Real Localization in Overseas Production of Japanese Manufacturers

Abstract:

The Japanese auto manufacturers have rapidly increased the amount of overseas production in the past two decades. For example, Toyota produced 678 thousand automobiles overseas, in 1990 which is merely 14% of the total production level, but by 2007, they were producing 4.3 million automobiles overseas, which is to say 50% of the total production.
When automobile firms shifts its production base overseas, first-tier suppliers shift with it, and it utilizes local suppliers for supplemental use. In general, when evaluating the local content, we use the first-tier local content. However, when observing carefully the production of each component, many of the components manufactured by local suppliers are composed of imported parts. In the value-added terms, the first-tier local content is an overestimation of the actual value added by local suppliers. In the example of a Japanese automobile manufacturer in Thailand 2007, the apparent local content was 90%, though the actual local content measured in value added was a much less 60%.
However, Japanese Manufacturing Model has been changing these several years. Reliance on imports from Japan for parts and materials is a cost-disadvantage for Japanese manufacturers when facing competition in the local market. In order for Japanese manufacturers to increase sales in the growing markets of developing countries, they need to manufacture newly-developed products that are adapted to local needs, and they need to offer the products at a priced level appropriate to the income level of local consumers. In order to do so, manufacturers need to decrease the amount of value-added by Japanese companies and achieve an actual localization, which should lead to reduced cost. We call such phenomenon the “real localization” as opposed to the apparent localization. Indeed, from late 2000’s Japanese auto manufacturers such as Toyota and Nissan have put efforts into such real localization.
Lastly, we will discuss about the impact of real localization in overseas on Japanese domestic manufacturing, especially on Japanese suppliers.