Japan and the Global Economy

Issues and Trends in the 1990s

Jonathan Morris

• Publisher: Routledge
• Year: 2002
• Print ISBN:
  9780415064569
• eBook ISBN:
  9781134921799
• Topic: Business
• Subtopic: Business General
• Index: Business

The revaluation of the yen in 1985 helped stimulate a dramatic increase in the already high level of Japanese outward investment. Few developed countries do not now host a large and growing community of Japanese businessmen and Japanese corporations are now major players in more or less every market. Japan and the Global Economy looks at the reasons for this growth and at the impact of Japanese FDI, both on the countries who receive it and on the Japanese. It was Japanese investment in manufacturing, particularly in high profile industries like automobiles, that first caught widespread attention. Consequently this book pays particular attention to manufacturing, but it also includes individual chapters on the three major trade blocks - the European Community, North America and South East Asia.

1 Globalization and global localization: Explaining trends in Japanese foreign manufacturing investment

Jonathan Morris

INTRODUCTION

Japanese foreign direct investment generally, and manufacturing investment (JMI) in particular, has displayed a strong growth trajectory in the 1970s and 1980s. As Dicken notes in Chapter 2, while there have been geographical variations in its destination, all major world regions have been the recipients of such investment. While the EC, for example, has lagged behind North America, as Morris’s chapter on JMI in the EC illustrates, it has nevertheless witnessed extremely fast growth particularly in the late 1980s which, for various reasons, Morris argues will continue into the 1990s. A recent study by Julius (1990), for example, illustrates that Japan had the biggest percentage growth in outflow between 1983 and 1988. Moreover, whereas other major OECD countries were also experiencing substantial inward flows in investment between 1980 and 1988, those into Japan were extremely low.

Given the explosion of JMI in the 1970s and 1980s, the purpose of this chapter is to provide a contextual framework with which to explain this growth as a backcloth to the other contributions. The correct question perhaps would be why it has taken so long to occur, given the overseas investment activities of companies from other major OECD countries, notably the USA and the UK. Indeed, as Dicken’s chapter notes, there has been a lively debate on the ‘uniqueness’ of Japanese manufacturing investment patterns, although Emmott (1989) has recently argued that the investment patterns of major Japanese corporations will come more and more to mirror those of their US counterparts.

The motives and rationales for JMI are returned to in a number of the contributions in this book. Morris’s chapters on JMI in the EC and Canada, for example, both explore this theme, as does Steven in Chapter 3, Reid in Chapter 4 on JDI in the USA, and Kumar on Japanese JDI in West Germany. Broadly, they can be summarized into three main motives. First, there is the growth in costs associated with exporting from Japan. As Steven’s chapter illustrates, this was largely due to the so called ‘yen crisis’ which developed out of the Plaza Agreement on exchange rates in 1985 and which saw the yen double in value against the US dollar within two years. As Reid’s chapter indicates, 40 per cent of the cumulative Japanese investment in 1989 came in the two years following this crisis, in 1986 and 1987. Closely associated with this has been increasing wage pressures in Japan. As Steven argues in his contribution, Japan changed from a relatively low wage economy to a high wage one, although the Japanese working class received little benefit from this process (see also, Steven 1988).

The second motive has been the protectionist tendencies displayed in North America and, more particularly, in the EC. These have manifested themselves a number of ways including ‘voluntary agreements’ on cars, formal quotas and tariffs, and more sophisticated measures in the EC, whereby Japanese products made in Japanese plants within the EC are counted as ‘Japanese made’ unless certain local content levels are achieved. As Morris points out in Chapter 10, this has proved a potent force in directing JMI towards the EC, as it has in the USA, according to Reid, and Florida and Kenney.

The final, major, motive has been the need to be producing in the major markets in order to effectively sell in these markets on a large scale. Morris‘s surveys of Japanese manufacturing firms in Canada and the EC illustrate that this has been as important a motive for Japanese FMI as the push of the high value of the yen and the pull of protectionist measures. Moreover, this is the thrust of the argument that ‘global localization’ as much as ‘globalization’ explains and provides a framework for Japanese FMI.

‘GLOBALIZATION’ AND ‘GLOBAL LOCALIZATION’

The argument I wish to develop here is that in the late 1980s and early 1990s the key theme of Japanese FMI will be global localization rather than globalization per se. Indeed, the distinction between the two terms could be seen as being one of stages. Globalization could be seen as a first stage in Japanese FMI where Japanese manufacturers set up manufacturing operations overseas in a relatively basic form, where the investments are essentially final assembly operations closely controlled by the parent in Japan, and where few components are sourced locally and little research and development is carried out.

Global localization can be seen as the next stage of the FMI process where the investments ‘deepen’ and Japanese manufacturers attempt to become ‘insiders’ in foreign markets, as US companies such as Ford, 3M, and IBM have done in Western Europe.¹ Crudely, this would include a move from assembly to full manufacture, the transfer of in-house key component production from Japan to the area of investment, and a greater use of local suppliers. It would also include transferring some of the decision making from the parent organization in Japan to local management and the transfer of R&D functions. This is a process discussed by Florida and Kenney in their chapter on Japanese automotive transplants in the US and by Morris on Japanese FMI in the EC. Two case studies are provided in the next section of this paper as exemplars of such a process. A note of caution is, however, added by Kumar’s chapter on Japanese FMI in West Germany as to the extent of such a process.

The next question to be answered is why should such a process occur, that is, why are certain Japanese companies moving from the stage of globalization to global localization? In the semiconductor industry, for example, it is not immediately obvious why major Japanese corporations should be moving from assembly to full manufacturing (wafer fabrication) as NEC and Fujitsu are in Europe. In this industry the fabrication stage is now capital intensive and therefore not prone to high labour costs, and transportation costs are minimal. The answer to this question lies in the rationale for global localization, that is, that such a strategy is essentially market driven. As the last section illustrated, Japanese corporations are increasingly seeing a need to produce in the markets that they are selling in, and the only effective way to compete is by following a global localization strategy and opting for full manufacture. In this way these companies can be flexible to meet ‘local’ market demands without having to wait for months for orders to appear from Japan or to wait for design changes from the corporate R&D centres based in Japan.

Robins (1989) has described this as the process by which leading edge companies are restructuring themselves into ‘flexible transnational’. It also explains in part why there has been such a rush of so-called strategic alliances across a range of industries and between companies from the major trading blocs (Cooke and Wells 1990; Wells and Cooke 1990; Womak et al. 1990) As Robins further argues:

They must now operate in all markets simultaneously. Global corporations are increasingly involved in time based competition: they must shorten the innovation cycle, cut seconds from the process time in the factory, accelerate distribution and consumption.

(Robins 1989:21)

As a consequence of this market-driven production philosophy, firms must also take on new organizational structures such as the ‘flat organization’ or ‘polycentricism’. The case studies of Sony and Honda which follow are ample illustrations of this, and an even better case would be IBM which, consciously or unconsciously, acts as a role model for the Japanese corporations (Morris and Imrie 1991).

GLOBAL LOCALIZATION: TWO CASE STUDIES

One problem with the study of Japanese overseas investment is that it tends to treat all Japanese corporations as an amorphous mass. As Cusumano (1985) has illustrated, however, even firms in the same industrial sector—in this case Toyota and Nissan—can display very different business strategies. The two case studies described here are in some ways untypical, as they are at the leading edge of global localization among Japanese companies. Nevertheless, it is arguable that these firms display characteristics in their internationalization strategies which other Japanese corporations are starting to adopt.

Sony

Sony have been at the forefront of the globalization of the Japanese consumer electronics industry; they were the first company to start production in North America when they located a plant at San Diego in California in the early 1970s and their Bridgend plant in South Wales was the first Japanese television plant in the EC (Morris 1987; Morris and Imrie 1991).

Essentially, Sony have divided their production and market into three major supranational trading blocs—Japan and the western Pacific rim (Japan, East and South-East Asia, and Australasia), North America (including Mexico), and Western Europe. This has also been driven by Sony’s export orientation. Indeed they are one of Japan’s most international companies with only 34 per cent of total sales in 1988 in Japan (Wagstyl and Buchan 1989). Accordingly, production is being reorganized on an integrated scale in these blocs:

1. Japan, East and South-East Asia, Australasia. There has been a considerable shift of production of consumer electronic products and components from Japan to other south and east Asian countries. This is especially true of lower value added and mature products such as consumer electronics, as opposed to the new product markets into which Sony has been diversifying such as semiconductors, computer workstations, computer disk drives and high-definition televisions. As part of this strategy, for example, in 1989 Sony announced the location of a plant in Singapore to produce tubes for colour television assembly factories in Malaysia and Thailand which will replace production from Japan.
2. North America. The San Diego facility has been considerably expanded since its inception in the 1970s to produce higher volumes of its initial product, colour televisions, but also to produce a diversified product range. Computer workstations, for example, are the latest product to be added to the plant. In addition the company has set up a R&D centre at San Jose in California, to service the North American operation.
3. Western Europe. Sony’s extensive European-wide complex of plants is rivalled only by that of Matsushita Electric. Moreover, this is set to expand further in the 1990s. The hubs of the operation are the Bridgend plant in South Wales, the largest plant and the only one to produce colour television picture tubes, and the Stuttgart operation in West Germany where, in addition to a large plant producing colour televisions, the European CTV headquarters are located. The company now has eight Western European plants spread across the UK, France, West Germany, Spain, Italy, and Austria (see Table 1.1).

Table 1.1 Sony’s European manufacturing operators

While there is a degree of duplication between plants, production is also strongly integrated. The Bridgend plant, for example, supplies picture tubes to the West German and Spanish plants. Similarly, the Colmar plant makes components and sub-assemblies for other European plants. Sony’s expansion in Western Europe extends beyond the number of plants. It includes diversification of product lines and global localization through increased local sourcing. On some products, for example, local content levels are close to 100 per cent.

This localization policy is being achieved in three ways. First, Sony have made extensive use of the growing number of Japanese suppliers who have located in the EC and in the UK in particular (Morris and Imrie 1991). Morris and Imrie estimate that there are at least fifteen such suppliers currently operating. Second, through transferring production of key and other components from Japan to Europe (CTV tubes would be one such example). Moreover in the 1990s Sony plan to transfer the production of semiconductors, video cassette recorder heads, optical pick ups and magnetic tape coating (de Jonquieres and Dixon 1989). Third, Sony are upgrading local suppliers through their supplier development programme in the EC and attempting to localize component sourcing to areas proximate to their main plants in order to fully operate a just-in-time system. In South Wales, for example, the corporation is aiming to source 80 per cent of its local content within a five mile radius or one hour’s drive time (Morris and Imrie 1991).

Sony’s global localization strategy in Western Europe, therefore, comprises transferring production of a wide variety of products and sourcing high percentages of content locally. Its product range is set to diversify considerably further in the 1990s to mobile communications, computers, medical electronics, robotics and security systems, plus the key components already mentioned (de Jonquieres and Dixon 1989).

In addition to transferring production, Sony is transferring some of its R&D capacity to the EC. Bridgend is already the R&D centre for CTVs, and the company plan two telecommunications R&D centres, in the UK and West Germany and a high definition (HDTV) research centre in West Germany. Research for HDTV in North America will be centred at the San Jose facility. The commitment to this policy of global localizaton is repeated in the autonomy given to international managers. In 1989, for example, Sony Corporation appointed a European and an American to its main board, the first Japanese company to do so. This is part of a strategy of a largely self-sufficient industrial and management infrastructure with substantial freedom to run its own affairs.

Honda

Honda’s place in Japan’s motor vehicle industry is very similar to that of Sony’s in the electronics field; it was a late entrant into the market, is considerably smaller than the two major companies and has used its internationalization strategy as a competitive advantage—given its relative weakness in its domestic market.

Honda’s initial production overseas dates to the late 1960s when it took a share in a domestic Malaysian producer. It now has a network of production facilities throughout south, south-east and east Asia, in Taiwan (1983), Malaysia (1978), Indonesia (1975 and 1978), Thailand (1984), and India. Honda holds a minority share in all seven plants which produce motorcycles, vehicles, and vehicle parts. It also has a plant in New Zealand.

Despite Honda’s entry into the Asian market via local production, it is in North America that the company’s global localization efforts are concentrated, although the company will follow this with major production facilities in the UK. Honda’s first, and main plant at Marysville, Ohio, is part of Honda’s North American-wide production complex which comprises eight manufacturing operations (see Table 1.2).

Table 1.2 Honda’s operations in North America

Car production started at Marysville in 1982, following motorcycle production, and as such Honda were the first Japanese company to build a manufacturing operation. Moreover, the company were also the first Japanese company to build engines in the USA at the Anna facility and the first to produce automatic transmissions. The company is the most integrated of the Japanese producers in North American automobile production; they were the first to export vehicles outside of North America, have the largest R&D and engineering facilities, and the highest local content of the Japanese transplants in the USA. The company is now the fourth largest vehicle producer in the USA after the ‘Big Three’ domestic producers (Economist Intelligence Unit 1989).

Currently Honda of America is undergoing a five step strategy to become self-reliant in the USA, including: boosting exports; increasing local content to 75 per cent by 1991; expanding production engineering; developing the second US assembly plant at East Liberty, and increasing R&D activities. The Ohio and California R&D centres have already doubled in size and will increase employment further from 100 to 500.

Honda, therefore, have gone through a rapid expansion of capacity in their various integrated North American facilities. The Marysville plant, for example, started with a planned capacity of 150,000 cars per annum which has subsequently been upgraded to 500,000 units. In addition, significant investment has taken place at the facility to upgrade it from an assembly to a full manufacturing operation, with plastic moulding, stamping, welding, painting, and sub-assembly facilities. The plant supplies components to Honda’s plants in Ontario and at East Liberty, Ohio. The two main omissions are engines and automatic transmissions, which will be built elsewhere. Car engine production started at the Anna plant in Ohio in 1985, which has undergone reinvestment to increase capacity to 500,000 engines, plus an iron casting facility for front and rear suspension components, and aluminium cylinder head and aluminium wheel production facilities. Two further car assembly units have started production—one at East Liberty, Ohio, which will produce a capacity of 150,000 cars per year, and a plant at Alliston in Ontario which has a capacity of 80,000 cars per annum.

As Florida and Kenney illustrate in Chapter 5, Honda, therefore have pushed forward a strategy of global localization of car production in North America in little over one decade. This has included siting R&D and engineering facilities, in transferring full manufacturing operations, and in increasing local content through transferring the production of components from Japan to Honda operations in North America. Local content has also been increased, however, by increasing component sourcing from locally based suppliers. Local content levels at Honda in North America will be 75 per cent by 1991. Indeed, as Florida and Kenney note, it is claimed that by the mid 1990s it will be as high as that at Chrysler. This has been achieved by being the most ‘Americanized’ of the Japanese transplants. For example, 95 per cent of the steel for fabricated components is from the US and 50 per cent of machine tools are from US-based plants.

The company has three subsidiary component suppliers: Bellemar Parts Industries ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Acknowledgement
• General note
• 1 Globalization and global localization: Explaining trends in Japanese foreign manufacturing investment
• 2 The changing geography of Japanese foreign direct investment in manufacturing industry A global perspective
• 3 Structural origins of Japan’s direct foreign investment
• 4 Japanese direct investment in the United States manufacturing sector
• 5 Japanese foreign direct investment in the United States: The case of the automotive transplants
• 6 Japanese manufacturing investment in Canada: Regional presence and integration strategies
• 7 Reshaping the international division of labour: Japanese manufacturing investment in SouthEast Asia
• 8 Pursuing the new international economic order: Overseas investment and trade of Japan, the Asian NIEs and ASEAN
• 9 Japanese direct investment and Australian economic development
• 10 Japanese foreign manufacturing investment in the EC: An overview
• 11 Japanese direct investments in West Germany: Trends, strategies, and management problems