The Bucharest University of Economic Studies [628775]

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The Bucharest University of Economic Studies
International Economic Relations
Group 918

THE JAP ANESE AUTOMOTIVE
INDUSTRY

BUCUR SIMONA ANDREEA

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Table of Contents

 Introduction
 The Macro Perspective
o Development of Japan’s Role in Global Economy
o The Role of the Auto Industry in the Japanese
Economy
 The Japanese Automotive Industry
o Japanese Automotive Firm Structure
o Plants and the Subcontracting Relationship
 Geographical Location Analysis
o Geographic Location
o Firm Cluster Areas
 Bursting of the Japanese Economy
o Rise of the Bubble
o Recent Developments in the Auto Industry
 Conclusions

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Abstract note

As the automotive industry becomes increasingly competitive and
global in nature, it becomes more important to understand the
dynamics of competition and the driving forces of k ey competitors .
This working paper analyzes the Japanese automotive manufactures
and their primary subcontractors. It describes the Japanese role in the
global industry, the structure of their domestic industry changes over
the past decade and the bursting of their economy.

“It’s a never ending battle of makin g a car better and also trying to be
better yourself ”
-Dale Earnhardt

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 Introduction

The Japanese automotive industry became one of the most important and
largest industries in the world. Over the years succeeded being nominated in the
top three of the countries with most cars manufactured, having an impressive
rapidly increasing. The auto motive industry was oriented both for domestic use
and worldwide export. In Japan it is a various and large markets of automobiles
with important manufactures as Toyota, Honda, Daihatsu, Nissan, Suzuki, Mazda,
Mitsubishi, Subaru, Isuzu, Kawasaki, Yamaha, a nd Mitsuoka.
The great results of Japanese automobile industry are remarkable, the rate of
efficiency of firms, led by Toyota, is the highest in the world automobile industry.
What is more important regarding the automobile industry in Japan is the
perform ance of enterprises which achieved a high rate of employment with well –
prepared workers, studies accounted about 5.5 million employees (8.7 percent of
the 63.51 million total labor force) are either directly or indirectly employed in the
industry.1 Further more, a significant aspect in Japanese auto production is the
advanced used technology with important innovations set up in this market which
created improvements in productivity. 2

 The Macro Perspective

o Development of Japan ’s Role in Global Automotive Industry
Even though Detroit is still heralded as the auto capital of the world, Japan
has pro duced more vehicles per year than the United States since 1980. Analyzing

1 http://www.jama -english.jp/publications/MIJ2015.pdf
2 http://www.slideshare.net/BhanuNegi2/japan -automobile -industry -392987580 )

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their producing model , which has been growing constantly over the past decades ,
compared to all other countries that had fluctuation in their productivity, Japan
hits from 5,3 million in 1970 to its 1990 peak of 13,5 million.
In 2014 motor vehicle production in Japan increased by 1.5% from the
previous year. This output has important consequence on the Japanese exports
which have risen 4.8%, moto vehicle having the most significant part in exports. 3
As opposed to American companies, Japanese car firms buy their raw materials
from a small number of impor ters . Suppliers being fewer, the business
relationship between producer and supplier requires a greater level of reliability
and long -term commitment.
o The Role of the Auto Industry in the Japanese Economy
The production of motor vehicles (shipments of 31,344 billion) accounted for
over 10 percent of total Japanese manufacturing and 30 percent of all machinery
manufacturing in 1992. The automotive industry is also an important source of
employment for Japan: 5,5 million employees (over 10 pe rcent of the 54,4 million
total labor force) are either directly or indirectly employed in the industry. Ov er
200,000 workers are employed by assemblers and their subcontractors; the rest
are employed in the supplier network and other supporting industries.
Japanese auto industry has been increasing its capacity through investment in
new plants and equipment. The new tendency of Japanese automobile industry is
to invest more in equipment and materials, but also in research and development
which is a vital component in developing of the market. The variety of materials is
an evidence of the advance in technology and sometimes can be considered also
a proper way to respond to customer’s needs. These decisions are taken by
multinational companies after some researches and statistics made before. Thus,
monthly wages have increased for workers in the automotive indus try of Japan. 3

3 http://www.jama -english.jp/publications/MIJ2015.pdf

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Exhibit 1 : Structure of Japanese Automotive Industry

Auto mak
Vehicle
Assembly

Primary suppliers
Components and System
assembly/manufacture
Secondary/Tertiary Subcontractors
Small parts and basic manufacturing

Materials Industries
Iron, non -ferrous metals, resins , etc

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Productivity and competition
Productivity was estimated by dividing the monthly production by the total
employees in the company. Although this is not the t raditional measure of
productivity (direct labor hours per vehicle), the number provides some measure
to differentiate efficiency among produc ers and gauges each organization ’s
improv ement over the decade. Mitsu bishi experienced the greatest absolute gain
in productivity. Toyota ’s produ ctivity also increased substantially, but seemingly
at the expense of its subcontractors. Nissan has improved its productivity, but
need to improve further in order to compete with the most productive
assemblers. Honda ’s productivity improved; Mazda ’s productivity declined. With
higher labor costs in 1980s, it became imperative for Japanese automotive firms
to increase labor productivity; most Japanese compan ies chose to accomplish this
objective by investing in capital equipment.4
The shift toward more capital intensive plants was a necessary response to
a general shortage of manufacturing labor, as well as higher, and therefore more
expensive, skill requirements needed in the production process. While the use of
additional capital allows further gains in productivity, it also redefines the
competitive strength of the production system.
 THE JAPANESE AUTOMOTIVE INDUSTRY

o Japanese Automotive Firm Structure

The Japanese automotive industry is characterized by a pyramid -hierar chical
structure (see exchibit 1) . In 1981, there were eleven assemblers and 9,500
suppliers. Approximately 500 suppliers are considered primary due to their scale
of operation, level of technological sophisticati on and r elationship with the

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assembler. A survey conducted by the Ministry of International Trade and
Industry (MI TI) reveals the division of labor in the industry by modeling an
unnamed automak er and its supplier relationships. It demonstrates that the
critical tasks are performed by the primary supplier and the assemblers, while
secondary suppliers do most of the work . Tertiary supplier assist the secondary
suppliers by performing the more cumbersom e and labor -intensive jobs. In
periods of hig h demand, tertiary suppliers outsource, or send work out, to small
parts shops located in backyards and garages . 4

o Plants and the Subcontracting Relationship
The total number of plants utilized by the eleven manufacturers and their
subcontractors was 83 in 1981, 88 in 1990 and 87 in 2000. In those three periods,
about half of the plants used for assembly, and nearly one -fifth of the plants were
run by s ubcontractors. Toyota and Nissan were the largest users of
subcontractors; eleven of sixteen plant s assembling Toyota vehicles w ere
subcontracted, and nine of the fourteen plants producing Nissan vehicles were
subcontracted.
While the Japanese automotive industry has been helped by subcontracting
and the kereitsu structure, the subcontracting relationship can also be a burden, if
the parent companies spread their resou rces too thinly over noncompany
personnel and management systems. 5

4 Lin, Chris. "The Japanese automotive industry: recent developments and future competitive
outlook." Ann Arbo r 1001 (1994): 48109 -2150 .
5 http://iveybusinessjournal.com/publication/continuity -and-change -in-japans -automotive –
industry/

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 GEO GRAPHICAL LOCATION ANAL YSIS

o Geographical Location 6
Japanese auto industry is concentrated in a few main industrial areas, in the
geographical proximity of assemblers and their primary suppliers. The industry is
concentrated in two main regions of Japan: the Tokyo metropolitan area and Aichi
Prefecture. Some smaller firms are clustered in locations on the outskirts of these
two main regions. Rece nt investments, though, have started or are planned for
newly developing areas.
Tokyo has been an historic locus of Japanese power, being a metropolitan
area, with a population of 13 million, is the most densely populated part of the
country, and Japan's g overnment, industry, and commerce are based in this city.
Heavy and light industries located in this coastal region include automotive, as
well as electrical appliances, electronics, optical products, precision engineering,
textiles, printing, and publishi ng.
Honda, Issuzu and Nissan have their headquarters in Tokyo. Suzuki's three
automobile manufacturing plants are located in the Tokai region. Mazda (Toyo
Kogyo) is isolated in the lower central part of Japan.
Nagoya, a prosperous commercial and industria l city, is Japan's fourth largest
city and third largest port, having a population of two million. It is located in the
middle of the Tokyo -Hiroshima megalopolis. Other important industrial zones are
the Aichi, a concentrated automotive area due to the pre sence of Toyota, and

6https://deepblue.lib.umich.edu/bitstrea m/handle/2027.42/1064/87139.0001.001.pdf?sequ
ence=2

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Osaka, one of the largest industrial and commercial city responsible for a quarter
of Japan's industrial output.
o Firm Cluster Areas

The advantages of location

Plant Clusters of Japanese Vehicle Manufacturers
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Clearly, the industry map of Japan indicates that the auto industry is
clustered in a few areas of the country. The map illustrates the size and
concentration of the clusters. Assemblers of the same company or group may
tend to locate in the same cluster f or the following reasons:

7 http://www.thetruthaboutcars.com/2011/03/morgan -stanley -sendai -tsunami -will-wipe –
out-may -saar -and-then -some/)

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1) the origins of the auto maker, the historic roots of the cities, and
the relationships of the automaker with their primary banks, or kereitsu,
can influence the geographical outcomes. (the company's relationship with
its prima ry bank largely determines the location of the head office)
2) coordination with headquarters and other plants is facilitated by
geographical proximity. It also enables primary suppliers to coordinate
more efficiently.
 BURSTING OF THE JAPANESE ECONOMY

o Rise of the Bubble

 DECLUSTERING – Historical view
In the late of XX century the Japanese the traditional areas of the automotive
industry were saturated and no longer ideal, due to high land costs and shortages
of qualified labor. As a result of this, companies in Japan began e xpanding in other
geographical areas to increase efficiency.
Movement Overseas – Global Regionalization 8
The overseas expansion of the Japanese auto industry has continued at an
increasing rate over the past decade. Japanese vehicle assembly plants in Nor th
America and Europe and also the transplant production capacity have increased
has increased dramatically. Transplants are new, generally efficient, well sited,
and serve a political, as well as an economic purpose. They are being used to
meet local dem and in North America and Europe and to export vehicles and parts

8 http://www.sciencedirect.com/science/article/pii/S0094119084710242

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to Japan and other areas of the world. Finally, the location of transplants in
Europe, as well as the United States, serves as a hedge against foreign currency
fluctuations. Japanese automoti ve firms have also been solidifying their presence
in the Southeast Asian automotive industry -the fasting growing market in the
world.
The Japanese development and commitment to the Southeast Asian
automotive industry allows Japanese companies to find anot her source of low –
cost labor. The Japanese investment allows the Southeast Asian countries to
develop their industrial infrastructure; in return, the Japanese have a bargaining
chip to open these growing auto markets to receive their exports.
Much of the J apanese expansion overseas has been fueled by the success
of automotive manufacturers in recent years. The automobile industry was a
major beneficiary of the bubble from economies. Low rate loans and equity
financing available encouraged a wave of investme nts by the auto makers. Higher
consumer wealth led to a boom in automotive sales. The excess consumer
spending of the bubble era spurred automotive sales beyond expectations and
Japanese auto companies reaped huge gains. These profits were reinvested in
new facilities, capital improvements, and overseas expansion.
Restructuring Industry, Innovation and Technology Advance 9

Japan’s was actually a miracle for the Japanese economy between the 1960s
and the 1980s. But the 1990s turned into a “lost” decade, and the economy has a
decreased tendency. During the decades the Japanese automobile industry was
very affected by the “bubble” and its bursting, a macroeconomic shock that
among other things left an overhang of excess capacity, after that it was secular
stagnation, during was a very low potential growth and another problem was

9 http://home.wlu.edu/~smitkam/autoswi thgraphs.pdf

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represented by the orientation of the economy still towards agriculture and
construction.
Restructuring in recent periods is evident and due to diverse factors such as
technological pro gress, planning, government policies, but this process of
restructuring is a difficult one. The difficulty of strategic reform is not merely
because of the Japanese context, this was specific to almost large firms and
complex institutions. The main difficu lties were in fact the approach and strategy
that companies should have taking into consideration their large -scale, recurring
tasks and coordinating group efforts. An important objective was to achieve these
task without a decrease in capital. Secondly, c hange is also hampered by the
dynamics of the automotive industry, which operates on an 8 -year product
planning cycle.
Strategy in the auto industry relies on a combination of the positioning and
marketing of product and the management of costs. In the pa st several years,
industry leaders have apparently concluded that economies of scale – in
particular due to an increase in fixed costs for research and development,
including for hybrid and fuel cell vehicles – require total vehicle output of at least
5 mi llion units, and passenger car output of 4 million units.
At the same time, the application of information technology to vehicle design
and engineering facilitates creating multiple vehicles off of a single basic
“platform”. This permitted different employ ees, scientists and engineers at
various departments and sometimes from different continents – to work
together. It was a vital key that helped this industry to develop and obtain more
capital.
The expectation is that by using platforms the breadth of mode ls can be
maintained, and region -specific variations offered, even as the number of
independent manufacturers decreased. Each of these emerging global giants,

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then, plans on operating in all major markets to spread the costs of platform
development and R&D across a larger number of vehicles.
Another feature of the Japanese auto industry, again rooted in the postwar
growth process, is a heavy reliance on outside suppliers. At the end of the war,
the industry was vertically integrated, both due to the difficu lty in finding
appropriate firms, and because relying on outside suppliers placed them at the
mercy of a capricious system of allocating raw materials. The cost of imported
raw materials is about to be reduced by an ascendant trend of consolidation and
globalization among suppliers.
Obviously, the motor industry has impacted a wide range of other industries,
such as parts and components. Due to this, automotive companies in advanced
nations created national strategies based on local (national) constraints . Their
overseas strategies were always in strict linkage with their national market
strategies, although this sometimes proved to the detriment of international
trade.
This of course meant that until the economic boom during the 90’s, car
companies mainl y competed on internal markets in each country rather than
having a global view towards their business. Japanese companies, due to their
highly efficient methods of production and constant innovation, have challenged
the western markets and thus lead to th e globalisation of the international
market for automotive products in 1990.
Japan's keiretsu parts system is one of the major reasons for the global success
of Japanese companies on foreign markets. Automotive companies in other parts
of the world like th e US or Europe, quickly realised that Japanese technological
advances were not the sole reason for their competitive edge, but rather keiretsu
transactions with suppliers were a very important contributor as well.

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Japanese auto makers are performing well in the age of global restructuring,
despite being once seen as delayed in the deployment of global strategies and
suffering directly as a result. This good performance is not only seen among
Honda , Toyota and other purely Japanese makers, but also among foreign –
affiliated makers (except for Mitsubishi Motors).
In the last 25 years Japan has contributed a competitive and innovative
industrial model which has pushed the international market to modernise and
raise the standards of their cars. 10
o Recent Developments in Automotive Industry
This industry has grown enormously in recent years, but Japan’s share of
global exports has fallen from 7 percent in 2000 to 4 percent in 2013. Thankfully,
Japanese industries have the technological capacity to bounce back from this and
retake some of their lost market shares. The distinct advantage is that due to the
rapid growth of other Eastern countries, new demand for machinery, cars and
othe r technological appliances is being created every day, thus Japan gains new
opportunities to develop their trade. 11
Much of the developed world is aging —and it will be watching intently to see if
Japan, the nation at the leading edge of this trend, can pio neer policy responses.
The private sector will also have to develop new business practices and
technologies to alleviate labor shortages, all of which will have positive
implications for productivity. Japan could be well positioned to export innovative

10http://ebooks.cambridge.org/chapter.jsf?bid=CBO9780511730283&cid=CBO978051173028
3A013&tabName=Chapter&image Extract =
11 http://sloanreview.mit.edu/article/manufacturing -innovation -lessons -from -the-japanese –
auto -industry/

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products and services geared to seniors, who represent a lucrative consumer
segment. 12
The world is undergoing a historic surge of urbanization, a shift that puts the
spotlight on infrastructure. There is a huge opportunity for Japan to improve
capital produc tivity in its own infrastructure projects as well as providing project
finance and engineering expertise to the rest of the world.
Today multiple transformative technologies, from artificial intelligence and 3D
printing to the Internet of Things, have alre ady appeared on the horizon. Japan is
already adopting —and even inventing —some of these breakthroughs.
Now the challenge is to accelerate adoption throughout entire industries so that
technology moves the needle on productivity performance.
As one of the m ost rapidly aging, urbanized, and technologically advanced
societies, Japan stands smack in the forefront of a global wave of disruption.
These trends present both pressures and incentives to act. For Japan the
global disruption can be a great opportunity to develop more and increased its
revenues. Japan’s industrial capabilities and the source of its signature exports. 13

12https://books.google.ro/books?hl=ro&lr=&id=7cCAASTW6IQC&oi=fnd&pg=PA1&dq=future
+of+japanese+auto+industry&ots=vvWZWWhTiJ&sig=XH7mLLi8Mbq FcX-
k7z4Epe4AeSk&redir_esc=y#v=onepage&q=future%20of%20japanese%20auto%20industry&f
=false0
13 Future_of_Japan_Executive_summary_March_2015.pdf

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CONCLUSIONS

In this paper, we highlighted the role of the automotive industry in the
Japanese overall economy, we made a Geographical Location Analysis and
marked some of its advantages. From a historical perspective, we saw how and
where the industry expanded over the past decade and then we looked to
innovation and technological improvement and analysed the challenges of a
future face d with urbanization and new trends.
In conclusion, we notice that Japan is a highly motorized society. As such,
its automobile industry offers a wide range of samples and models, allowing
people to make their choices based on their own preferences and need s. Even if
the Japanese automobile market has experienced several periods of growth
stagnation caused by saturation, it still remains a key player in this industry.

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