Close and enduring relationships between big business and smaller companies help keep Japanese industry productive and innovative.
Close and enduring relationships between big business and smaller companies help keep Japanese industry productive and innovative.
A typical automobile horn produced in Miyamoto Electric Horn Co.'s graying, multistoried Tokyo factory seven years ago contained 50 parts. This year's new model contains 20. Miyamoto employees say that with help from Nissan Motor Co., which buys everything Miyamoto makes, their company's productivity has risen an average of 10% each year -- growth that is roughly typical of the Japanese auto industry but more than three times the long-term average in America's auto business.
Deep ties between Nissan and Miyamoto illustrate a key fact of the Japanese economy: Close, stable, multilayered partnerships between big business and many smaller companies keep Japanese industry productive and -- in thousands of small ways -- innovative. The partnerships unite the vast resources of big business with the concern for detail of smaller businesses, linking the companies far more intimately than is typical in most American subcontracting relationships.
Nissan entrusts the design and manufacture of 98% of its horns to Miyamoto, which makes nearly 2 million a year in its 19 000-square-foot Tokyo factory. And Nissan pledges to buy most of its horns from Miyamoto as long as Miyamoto does excellent work.
Freed from fears that they will lose their contract in annual competitive bidding, Miyamoto's three horn engineers concentrate on long-term projects for improving horn design fundamentally. Their success in reducing the number of parts over the last seven years demonstrates their ability Neither General Motors Corp. nor Ford Motor Co. has reduced the number of horn parts, 30 and 29, respectively, in more than a decade.
Moreover, the partnership benefits virtually every aspect of Miyamoto's productivity. Because Miyamoto is confident of future orders, it can install expensive new equipment with little risk. Nissan consultants help Miyamoto choose the best machine tools and determine how fast they should run. But Miyamoto's ordinary employees contribute cost-cutting ideas, too, with good reason. They know that managers really care about horns because Nissan encourages Miyamoto to remain highly specialized, producing only a handful of products -- horns, buzzers, and relays -- for Nissan. And Nissan has taught Miyamoto managers special techniques to elicit worker suggestions.
In addition, Miyamoto workers know they will benefit as a group from business success. Nissan makes sure its more efficient subcontractors are paid well enough to pay, in turn, higher wages than inefficient subcontractors -- although never higher wages than at Nissan itself.
Along with curbing production costs, the partnership provides other savings for Nissan. It can trust Miyamoto's inspection of its horns and ask Miyamoto to make daily deliveries directly to Nissan assembly lines. It need not inspect incoming parts or maintain more than two days' worth of inventory.
Miyamoto Electric Horn has been closely tied to Nissan since the 1930s and especially since World War II but it retains an independent identity. Tomio Miyamoto president of the company, claims his company may be the oldest business in the entire Japanese vehicle industry. It was founded in 1872 by his great-great-grandfather to make copper pots and horns for Japan's military, and it entered the vehicle industry in 1882 with horns for horsedrawn Tokyo streetcars Miyamoto regards the company not only as a stronghold of progressive craftsmanship, but also as a protector of the traditional spirit of downtown Tokyo artisans and merchants who served the feudal lords in the old days and yet maintained their own lively culture.
Before World War II, Miyamoto Electric Horn was independent, selling not only to Nissan but to other makers as well. But bombs destroyed its Tokyo factory during the war, killed Tomio Miyamoto's mother, and left the business in shambles. After the war the Miyamotos worked out a deal to manufacture horns for Nissan in make-shift quarters. With the Korean war, for which U.S. forces purchased Japanese vehicles, the company returned to prosperity as a captive supplier to Nissan.
Japan's subcontracting system took its present form in the 1950s and '60s Subcontracting was always a prominent feature of Japanese business because companies wanted a cushion of subcontracted work that they could bring in-house for their own employees during hard times. But as companies grew rapidly, they lacked the capital to produce all the parts they needed, and their dependence on subcontracting increased. (A similar lack of capital has produced a similarly heavy dependence on subcontracting at such medium-size Western auto makers as Chrysler Corp.)
Unlike Western manufacturers, however, the Japanese sought familial relationships with their suppliers that were analogous to -- although not generally as strong as -- their relationships with their employees. Nissan sought mainly specialized subcontractors whose principal business would be to supply Nissan. lt bought stock in most key suppliers. Company officials say they sought -- and still demand -- subcontractors with majime ("steadiness"). The word suggests suppliers committed to their product rather than to profitability. To Miyamoto it means, "We're not filling our pockets with money."
Large companies established forums in which members of their business families shared problems. Nissan organized the Takara-kai (Treasure Society), an association of key auto parts suppliers, to discuss both manufacturing techniques and the Nissan family's needs. Nissan today spends 65% of the money allotted for parts with 110 Treasure Society members and another 30% with the members of another group, the Shoho-kai (Crystal Treasure Society), which represents the large companies that make such technologically sophisticated parts as radios, tires, batteries, and glass.
Treasure and Crystal Treasure companies take responsibility for assuring the quality of the tens of thousands of parts from their own subcontractor-partners. They often supply completed subassemblies, such as seats, when U.S. auto makers would buy bits and pieces to build their own seats. Nissan buys directly from only 460 parts suppliers. By contrast, Ford deals directly with 2,500 important parts suppliers in North America for about the same number of cars.
The partnership doesn't mean Nissan makes life easy for auto suppliers. If subcontractors don't meet Nissan standards, their managers will find Nissan consultants visiting them more frequently than they want. Nissan may even dispatch a manager full-time to help solve persistent problems. If parts must be recalled and replaced after they have been shipped around the world, the supplier must pay the cost of all the labor involved wherever the defective parts are in use.
Moreover, the partnership doesn't preclude Nissan from buying at least some horns elsewhere; it merely forbids a sudden withdrawal of business that would destroy a hard-working supplier. And on one or two occasions a persistently inadequate supplier has been allowed to go into bankruptcy.
A slightly inefficient subcontractor faces perilous times when demand for an industry's product weakens, especially if it is not a direct supplier of Nissan and amember of a powerful partnership like the Treasure or Crystal Treasure societies. And even with partnerships, companies may consider some jobs they have subcontracted to be possible work for their own employees when sales lag.
Suzuki Bankin (sheet metal) Co., a subcontractor supplying parts of truck bodies and automobile fenders for large truck and auto body subcontractors, for example, has faced a 40% decline in the prices that truck-body makers have paid in the past two years. It has had to launch an aggressive cost-cutting campaign, which has included encouraging the resignations of 10 of its 80 workers.
Suzuki is an active member of the Kowa-kai (Wide Harmony Society) of Press Kogyo Ltd., a truck-body maker that is its largest customer, and whose products wind up in Nissan, Isuzu, and Mitsubishi trucks. Yoshio Suzuki, president, has shown the society, for example, how his company reduced the number of workers from four to two on a particular machine.
But the long-term partnership between Suzuki and Press can't protect Suzuki today. The Japanese truck industry is facing a famine. Truck sales have collapsed over the past two years as the economy has joined the worldwide recession -- not succumbing as profoundly as the U.S. economy, but stagnating nevertheless. In a famine, the weakest households in even the most benevolent clans suffer severely. Such primary truck-part subcontractors as Press have politely asked for a series of drastic price reductions. " Suppose you've got some work that you've been doing for $100. They'll say, 'Please do it for $70,' " Suzuki says. He told the customers that accepting the lower price would be "difficult," but he did it anyway. The alternative was a sharp cut in the amount of work Suzuki would have received. The primary subcontractors could easily have done the work with their own underutilized equipment and personnel.
Thousands of other small subcontractors face similar problems. Multilevel subcontracting is probably more highly developed in Japan than in any other country. Suzuki feels he has a partnership with several tiny workshops to whom he has subcontracted production of brackets and other small items, but he cannot protect them from price cuts that are roughly proportionate to those he himself faces.
Nissan officials say that most Treasure and Ciystal Treasure companies spend about 65% of their revenues on parts and materials. A Japanese government study found that Toyota, whose subcontracting system may be even more highly developed than Nissan's, had 5,437 secondary subcontractors and 41,703 tertiary subcontractors. And Japanese auto men stress that there are even more fourthand fifth-level subcontractors. Because of extensive subcontracting, 46.6% of manufacturing employees in Japan work in companies with fewer than 50 workers, compared with 10.6% in the United States.
The weaknesses in the subcontracting partnership at the secondary and lower levels encourage efficiency. The system can keep enough business flowing to companies that have made major investments to enable them to service their debts. But aggressive price competition among companies like Suzuki's -- which have no advanced technology of their own -- helps bring inflation under control quickly whenever recession hits Japan. Moreover, Hiroya Shirato, an official of the Japan Auto Parts Industries Association, notes that many of the subcontractors who bear the brunt of declines in demand are less specialized than primary subcontractors and can "look for work in the electronics and shipbuilding industries. " Thus extensive use of subcontracting enables Japan to switch people from slow to busy industries without throwing them out of work.
The system is tough on entrepreneurs, whose responsibilities to their business households prevent them from going out of business when times are tough. Although Suzuki is willing to ask a few employees to resign, he refuses to close his company. "If I could quit I'd be happy," says Suzuki, who knows several vehicle parts makers that have gone out of business recently. Each employed about a dozen workers. Each found new jobs for its employees -- mostly in other small factories. "I have 70 employees. There must be 300 people including their families," Suzuki laments.
Even executives at Miyamoto Horn and Nissan are troubled today by the need to maintain jobs for all their people. The Japanese system, even more than America's, makes managers bear the burden of hard times. They are still ultimately responsible for meeting the payroll.
As long as the world economy remains depressed, the very successes of the partnerships in Japan's auto industry will cause trouble for its managers. The managers remain confident that they have the technical ability to continue improving productivity at rates approaching those of the past -- which averaged 8.6% a year from 1970 to 1980, only slightly below the 10% a year claimed by Miyamoto. But the world market can't absorb 8.6% more Japanese cars every year, and the Japanese can't -- or won't -- lay off employees.
Ultimately, despite its success, the auto industry will probably have to cut its hiring sharply, and many people now working in subcontractors' shops will have to be transferred to other industries. Moreover, some changes under way in the partnerships can be interpreted as a weakening. In recent years, many subcontractors have come to feel they would be better off serving more than one customer. Miyamoto, for example, would like to begin supplying Ford and GM. And the current difficulties in Japan's auto industry -- such as pressure in other countries for lower costs -- have made large companies more willing to consider new suppliers.
But Nissan's lifetime employees are unlikely to forget the long-term benefits of stable partnerships with suppliers. And Miyamoto is unlikely to neglect the relationship with Nissan that enabled his company to go literally from ashes to $120 million a year.
The big company-small company partnerships of Japan remain strong and, as business relationships go, stable. The difficulties of the Japanese automobile industry are unlikely to be as profound as those of anyone who must compete with such partnerships, in thc automobile industry and elsewhere.