000 yuan per employee, with the figures rising 10 percent every year. As to employees at foreign auto-related companies in Shanghai, average labor costs including overtime premiums and social security benefits come to around 3,000 yuan per month while the highest earners are said to receive a 5,000-yuan-level monthly salary. If the trend continues, a gap between Japan and China will be substantially reduced to the level where Japanese labor costs are several times those in China.
As a production system at Toyota Motor Corp. self-explains, collective strength in integrating ability and capability of designing and building in quality counts a lot in auto production. Cutting-edge production facilities and low labor costs are not enough make an automaker competitive. When productivity, quality and delivery time are all taken into account, several-time difference in labor costs cannot be a determining factor. It is often said that it takes a while before Chinese automakers become a rival for Japanese automakers. Such observation seems to have been derived from the peculiarity of the auto industry and China's labor conditions.
China's production and labor conditions are extremely diverse. Production systems also differ depending on the types of products, i.e., whether they have an integral architecture or an open-modular architecture. If we are to disregard all the regional and industry-by-industry differences in China and believe that the same success as that of the electronics industry in the Huanan area is taking place all across China, we would once again fall into the same old routine of simplification and excessive reactions.
The electronics industry in the Huanan area is not alone making a leap forward in China as several other powerful industrial clusters are emerging. Japanese firms should map out a plan for the well-modulated division of production activities between Japan and China based on thorough understanding of the congeniality between the peculiarity of their products and the strength of the emerging industrial clusters in China. That is the very basics of strategic theory.
Reforging of the manufacturing sector is prerequisite for work division between Japan and China
From the aforementioned viewpoint, the ongoing rush of China shift, as seen with some home electronics makers, might be the case of excessive reactions. Such cross-border work division may turn out to be a choice of absolute necessity. Still, before jumping on the conclusion, Japanese companies should fully quest the possibility of re-strengthening domestic factories. In this regard, there have been quite a few cases that invoke some concerns.
A certain major electronics company, for instance, recently introduced a full-fledged Toyota-style production system to its domestic factory. In several months, the productivity of this factory has tripled. Even before adopting the new system, the factory had been regarded as one of the highest grade, belonging to the top 10 percent group in Japan. The recent development, however, shows that productivity of the truly top companies like Toyota is more than three times as high as that of second-tier top companies. The manufacturing sector is a world where it is no surprise that a productivity gap of this scale exists between the truly top companies and those that follow.
Given this reality, I am afraid there are many cases in which a company, while doing nothing to improve its domestic factories demonstrating less than one third of their potential efficiency, jumps on the bandwagon of China shift alluded by a single factor of low labor costs. Some failing cases of such attempts have been reported. The likely outcome of such a trend is a double whammy; Japanese firms fail in their China operations and the excessive hollowing out of domestic industry occur, self-realizing a self-predicted omen.
I am not trying to oppose Japanese companies' advance into China. Instead, I am trying to say that too many Japanese companies are advancing into China in an unwise way. It is no coincidence that many of Japanese companies successful in China operations (such as Funai Electric Co. and Shimano Inc.) have an established idea as to what manufacturing is all about.
Two-front strategy of Japan-China division of production activities
The two-front strategy, which I mentioned in the introductory part of this column, is important in thinking Japanese companies' Chine businesses. That is to seek tie-ups in weak fields while pushing further in the areas of their strength.
On one hand, many Japanese products are perceived to be "over-designed" in the Chinese market. It is surely important to abide by the customer creed. In many cases, however, products that satisfy Chinese customers can be produced Chinese at lower costs by simplifying product designs and production systems, and by utilizing strictly selected China-made facilities and materials. It is bit risky to simply transfer Japan-made product designs and facilities. In this context, it is worthwhile considering a tie-up with a well-performing Chinese manufacturer to absorb knowhows for producing products that fit the needs of Chinese customers.
On the other hand, however, there are also cases in which a strategy of taking a long-term approach for the gradual penetration of high-end products works well. Companies pursuing this kind of strategy - Sony Corp. and Shiseido Co. among them - would maintain the high-quality, high-cost feature of Japanese products, protect the value of their original technology by obtaining patents or through other measures, continue to heighten the value of their brands, and have a strong foothold in the limited but high-end layer of the Chinese market.
The two-front strategy is to learn from others in one's weak areas and make tenacious efforts in one's strong fields, devoting time and energy to make Chinese customers recognize the quality of high-end products and have the products gradually penetrate in the market. In this sense, it is noteworthy that Honda is now launching a two-way strategy of trying to make a comeback through a tie-up with a Chinese partner in low-priced motorbikes on one hand and continuing to market high-end models on the other.
Products with integral architecture at every stage of processing
The reality we cannot afford to overlook in thinking about manufacturing in the Asian region - that embraces Southeast Asia, China, South Korea, Taiwan and Japan - is that clusters of companies and factories with differing abilities are emerging in this region. Japanese manufacturers no longer enjoy all-front superiority in East Asia. This, however, does not mean that Japanese manufacturers are losing on all fronts. The Japanese manufacturing sector has its strength in the depth of industrial structure that enables them to put out products with an integral architecture for exports at every processing stage. Up until today, automobiles and electronics have generated much of Japan trade surplus. From now on, Japan may as well seek a better balance, switching gear to challenge with integral-type products at every processing stage.
RIETI Faculty Fellow Takahiro Fujimoto receives the Imperial Prize and the Japan Academy Prize of 2002
Takahiro Fujimoto, faculty fellow of RIETI, was awarded the Imperial Prize and the Japan Academy Prize of fiscal 2002 for his book "The Evolution of a Manufacturing System at Toyota." In this book, he unveils how Toyota, a leader of Japan's manufacturing sector, has evolved into one of the world's top companies and maintains strength by setting a clear theoretical framework based on detailed historical and statistical researches.
Photo cap: RIETI Faculty Fellow Takahiro Fujimoto explains to the Emperor and the Empress about Toyota's manufacturing system during an award ceremony on June 10.
- AOKI Masahiko and ANDO Haruhiko, "Mojuruka: Atarashii Sangyo Akitekucha no Honshitsu (Modularity: Nature of New Industrial Architecture)" Toyo Keizai Shinpo. FUJIMOTO Takahiro, TAKEISHI Akira and AOSHIMA Yaichi, "Bijinesu Akitekucha: Seihin,Soshiki, Purosesu no Senryakuteki Sekkei (Business Architecture: Strategic Designing of Products, Organizations and Processes)" Yuhikaku.
- OHARA Moriki, "Chugoku Otobai Sangyo no Sapuraiya Sisutemu (Supplier System of Chinese Motorbike Industry)" in "Ajia Keizai" April 2001
February 26, 2002
Article(s) by this author
September 8, 2009［Newspapers & Magazines］
June 9, 2009［Newspapers & Magazines］
December 6, 2007［Keizai Sangyo Journal］
September 7, 2007［RIETI Report］
February 26, 2002［Keizai Sangyo Journal］