Japanese Automobile Industry Development and Experience

Japanese Automobile Industry Development and Experience HE Chengye 1, BAI Gang 2 1. School of Business, Osaka International University, Japan, 5730192 2. School of Business and Management, Temple University, Pennsylvania, America, 191226096 Abstract: With the modernization of China's industry, how to introduce and diffuse advanced technology is the problem that must be faced. By the method of historical analysis, this paper analyzes Japanese auto industry development and experiences, in hope for providing reference to China's technological and economic development. Investigating Japanese auto industry development as the analysis shows that, in the process of technology introduction and diffusion, improving social and economic systems, formulating strategic economic development policies, promoting indigenous technology and management innovation, those are necessary conditions for international competitiveness. Improving technical education of labor force, especially in the areas such as operation management, production management, and quality management, it is important for China in terms of promoting technological absorption and improving innovation capability of the whole society, as well as enhancing the whole competitiveness and maintaining sustainable economic development. Keywords: Technology introduction, Technology diffusion, International management, Management rationalization, Technology innovation, Mass production Introduction For any country in the modern industrialization process, the introduction and diffusion of technology is an undeniable common obstacle to overcome. By comparing the industrializations in economies with different history, culture, and social backgrounds, the common knowledge can be obtained, which has a great value for the present Chinese technology introduction and diffusion. This paper draws implication from the automobile industry, which is the established industrialization indicator for a typical economy. We have analyzed the development of Japanese automobile industry and explored the inexpediences of technological introduction and diffusion. Regarding the current status of China, finished-car assembly enterprises are not inferior to Western developed countries. However, parts and components manufacturers and related enterprises have not fully developed, as there are cases that some of major components have to be imported. The most extreme example is the KD (component assembly) production. Until now, China has not acquired the systematic industrial mass production technology. Without improving education level of workers, learning and mastering technical and managerial skills, increasing intra- and inter-industry cooperation, the technological introduction, digestion and diffusion cannot be realized. Given the technological gap between China and developed countries, China is facing a more serious issue than Japan. Text Automobile production involves 5,000 different and total more than 20, 000 parts and components. Materials supplying, parts and components manufacturing are indispensable. At the same time, learning technical and managerial skills cannot just stay at the level of operation and maintenance. Production management and quality management must also be highly efficient. If production management and quality management have not achieved a satisfied level, it is impossible to make competitive products on a large scale. By implementing management measures such as production of Kanban means and QC/TQC quality control, Japanese auto industry has strengthened technology innovation and maintained international competitiveness. 214

1 Formation and Development of Japanese Automobile Industry During World War I, Japan recognized the importance of automobiles, and automobile manufacturing companies were nurtured through meeting the need for military trucks. But industries related to automobiles in Japan are underdeveloped, leading to poorly developed automobiles. Instead, Ford and GM entered the Japanese market. In fact, Japan's domestic automobile manufacturing started around 1935, and it was also born in the need for military vehicles. Automobile AG (Nissan Automobile) was founded in 1933. In the same year, Toyota Automatic Textile Manufacturing established the new Automobile sector (in 1936, called Toyota Motor). After World War II, Japanese manufacturing companies resumed automobile production, primarily trucks, including three-wheel trucks. Subsequently, because of special needs induced fierce competition between Toyota, Nissan, Isuzu, Daihatsu, Toyo and Kogyo (Mazda), Japan automobile manufacturers had to resort to mass production and rationalization. However, the biggest challenge was the integration between intra- and inter-industry companies. At that time, the supply of automobile production materials, equipments for mass production and cultivation of parts and components manufacturing were inadequate. The growth of Japan's automobile industry after World War II, as a typical Japan's business success, has very important significance. After World War II, Japan experienced economic recovery, high growth, and two oil crises. Output of annual automobile production capacity has increased from the initial 20,000 units to about 12 million units, car exports has increased from 2 in1947 to today s700 million units. Figure 1 Experience of Japanese automobile industry 1933 Automotive AG was established 1938~ 1945~1955 1956~1960 1961~1965 1966~1973 1974~1978 1979~1986 1987~ began to military truck production after World War II,production system was recovered established policy of supporting the automotive industry established and achieved mass production system environmental changes lead to industry restructuring as oil crisis, led to the beginning of rationalization business formally enter into the European market formally entry into the Asian market Source: Based on He Chengye: Business Organization and Management in China. Seizansha Press, 2003:120 With regard to entering Chinese market, Japanese companies largely lagged behind European companies. In the late 1980s, European and American companies accelerated the speed of entering China, particularly expanded local production of the Volkswagen. After Japanese Federation of Economic Organizations visited China in September 1995, Toyota set up its Chinese subsidiary. Japanese car manufacturing companies (especially Toyota) exported a large number of finished cars to China. However, they did not strategically and officially enter China to establish the position in the 215

Chinese auto market until China accumulated high foreign exchange reserves. It is said that the reasons that Japanese companies delayed entering China are under-development of basic industries, lack of preparation in legal aspects, and shortage of technical staffs. Facing the huge Chinese market, Japanese companies have to correspond with local manufacturers, actively entering China, targeting the auto market, and showing a positive attitude towards car co-production. Toyota, Nissan, and Honda have already started local procurement of components while balancing foreign exchange and establishing service outlets. They also spent considerable efforts to ensure the dealership at export destinations. Now, following the trend of Chinese government's industrial policy, Japanese companies focus on car coproduction. Figure2 the number of overseas production of Japanese car manufacturing companies Source: Japan Automobile Manufacturers Association 2 The Training of Components Enterprises in Japanese Automobile Industry and Experiences Japanese auto components production started when Ford and GM were entering Japan. At that time, Japanese auto components industry cannot be seen as an integrated industry and is a simple components production on a small-scale. After World War II, components industry rapidly developed. About half of components manufacturing factories became dedicated auto components manufacturers after World War II. These components manufacturers are mostly small and medium enterprises. Now, small and medium components manufacturers have been closely linked with finished-car assembly enterprises. During the progress in the serialization production, the parent company nurtures the subsidiaries of components manufacturers, providing the series subsidiaries with technical guidance, machinery and equipment assistance, introduction of foreign latest equipment, rationalization management in components production, as well as financial assistance of investments and loans. The automobile industry is a comprehensive machinery industry, in which technology and production systems are built upon extensively related sectors. Therefore, in order to cultivate and develop Chinese automobile industry in the future, it is imperative to examine how auto manufacturers organize components production with materials supply and sales, how Japanese companies take the advantages of management and group doctrine, and how the highly productive technical system evolves. There are four noticeable characteristics of Japanese auto industry. First, high outsourcing rate and effective production provide support for high level components manufacturers, leading to an efficient 216

vertical specialization organization structure between automobile enterprises and components manufacturers. Second, the stable labor-management relation ensures the cooperation between labor and management, thus improving production and quality. As a result, the most efficient production system has been developed. Third, Japan auto industry has an exclusive series distribution system. Forth, in contrast to the monopoly of European and American automobile manufacturing industry, Japan's auto industry has nine companies engaging in a fierce competition. Currently, China has more than 100 automotive manufacturing companies. Because of small-scale production and low productivity, the weak and low quality components industry has the average external procurement rate of 35%. For automobile manufacturing industry to complete industry restructuring, improve the integration of intra and inter-industry, and realize efficient production, Japan's experience is worth studying. Figure 3 sales ranking top 10 of the parts company's market share in Japan Source: Securities Report in March 2010 (91Japaneseauto parts companies) 3 Technology Accumulation and Obtaining the Evolutional Capability in Japan From the development process of the automobile industry, the establishment of Japanese machinery industry before World War II was rather slow compared to those of Europe and America. Especially, small and medium enterprises did not reach the level of producing modern industrial components. In some cases, one machine was used for a number of processing and accuracy was low. Before World War II, Japanese small and medium machinery industry did not yet establish the basic concept of mass production. During the wartime, small and medium enterprises participated in military production, and were required to have the same level of quality as large enterprises. As the suppliers of military equipment, components manufacturers were forced to acquire the mass production technology. The production in the War undoubtedly provided the best chance to master mass production technology for a 217

large number of small and medium enterprises. These military components manufacturers smoothly transformed into automobile enterprises and other commodity products enterprises after World War II, and successfully caught up with the wave of mass production. To study the growth mechanism of Japanese enterprises under the protection policies after World War II, it is imperative to examine the protection policies that Japanese government implemented to cultivate auto industry as the strategic industry. For example, in October 1951, the 5 th item of the protection and cultivation policy for auto mobile industry made by Japanese Ministry of International Trade and Industry set the vision of national cars, investment protection, import restrictions and other industrial policies. It has played a significant role for the growth of Japanese automobile industry. However, the fundamental driving force for Japanese auto industry growth is the fierce competition in enterprise investment, competition and coordination among components manufacturers and assembly enterprises. This is the primary force for enterprise growth. Had relied only on the protection, Japanese auto industry could not become competitive. On the other hand, if the market were not intervened, the domestic market would be occupied solely by foreign companies. Balance of carrots and sticks is the essence of industrial policy. During that time, Japanese industrial policy had done a very well job by presenting the appropriate challenges while maintaining the necessary competition. When protection is needed, the government does the best to stubbornly provide support. This is undoubtedly the valuable experience for the policy makers of Chinese auto industry. The remarkable growth of Japanese post-war economy is attributed to the learning experience before and after World War II. Small and medium machinery enterprises learned the basic concept of mass production system from the military equipment manufacturing in World War II. Auto industry has also accumulated some experiences in production and technology development. Without these experiences, Japan cannot establish a mass production system in such a short time. It is undeniable that Japanese people are diligent, with low illiteracy rate and high level of education before World War II. This is the condition that China needs to recognize once again. 4 Indigenous Technology Innovation in Japanese Enterprises With high economic growth in 1960s, Japan began to implement doubling income plan. Demand for automobiles moved from businesses to households while cars production rate was raised compared to main commercial vehicle production. To improve the car mass production system, enterprises set up factories with annual output of 200,000 units one after another and formally started mass production. While focusing on introducing technology and pursuing economic efficiency to keep up with the scale of mass production system, automobile enterprises emphasized effective integration of organization and technology as well as quality management at the factory level. At the same time, Japan implemented the liberalization of trade and capital, leading to active cooperation and restructuring between enterprises. At first, Nissan merged with Prince. Toyota cooperated with Hino and Daihatsu, creating Toyota Group. Under the guidance of industrial policy of Ministry of International Trade and Industry, Japanese auto industry restructuring was carried out by individual enterprise's own management strategy. Oil crisis in 1973 was a heavy blow to Japanese economy. Affected by Japanese government policy of controlling aggregate demand, the domestic auto demand quickly dropped. With a sharp cut of production in oil crisis, Japanese auto companies and parts manufacturers fully introduced the quality management systems such as QC, TQC, and Toyota's Kanban methods in response to a diversified market, and carried out the rationalized management to maintain profitability. The key point is that the rationalized management has been widely accepted by the entire Japanese auto industry after the oil crisis and extensively dispersed, thus leading to an effective production with limited equipments and a greater scale advantage of auto industry. Oil crisis led auto industry to save resources and energy. By improving the engine, the vehicle became lighter, and fuel consumption was reduced. With introduction 218

of electronics, computerization and robots, re-examining the mass production system, Japan automobile industry has transformed to a flexible production system. The rationalization of management, which has rapidly dispersed in the oil crisis, caused the subsequent changes in the structure of the world-wide automobile industry, providing Japanese auto industry with international competitiveness relying on technical innovation and environment adaptation. The process that Japanese auto industry rapidly caught up with the technical level of Europe and America after World War II is characterized by the indigenous technology innovation one after another. After World War II, Japan invested heavily in pure technology introduction and further developed the introduced technology with respect to adaptability. Japan's R&D expenses exceeded equipment cost in1986.according to the survey data of Ministry of Economy, Trade and Industry of Japan in 2007, Japanese auto companies R&D expenses still remain at the top level in the world. Figure 4 International Comparison of Japanese auto companies R&D expenses and sales volume R&D Expenses 0 20 40 60 80 100 Billion USD TOYOTA DAIMLER R&D expenses of other countries enterprises HONDA FORD VOLKSWAGEN R&D expenses of Japanese enterprises NISSAN DENSO BMW GM Sales volume of other countries enterprises Sales volume of Japanese enterprises SUZUKI 0 1400 2800 Billion USD Sales Volume Source: Ministry of Economy, Trade and Industry of Japan: research and development trends of Japan's enterprises and policy issues. 2007: page 5. Currently, China's R&D expenses have been second only to the U.S, higher than Japan, but the technology is not advanced yet. To build a strong consciousness of indigenous technology development, the key is technology and management innovation. 219

5 Characteristics of Technology Diffusion of Japanese Automobile Industry Technology development and diffusion depends on the demand information that suppliers have. Based upon introduced foreign advanced technology, Japanese auto industry carried out indigenous technology development, which is characterized by fast exchanging of information on new technology between suppliers and demanders, repeating development and improvement through continuous communications between each other. The existing status of social value system is also one of the important factors affecting technology diffusion. During the introduction of the foreign new production technology, organization and management methods, conflicts between different value systems are inevitable. It requires that the recipient's value system has sufficient flexibility. The introduction of establishment and organization is more affected by the social value system than goods and technology. In other words, the lower the resistance of value system, the easier and faster the establishment and organization is introduced. Japan introduced a large number of mechanical technology and production methods from Europe and America since the Meiji period. Within traditional value, religion and social ideology, there are barriers to integrate with other cultures. The sense of social value is not just limited to the issues of cross-cultural contacts such as technology introduction; it is also related to issues such as technology diffusion and entrepreneurship. From the long-term economic development standpoint, the social economic system has a greater impact than the accumulation of physical capital and infrastructure. For the automobile industry, Japan's socio-economic structure is characterized by: 1. During the technology diffusion of Japanese auto industry, the identified supply side has maintained a long-term relationship of trust with the demand side. This is Japanese-style management practice determined by the long-standing commercial integrity in Japanese society. From the observation of the whole Japanese economy, it is easy to find such long-term relationships of trust between enterprises. 2. Establishment and organization play a supplemental role to promote the market economy. These establishments and organizations, modeled by the original examples of Western European countries, have evolved and changed in Japan, and thus played very well. That is, establishments and organizations supplementing the market system promote technological diffusion. Meanwhile, the rapid technology diffusion has also increased social economic homogeneity, which has greatly enhanced its adaptive ability. Japanese technology development shows that the technology gap hypothesis is supported, that is, technology and market interact with each other and both provide a supplement role. As Professor Kiyokawa pointed out, Japanese rapid technology diffusion is (an) industrialization starting from the downstream. The relationship between technology diffusion, social structure and market developed level is shown in Figure 5. 220

Figure 5 Economic development and technological diffusion Market Developed Degree Technical Level Education Organization Establishment Social Structure Source: Kiyokawa Yukihiko: Japan's economic development and technological diffusion. Toyo Keizai, 1991:42 6 Conclusion In summary, the experience of Japanese automobile industry development has several implications for today s Chinese technology introduction and diffusion. 1. Actively promote technical education. Extensive technical education is bound to raise the general level of technology. Reserving scientific and technical labor force and placing them to the important positions in economic organizations as a supplement to marketing activities, are extremely useful to promote technology diffusion and market competition. Improvement of education is essential along with market and technology development in the long run. 2. Establish the sense of global competition, accelerate technology diffusion. The globalization of operation leads enterprises to compete for the international market as a prerequisite. The industrialization focusing on domestic market only brings out low-level competition, leading to lowquality mass production. From the long term perspective, such industrialization inevitably tends to stagnate. For China, which is vast and populous, from the perspective of employment policy, the priority is to modernize the import-substitution industry for domestic market. Those industries, which are weakly linked with international market, are less exposed to external shocks and thus, maybe survive in the wave of foreign technology innovation. Therefore, it is unavoidable that those industries have less incentive to introduce new management methods, management organizations, and peripheral innovations, leading to slow improvement. Moreover, the rising local protectionism and formation of regional economic circle impede competition, creating market segmentation, and strongly hindering diffusing technology in China. Therefore, it is imperative to closely participate in the international market, establish an aspiration for competition and promote industrialization under the open system. 3. Strengthen the system of research and development, vigorously promote indigenous technology innovation. The Japanese companies represented by Toyota, Nissan, Honda have always maintained the idea of independent technology, emphasizing the innovation of independent brands. Sustainable economic growth of China must rely on technology and management innovation as well as the development of new strategic industries. 4. Improve the social and economic systems, make strategic development policy to supplement and promote the market economy activities, and promote economic development. China has completed the transition to the market economy, but little experience of the market economy is accumulated. Compared with other developed countries, there is a risk of systematic efficiency. By establishing a legal system, making laws and policies, creating enterprise system and capital market system corresponding to the market mechanism, improving enterprise internal system and external environment, 221

the conditions would become better for Chinese enterprises to acquire the competitiveness in the global market. References [1]. He Chengye: Business Organization and Management in China. Seizansha Press, 2003:116~138 (In Japanese) [2]. Japan Automobile Manufacturers Association (In Japanese) [3]. Securities Report in March 2010 ((In Japanese) [4]. Yano Gou: Quantitative analysis for the history of Japanese automobile industry technical introduction process 1950-60 era. The Economic Review (Kyoto University), 1996: Cap. 159, No. 3 (In Japanese) [5]. Yonekawa Shin-ichi: Japanese business history postwar. Toyo Keizai, 1995: Cap.2, No.2(In Japanese) [6]. Kiyokawa Yukihiko: Japan's economic development and technological diffusion. Toyo Keizai, 1991 (In Japanese) [7]. Ministry of Economy, Trade and Industry of Japan: research and development trends of Japan's enterprises and policy issues. 23rd Research and Development subcommittee information 5, 2007: page 5 (In Japanese) 222