The opening up of Japanese production networks

Some of the observed differences in organization of production networks are explained by the very different product mix that Japanese and American electronics firms  shifted to Asia. From the late 1960s, American firms in Asia concentrated on ICs and PC-related products, whereas Japanese firms, almost without exception, focused on lower end consumer electronics and related components. Microprocessors and PCrelated products are highly differentiated products that require close and fast interaction with sophisticated customers. TV sets and household appliances, on the other hand, are homogeneous products.

Specific features of consumer electronics are important for the organization of Japanese production networks. Lower end consumer devices have a variety of characteristics that are conducive for the establishment of global export platform mega-plants. Their homogeneous character permits the realization of large economies of scale in which close interaction with customers is not required. They are characterized by a high divisibility. Different stages in the value chain can be easily separated, and fundamental changes in design methodology has facilitated offshore production, even for relatively complex components such as drums, video heads, and small motors. With but few exceptions  most components and subassemblies are also characterized by low transportation costs, and can be easily moved between different locations.

By the end of 1992, many of the major Japanese companies showed signs of reconsidering their approach to the management of their Asian production networks. In particular, they displayed a new willingness to give more autonomy to local managers, to delegate to subsidiaries greater responsibility for higher end, more knowledge-intensive support services, such as product and process customization and software engineering, and to increase their sourcing from local suppliers. By the mid-1990s, some Japanese networks had become substantially more embedded in the local economies. To what extent do the forces of globalization explain these changes in the management of Japanese networks?

A combination of factors exerted pressure on Japanese corporations to change the governance of their production networks. Some of these relate directly to the

increasing internationalization of the Japanese economy. The Japanese government’s loss of control over the exchange rate, symbolized by the dramatic appreciation of the yen after the Plaza Accord in 1985, not only launched the new wave of IPNs but continued to shape them profoundly. By the early 1990s, the cost of imported components from Japan was undermining the international competitiveness of the newly established subsidiaries in Southeast Asia. Such competitiveness was already under threat by the rapid advance of electronics producers in Korea and Taiwan, itself a reflection of the increasing globalization of production capabilities.

To increase local linkages necessitated granting greater autonomy to local managers. Before some firms changed their policies, Japanese procurement decisions were made by individual product divisions and profit centers in the parent through procurement offices that had strong ties with domestic suppliers. Procurement engineers were trained to handle the multilayered networks of Japanese suppliers, but had neither the incentive nor the expertise to search for, certify, and upgrade foreign suppliers. Under this system, it was difficult for managers of affiliates to override decisions made by the procurement offices in Japan. The system inevitably produced delays that were unacceptable in an era of shorter product life cycles. For example, once an affiliate located and certified a local supplier, it could take up to nine months for the parent company to approve the component.

In response to the need both to locate alternative sources of supply and to make more rapid decisions on procurement, Japanese companies began to establish regional procurement offices. One example is Hitachi, which in August 1993 established in Singapore a Center for the Promotion of Procurement in Asia. Other companies soon followed as Hong Kong and Singapore competed to establish themselves as the principal locus for regional headquarters of Japanese networks.

Data on the procurement activities of Japanese subsidiaries in ASEAN reflect the pressures for the opening up of production networks. These changed markedly between 1990 and 1995. Whereas, in 1990, Japanese subsidiaries in ASEAN engaged in manufacturing sourced 38 percent of their components from the local market and 44 percent from Japan, by 1994–5 the proportions had been almost exactly reversed 18