The Challenges of Late Industrialization: The Global Economy and the Japanese Commercial Aircraft Industry

The Challenges of Late Industrialization The Global Economy and the Japanese Commercial Aircraft Industry

Seishi Kimura

The Challenges of Late Industrialization

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The Challenges of Late Industrialization The Global Economy and the Japanese Commercial Aircraft Industry Seishi Kimura

© Seishi Kimura 2007 All rights reserved. No reproduction, copy or transmission of this pulication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2007 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 9781403998798 hardback ISBN-10: 1403998795 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Kimura, Seishi, 1969 The challenges of late industrialization:the global economy and the Japanese commercial aircraft industry/Seishi Kimura. p. cm. Includes bibliographical references and index. ISBN 1403998795 1. Competition, International. 2. Barriers to entry (Industrial organization) 3. Aircraft supplies industry“Japan“Case studies. 4. Aircraft industry“Japan“Case studies. I. Title. HF1414.K515 2007 338.4 7629133340952“dc22 2006042276 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 10 09 08 07 06 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

For my parents, and my wife, Naoko

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Contents

List of Tables

ix

List of Figures

x

Acknowledgements

xi

Preface

xiii

1 Introduction 1.1 1.2 1.3 1.4

1

Purpose of the study Definition of the key concepts Research approach and focus Structure of the study

2 Late Industrialization and Globalization: Literature Review

2 3 5 11

13

2.1 Theoretical approaches to the late industrialization 2.2 Globalization literature 2.3 Concluding remarks

14 22 31

3 Changing Context of Firm-based Late Industrialization in the Global Business Transformation

33

3.1 Firm-based late industrialization in global value chain perspective 3.2 Global business transformation and its consequences for FLI in the commercial aircraft industry 3.3 An overview of the post-war development of the Japanese aircraft industry 3.4 Concluding remarks

4 Upgrading in Global Value Chains: Analytical Framework 4.1 The upgrading process: the ‘controlled’ growth of the dependent firm in a GVC vii

34 56 72 77

79 81

viii Contents

4.2 Determinants of upgrading 4.3 The dynamics of upgrading

5 The Post-war Development of the Japanese Commercial Aircraft Production: Case Study 5.1 Historical background 5.2 Rebuilding the industry (1952 to early 1960s) 5.3 Failure to catch up by the national project (late 1950s to 1970s) 5.4 Upgrading to ‘significant’ supplier status in the Boeing’s GVC (1970s to mid-1990s) 5.5 Diversifying into different GVCs (late 1990s to present) 5.6 Concluding remarks

90 108

111 112 116 121 134 162 171

6 Conclusion

174

Appendix

183

Notes

193

Bibliography

206

Index

220

Tables 1.1 3.1 3.2

Field interviews, 2000–2001 Various actors in global value chains Two stylized strategies of firm-based late industrialization 3.3 Market shares in the commercial aircraft industry 3.4 Development costs of new aircraft 3.5 R&D investment by the leading system integrators and module system makers in the aerospace industry in 2004/05 fiscal year 3.6 Aerospace parts imports by the major aircraft manufacturing countries 3.7 Various partners of an international collaboration project 3.8 The number of ‘significant’ suppliers in selected commercial aircraft 3.9 International comparisons of the aerospace industry (2000) 3.10 Top ranking of the aerospace companies (2001) 3.11 Aircraft parts exports from selected latecomers 4.1 Learning dimensions in the upgrading process 4.2 Alternative types of global sourcing 5.1 Relative importance of Japanese aircraft and aero-engine producers 1941–1945 5.2 Licensed aircraft manufacturing in post-war Japan 5.3 Indigenous aircraft production in post-war Japan 5.4 Excerpt from the B767 Operations Requirements and Resources Plan – CTDC Manpower and Equipment Survey 5.5 Japan’s development costs of the B777 project 5.6 Selected financial results of the major Japanese aircraft manufacturers in 1990 A1 The list of the interviewees of the fieldwork A2 Japanese manufacturers’ participation to international collaboration projects

ix

7 44 55 58 59

59 65 67 68 73 74 77 82 95 116 119 129

155 157 158 183 185

Figures 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

A value chain of the commercial aircraft industry The power–dependence model Chain hierarchy of the commercial aircraft industry Functions and competences underpinning a GVC Mechanism of firm-based late industrialization The alternative strategic routes towards FLI Recent restructuring of the aircraft industry The virtuous circle of entry barriers of the finished product market of the commercial aircraft industry 3.9 Total production, exports and military dependency of the Japanese aircraft industry 3.10 Productivity of aerospace divisions of the major Japanese aerospace companies 4.1 Dynamic strategic fit of a dependent firm 4.2 Two-way interactions between strategies and local institutional settings 4.3 Interactions among the determinants 5.1 Japanese aircraft production 1930–1945 5.2 Local institutional setting of the YS-11 Project 5.3 Japanese workshare in the B767 production 5.4 Japanese workshare in the B777 production 5.5 Local institutional setting in the B777 project 5.6 The area of Japan’s competences in the commercial aircraft GVCs 5.7 Japanese manufacturers’ participation in the various GVCs (as of December 2005) 5.8 Japan’s upgrading process through international collaboration projects

x

37 41 43 48 51 53 57 62 75 76 97 107 109 113 126 140 145 146 163 170 172

Acknowledgements

In writing this book, most of all, I would like to thank Professor Peter Nolan, my supervisor at the Judge Business School (originally named as the Judge Institute of Management Studies), University of Cambridge. No amount of words can express my gratitude to him for intellectual guidance and moral support. I owe my debt to Professor Ajit Singh and Professor Christopher Howe for their valuable comments. I owe a tremendous debt of gratitude to those individuals – executive managers and engineers of both Japanese and foreign aircraft manufacturers and airline companies, senior bureaucrats at the related Japanese government ministries, and executives of industrial associations – who kindly allowed me to interview them and helped me to gather primary data during my fieldworks on the Japanese commercial aircraft industries. I also owe a debt of gratitude to the funding agencies – Cambridge Political Economy Trust and Suzy Paine Fund – for financially enabling me to carry out my research. I would like to express my gratitude to Professor Yoshihiko Motoyama, Professor Tatsushi Matsunaga, Dr Takanori Ida, Dr Norio Sawabe, Dr Susumu Egashira, Dr Yasuo Sugiyama, Dr Ha-Joon Chang, and Dr Hugh Whittaker for providing me with invaluable academic advice. In particular, I deeply thank Professor Radha Sinha and Professor Yoshitaka Okada for supporting me throughout my academic career. I wish to thank my dear friends: Dr Jocelyn Probert, Dr Jin Zhang, Dr Armen Papazian, Dr Hiroshi Oikawa, Hiroshi Masuda, Hiroyuki Kuribayashi and Dr Satoshi Mizutani. I especially thank Professor Miles Dodd for reading through the manuscript with me. They all provided me with deep friendship and moral support both in my academic and private life. I would also like to thank my colleagues and students at Fukushima University for providing me with an ideal academic environment. Finally, I would like to acknowledge my parents Sadatoshi and Chiyoko Kimura. They have always provided me with unconditional support. Above all, I want to thank my wife, Naoko. She made a direct xi

xii Acknowledgements

contribution by helping me with my data gathering and input. But most importantly, she put up with my long working hours and encouraged me throughout this study. SEISHI KIMURA Fukushima, Japan

Preface Economic globalization has created a new set of challenges and opportunities for the late industrialization. This book examines the bottom-up process of late industrialization, in which latecomer firms grow in terms of scale and scope, and in turn contribute to the overall industrial development of their home countries. The analysis focuses on the growth of latecomer firms in globalizing industries, with a particular reference to the post-war growth of the Japanese manufacturers in the commercial aircraft industry. After reviewing the literature on economic globalization and late industrialization, we examine how recent trends of economic globalization have transformed the context of late industrialization in the commercial aircraft industry. By adopting and elaborating the global value chain (GVC) perspective, we underline that vigorous market consolidation has, on the one hand, remorselessly raised the barriers to entry for the latecomer firms, which attempt to catch up as system integrators. On the other hand, incumbent system integrators have been increasing and deepening their outsourcing practices on a global scale. This rise of global sourcing has opened a ‘window of opportunities’ for the latecomer firms to upgrade as a supplier in GVCs. We then propose an analytical framework for the upgrading process of latecomer firms in GVCs, deriving theoretical insights from the interdisciplinary literature – including supplier system research, competence-based strategic management, systems of innovation, and new institutional economics. The analytical framework delineates what kinds of competences the latecomer firms must learn in order to upgrade in the GVCs. It also explains how the upgrading process can be controlled by the lead firms, which possess the dominant power over GVCs. Moreover, basing on our fieldwork on the Japanese aircraft industry, we inductively identify three significant factors underlying the upgrading process: (1) lead firm’s sourcing strategies, (2) latecomer firm’s dynamic strategic fit, and (3) local institutional setting. Our analytical framework expounds the logics behind those factors – how and why they are significant factors as well as how they interrelate with each other in the upgrading process. The empirical part of this study carries out an in-depth case study analysis of the post-war growth of the Japanese aircraft manufacturers, xiii

xiv Preface

which are latecomers in the fast-globalizing commercial aircraft industry. Unlike the well-publicized successful catch-up of Japan’s steel, shipbuilding, and automotive industries, the Japanese aircraft manufactures have failed to become the leading competitors in the world market. Nevertheless, they have successfully upgraded their production activities since the 1970s – particularly as the global suppliers in the Boeing’s GVC. By employing our analytical framework, we comprehensively examine how and why they have failed to catch up, but have succeeded to upgrade in their efforts towards the firm-based late industrialization.

1 Introduction

Japan’s rapid industrial growth has demonstrated that late industrialization was actually possible during the 20th century. She was a latecomer in the world economy when it ‘opened the country’ (kaikoku) to modern international trade in the late 19th century. By the end of 20th century, nevertheless, she has become the first major nation outside the Western mainstream, to succeed in ‘catching up’ with the economic and technological leaders. Japan’s success served as a beacon for the latecomers who followed, and provided some guidelines for the pursuit of late industrialization to those who mainly began industrializing after the Second World War. These latecomers have actually achieved late industrialization to a significant degree although they have not fully ‘caught up’ with the forerunning economies yet. They came to be categorized as the ‘newly industrializing economies’ (NIEs), and include Korea, Taiwan, Hong Kong and Singapore, as well as some ASEAN countries. However, the world economy has undergone far-reaching structural changes since the end of the 20th century. The main features of this structural change are globalization, for which the transnational corporations (TNCs) have been often designated the primary driving force. Having expanded the scale of their operations through endogenous growth and M&A, the TNCs have intensified their oligopolistic competition on a global scale and have raised the barriers to entry to the finished product market. In addition, the TNCs have increased their cross-border outsourcing both in scale and scope, and have in turn expanded, deepened and intensified the global dimensions of the intermediate goods markets. These trends towards economic globalization have fundamentally changed the context of late industrialization. 1

2 The Challenges of Late Industrialization

Consequently, it has been often argued that the lessons from Japan’s successful late industrialization in the past century are no longer valid for today’s latecomers in the globalizing economy. For instance, Japan did not follow the textbook version of laissez-faire. She instead implemented various industrial policies, focusing on nurturing large indigenous industrial firms, enabling them to compete in the oligopolistic international market. Some globalists (that is, those who emphasize the globalization trends) have asserted that such industrial policies would not be effective any more. The concept of late industrialization has been studied extensively, in terms of the structural opportunities (or obstacles) inherent in the world economy as well as in terms of the latecomers’ potential to seize the opportunities (or to overcome the obstacles). However, the existing literature on late industrialization largely fails to take into full account the effects of economic globalization. On the other hand, the concept of globalization is one of the most controversial issues in social science today. Nevertheless, partly due to its high level of aggregation, the globalization debate tends to result in elusive conclusions and implications – specifically in relation to late industrialization. Therefore, there is urgent need for focused and in-depth research to gain a clearer and more comprehensive understanding of late industrialization in relation to the recent trends of globalization. The new and ambitious aim of the present study is to fill this gap in the existing literature both theoretically and empirically.

1.1

Purpose of the study

The purpose of this study is to understand the firm-level dynamics of late industrialization in the epoch of globalization. The study analyses the process of ‘firm-based late industrialization’ (FLI), in which the latecomer firms grow – in terms of increasing value-added productivity – in global industries. More specifically, it examines the nature of the obstacles or opportunities, which latecomer firms might encounter in pursuit of growth, and further, how they may (or may not) be able to overcome the obstacles or exploit the opportunities. The analysis focuses on the process of latecomer firm growth in relation to the globalization of industrial structures as well as in relation to firms’ strategies and learning processes, inter-firm relations, and local institutional settings – with particular reference to the post-war growth of the Japanese commercial

Introduction 3

aircraft industry. Thus, the research questions addressed in the study are: • How may latecomers pursue firm-based late industrialization (FLI)? • What are the trends and driving forces of the recent global business transformation? • How have these globalization trends changed the context of FLI? • What are the underlying factors of the FLI process? • How can we describe the FLI of the post-war Japanese commercial aircraft production? • What are the lessons to be learnt by current latecomers from the Japanese post-war FLI? By answering these questions, the study intends to create a comprehensive fund of knowledge about FLI, which may ultimately assist developing countries in designing government policy and corporate strategies for FLI.

1.2

Definition of the key concepts

To address these research questions, one first needs to clarify the precise meaning of the key concepts as well as the theoretical concerns of the study. What do the key concepts – late industrialization and globalization – specifically mean in this study?

1.2.1

Firm-based late industrialization

The concept of ‘firm-based’ late industrialization (FLI) used in this study has a different meaning from the more general term ‘late industrialization’. The concept of late industrialization usually refers to a macro process, in which developing countries transform their economies from an agricultural to an industrial base. Meanwhile, FLI refers in this study to a micro-rooted/bottoms-up process, in which the growth of latecomer firms in a concerned industry will contribute to national-level industrial development, and will ultimately produce a high and rising standard of living for the citizens of their home countries. Radosevic (1999: 122) points out that the firm-level analysis has not been taken into consideration for a long time in political economy (Hall 1997), growth theory (Chandler and Hikino 1997), or development economics (Teece and Zelner 1997). However, the series of poineering studies by Peter Nolan reveal that the in-depth analyses at the firm-level are critical for comprehensive understanding about the late industrialization

4 The Challenges of Late Industrialization

in the age of globalization. He emphasizes the pivotal role played by the firms in economic development and its significance in policy making, with special reference to China (Nolan 2001a, 2001b; Nolan and Zhang 2002, 2003). The firm is a basic organization of national economic significance acting as a locomotive to create new value in a national economy by transforming the fixed cost inherent in investment into revenuegenerating goods and services (Lazonick 1991; von Tunzelmann 1995). Since productivity is the root driver in the long run of national per capita income (Porter 1990: 6), the ultimate goal of FLI – that is, the rising standard of living of latecomer countries – is principally brought about by the growth of firms, which increase productivity and wage levels by augmenting the value-added element of their productive activities. In short, it should be a special concern for students of late industrialization to scrutinize the growth of the latecomer firms in a certain industry that ultimately contribute to the overall industrial development at national level. In this study, therefore, we especially focus our analysis on the growth of the latecomer firms in the fast-globalizing commercial aircraft industry.

1.2.2

Globalization

The term ‘globalization’ has become widely accepted jargon in various disciplines, such as economics, management studies, political science, sociology and anthropology. According to Held and McGrew (2000), the general concept of globalization can be defined as follows: [G]lobalization denotes the expanding scale, growing magnitude, speeding up and deepening impact of interregional flows and patterns of social interaction. It refers to a shift or transformation in the scale of human social organization that links distant communities and expands the reach of power relations across the world’s major regions and continents. (Held and McGrew 2000: 4) In general, the concept of globalization thus refers to the multifaceted social phenomenon that has a significant impact on politics, economics, societies and cultures over the world. One significant problem with the term ‘globalization’ is that it is a multi-faceted/catchall concept. For political scientists, for instance, the term globalization often refers to the emergence of a post-Westphalian world order – growing extensity and intensity of military relations and political activity between the political units of the world system

Introduction 5

(Held and McGrew 1998: 222–32). Meanwhile, in the field of economics and management studies, the main issues include the globalization of finance, competition, the firm structure and technology. Consequently, the discussion (especially interdisciplinary) about the globalization phenomenon has resulted in heated but often elusive conclusions and implications, as we shall see in detail later. To avoid such conceptual imprecision, this study focuses on the globalization of production systems rather than that of short-term financial flows.1 Hence, paraphrasing the above general definition in terms of production systems, the concept of globalization in this study refers to the expanding magnitude, speeding up and deepening impact of interregional flows and interactions among the geographically dispersed production activities – such as design, manufacturing, marketing and after-sales service. More specifically, the study will examine the major driving forces for the globalization of production systems – that is, the recent behaviours of transnational corporations (TNCs), such as focusing on core business, outsourcing and strategic alliances.

1.3

Research approach and focus

This study is in essence exploratory research because it primarily aims to understand a concept and phenomenon which has not yet been theorized in a rigorous manner (Creswell 2003: 21–2). As we will see in the literature review in the next chapter, the key concepts of the study (that is, late industrialization and globalization) have been thus far discussed separately. Besides the important pioneering studies by Nolan and his colleagues (Nolan 2001a, 2001b; Nolan, Sutherland and Zhang 2003), little attempt has been made to scrutinize firm-based late industrialization in the context of the recent global business transformation. There is no rigorous model or theory – to the extent of my knowledge – elucidating the process of latecomer firm growth in the epoch of globalization. Hence, this study’s research approach is designed to contribute to theory building rather than theory testing.

1.3.1

Analytical framework

The study will attempt to develop an analytical framework to identify the major determinants of firm-based late industrialization, and to describe how they interact with each other in the context of the global business transformation. In general, the analytical edge embodied in the framework is contained in the choice of variables included, the way

6 The Challenges of Late Industrialization

the variables are organized, the interactions between the variables, and the way in which alternative patterns of variables and their contextual environment affect outcomes (Nelson and Winter 1982: 25–7; Porter 1991: 96–9). The analytical framework of this study includes those variables such as the latecomer firm’s strategy and learning, the lead firm’s outsourcing strategy, the nature of the institutional setting as well as the lead firm’s control over the latecomer firms’ growth. The analytical framework is constructed not only deductively deriving from the theoretical insights of the inter-disciplinary literature (such as economics, management studies, and political economy), but also inductively based on the in-depth case study of the post-war growth of the Japanese aircraft manufacturers. In other words, this study incorporates a two-directional interaction between the development of the analytical framework and the implementation of the fieldwork in the case study. I turned to the in-depth case study to identify significant variables and explore the relationships between them. At the same time, I constantly checked the significance and consistency of these identified variables and their relationships by referring to the theoretical insights of the inter-disciplinary literature. In turn, the analytical framework organized the implementation and presentation of the case study by guiding the relevant variables and events to be examined.

1.3.2

Case study method

The study employs the case study method for its empirical inquiry. Given the dynamic and contextual nature of the research questions listed above, the case study method has many advantages over other research methods, such as survey or computer-based analysis of archival records (Texier 2000: 54–5; Yin 2003: 11–14). The case study method makes it possible to follow all the steps of the process of FLI, from its beginning to its recent advancement. It also makes it possible to take into consideration the complex interactions between the phenomena concerned – that is, the FLI of the post-war Japanese commercial aircraft industry – and the contextual elements, such as the local institutional settings and the global businesses transformation. The basic unit of analysis is the role of the Japanese aircraft manufacturers in the global production system. In addition, there are embedded units of analysis – the vertical and horizontal inter-firm relations and the institutional setting, such as industrial associations and government agencies. The case study was carried out partly by reviewing existing written material, such as academic research, industrial analyses of private and government agents and annual reports. These documental sources are

Introduction 7

the basis for the early historical period of the case study. To analyse more recent history and the current situation, I conducted fieldwork in Japan in 2000 and 2001. I conducted 32 semi-structured interviews with 57 persons at 21 organizations. These interviews were carried out with persons involved in Japanese commercial aircraft production – that is, executive managers and engineers of both Japanese and foreign aircraft manufacturers; senior bureaucrats at related Japanese government ministries; and executives of industrial associations. Interviews were also carried out at the Japanese airline companies and at research organizations. Table A1 (see Appendix) lists the organizations, interviewees, titles and dates, and Table 1.1 summarizes this schedule, with the organizations grouped into six categories. The validity of information obtained in the interviews was achieved through data triangulation, involving the double-checking all information in at least two interviews and when possible checking with documental sources. Data triangulation reduces the risks of the biased perspectives of individual interviewees (Texier 2000: 61). In addition, the documental sources have been used to fill information gaps but also as a pointer towards new interview questions.

1.3.2.1

Choice of industry

The commercial aircraft industry2 is chosen for the industry focus because it is one of the fastest globalizing industries in terms of both market structure and production system. On the one hand, the commercial aircraft market has undergone an intense consolidation process over the last two decades. The enormous cost of product development drives the system integrators in the commercial aircraft industry to amortize those costs across the markets around the globe. At the same time, as Table 1.1 Field interviews, 2000–2001 Category

Government agencies Trade associations Japanese aircraft manufacturers Foreign aircraft markers Airline companies Research organizations Total

Number of organizations

Number of interviewees

2 3 7 5 2 2 21

4 9 32 6 4 2 57

8 The Challenges of Late Industrialization

the technology advances rapidly and the size of aircraft increases, so has the cost of product development for new aircraft risen relentlessly. The large product development expense together with the severe cost pressure from the customers (that is, airline operators) has driven the industry towards ever larger firm size and higher concentration. Indeed, as the result of vigorous consolidation process throughout the 1990s, marking its peak when Boeing acquired McDonnell-Douglas in 1997, the industry has become a duopoly in the major market segments: Boeing and Airbus Industrie in the large jet aircraft (over 120 seats) market; and Bombardier and Embraer in the regional jet market. Such extreme global market concentration poses formidable barriers to entry for latecomers. Furthermore, such a powerful trend in the extent of firm-level concentration of global market share has not been peculiar to the commercial aircraft industry. It could be observed in industries as diverse as soft drinks, pharmaceuticals, automobiles, trucks, power equipment, farm equipment, oil and petrochemicals, mining, pulp, brewing, banking, insurance, advertising and mass media (Nolan 2001: 102). Meanwhile, the commercial aircraft industry is a good example of the typical globalization trend of production systems described earlier. In addition to the enormous product development cost, an aircraft’s long product life cycle (over 20 years) and the uncertain nature of advanced technologies exacerbate the business risk of the commercial aircraft industry. In order to share those high risks with other firms, the prime contractors in the industry have increasingly resorted to strategic alliances and outsourcing, which are often termed ‘international collaborative aircraft development’. Facing ever fiercer global competition and technological complexity, the system integrators have concentrated on strategic activities while globally outsourcing less-strategic activities. Such global sourcing even includes medium-skill activities – such as the component design and assembly, which are more likely to be profitable than low-skill, labour-intensive piece part manufacturing. The rise of global sourcing has thus provided the opportunities for the latecomers to upgrade by becoming competitive global suppliers. Therefore, by focusing on the recent restructuring of the commercial aircraft industry, we may highlight the new set of obstacles and opportunities for late industrialization in a fast globalizing industry.

1.3.2.2

Choice of country and firms

Japan has been chosen for the country focus of the study because the post-war growth of the Japanese aircraft industry well illustrates both the

Introduction 9

difficulties and possibilities of late industrialization in a global industry. Aircraft production in Japan is mainly carried out by one division of the multi-product heavy industry companies: Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Fuji Heavy Industries (FHI) and Ishikawajima-Harima Heavy Industries (IHI). There are also two smaller manufactures, Shin-Meiwa Industries and the Japan Aircraft Manufacturing Corporation (JAMCO), which have a close relationship with FHI and KHI respectively. The post-war profile of the Japanese aircraft industry illustrates a unique aspect of Japan’s experience in late industrialization. Unlike the well-documented stories of the country’s steel, shipbuilding, automotive and electronic manufacturers, the Japanese aircraft manufacturers have failed to become leading competitors in the international market. In 2001, the sum of total aerospace sales of the four major Japanese aircraft manufacturers is just 14 per cent of that of Boeing alone (see Table 3.10). In other words, the Japanese aircraft manufacturers could not gain a competitive position in the world market, as have Toyota or Sony. Consequently, the post-war Japanese aircraft industry has often been stigmatized as a ‘failure’ of catch-up. On the other hand, the Japanese aircraft firms have gradually but successfully upgraded their activities as global suppliers. The Japanese aircraft industry as a whole increased its total production twenty-fold from 55 billion yen to over 1 trillion yen between 1965 and 2001 (see Figure 3.9) During the same period, the aerospace export value rose from practically nil to over 350 billion yen. Meanwhile, the Japanese aircraft manufacturers have upgraded their supplier status incrementally. In the airframe sub-industry, for instance, the Japanese manufacturers started their supplier activities as piece-part subcontractors for the Boeing B747 in the late 1960s. They then expanded the scale and upgraded the level of their activities throughout the 1970s and 1980s. In particular, the Japanese aircraft firms have become the single source sub-system suppliers for both the B767 and B777 carrying out the detailed design and production of most of the fuselage and a part of wing. They upgraded their supplier status from ‘programme participant’ undertaking 15% work share in the B767 programme to ‘programme partner’ undertaking 21% work share in the B777. Furthermore, Boeing officially announced on 26 April 2004 the go-ahead for the B787, which will the most important new aircraft programme to be launched by Boeing since the late 1980s as a replacement for the rapidly ageing B757 and the B767 (Financial Times, 26 April 2004).3 What to be noted is that the Japanese manufacturers, namely MHI, KHI and FHI, will become

10 The Challenges of Late Industrialization

‘revenue-sharing partners’ undertaking 35% work share (see Figure 5.8). Such upgrading of the Japanese manufacturers’ supplier status can be also represented with the steady increase in capital intensity and valueadded per labour unit in the major Japanese aircraft manufacturers (see Figure 3.10). Thus, while Japanese manufacturers failed to catch up to the global leading competitors, their success in upgrading as global suppliers may present an apt case study for illustrating the difficulties and the possibilities of firm-based late industrialization in the globalizing commercial aircraft industry.

1.3.3

Limitations

The traditional problem posed by the case study method is whether a study’s findings can be generalized beyond the immediate case study. ‘How can you generalize from a single case?’ is a frequently heard question (Yin 2003: 10). Indeed, both the nature of the commercial aircraft industry and the post-war growth of the Japanese aircraft industry are peculiar in terms of ‘general’ images of manufacturing industries or ‘general’ histories of late industrialization. As Texier (2000: 62) rightly points out, the commercial aircraft industry is regulated very strictly by the state because of its strategic value in technological, economic and military terms. Moreover, the firms studied are large corporate entities making up the extreme concentration of global market share.4 They produce a very limited number of massive and extremely complex products for only very few customers. The conclusions that this study draws from the case study might not be valid for firms producing mass-market types of products. Also, Japan was the first non-Western country to catch up with global economic and technological leaders. In particular, as we will see later, Japan established a military aircraft industry ‘advanced’ for its time during the early stage of the Second World War. The lessons to be learnt from this study’s case study might not be applicable for the current latecomers, which have far fewer resources and less experience in aircraft production than Japan had at the outset of its late industrialization. Despite these limitations, this study provides significant groundwork for analytical generalization and theory building. Essentially, the object of the case study method is not to represent a ‘sample’ for enumerating frequencies, that is, statistical generalization. The goal of case study is, instead, to generalize a particular set of results to some broader theory, that is, analytical generalization (Yin 2003: 37). This is exactly what this

Introduction 11

study aims to achieve by creating the analytical framework and delineating the global business transformation of the commercial aircraft industry, which is one of the fastest globalizing industries in terms of both market and production. In addition, this study highlights the new imperatives in pursuit of late industrialization in the epoch of globalization by illustrating in detail how even Japan painfully struggled to overcome the obstacles and to seize the new opportunities in the global commercial aircraft industry.

1.4

Structure of the study

This study is organized into four main chapters. Chapter 2 reviews the literature, without claiming to be exhaustive, on economic globalization and late industrialization. Chapter 3 examines how recent trends in economic globalization have transformed the context of late industrialization in the commercial aircraft industry. By adopting and elaborating the global value chain (GVC) perspective, we underline that vigorous market consolidation has, on the one hand, remorselessly raised the barriers to entry for latecomer firms, which attempt to catch up as system integrators. On the other hand, incumbent system integrators have been increasing and deepening their outsourcing practices on a global scale. This rise of global sourcing has opened a ‘window of opportunity’ for latecomer firms to upgrade as suppliers within GVCs. In Chapter 4, we develop the analytical framework for the upgrading process of latecomer firms in GVCs, deriving theoretical insights from the interdisciplinary literature – including supplier system research; competence-based strategic management; systems of innovation; and new institutional economics. The analytical framework outlines the kinds of competence the latecomer firms must learn in order to upgrade in the GVCs. It also explains how the upgrading process can be controlled by the lead firms, which possess the dominant power over GVCs. Moreover, based on our fieldwork on the Japanese aircraft industry, we inductively identify four significant factors underlying the upgrading process: (1) lead firms’ sourcing strategies, (2) latecomer firms’ dynamic strategic fit, and (3) local institutional setting, as well as (4) lead firms’ control over the latecomer firm growth in GVCs. Our analytical framework expounds the logics behind those factors – how and why they are significant factors as well as how they interrelate with each other in the upgrading process. Chapter 5 carries out an in-depth case study analysis of the postwar growth of the Japanese aircraft industry, which was a latecomer in

12 The Challenges of Late Industrialization

the fast-globalizing commercial aircraft industry. On the basis of our analytical framework, we comprehensively examine how and why it has failed to catch up, yet has succeeded in upgrading. Finally, Chapter 6 concludes the study, emphasizing the correlation between the analytical framework and the case study in analysing the firm-based late industrialization of the Japanese commercial aircraft industry.

2 Late Industrialization and Globalization: Literature Review

Ever since the world economy started taking shape a couple of centuries ago, there have been extensive discussions on how the backward economies could industrialize belatedly and ‘catch up’ with the leading industrialized economies. More recently, since the end of the 20th century, there have been heated debates over whether or not the structure of the world economy has been shifting fundamentally towards a so-called ‘global’ economy. Almost everyone agrees that the structure of the world economy has been transforming in some way and to a certain extent. However, there is little understanding how the structural transformation of the world economy might affect the latecomer economies in pursing late industrialization. In this chapter, we first review the various theoretical approaches to late industrialization. We organize our discussion into three parts according to the different analytical focuses. In the first section, we examine the analysis of external factors affecting the latecomers – that is the structure of the world economy. This approach is mainly concerned with the structural obstacles and opportunities that the latecomers face in pursing late industrialization. Then we turn to the internal factors influencing the latecomers. We review what kinds of capabilities have been identified to help the latecomers to overcome the structural obstacles and to seize such opportunities that may arise. Thirdly, we consider the major agents of late industrialization – namely, large industrial firms and the latecomer governments, whose roles have been frequently discussed in the literature. In the second half of this chapter, we review the literature on economic globalization. After presenting an overview of the globalization debate, we examine the globalization literature that is concerned with causes and effects of economic globalization. We particularly focus 13

14 The Challenges of Late Industrialization

on the debate on whether or not ‘global firms’ are arising and wresting power from national governments. Most importantly, we examine the arguments put forward in the globalization literature concerning the extent to which economic globalization affects the prospects for late industrialization.

2.1

Theoretical approaches to the late industrialization

2.1.1 Obstacles and opportunities in the world economy: the external factors Friedrich List (1841) was a pioneer in raising the issue of late industrialization in the middle of the 19th century. As a German political economist, he was against England promoting liberalism around the world and forcing Germany to liberalize her trade policies (List 1841/1922). He argued that there would be a ‘fixed’ division of labour in the world economy as long as England kept exporting industrial goods and Germany exporting agricultural goods by following their comparative advantages. Such ‘fixed’ division of labour, List asserted, would restrain Germany from industrializing and would condemn it to a dependent position in the world economy. In order to outgrow their dependent position, List argued, Germany and the other latecomers would be forced to protect and nurture their indigenous industries in order to develop their own ‘national economies’ (Suehiro 2000: 36). List’s arguments have been overtaken and elaborated by the dependency theory, which was influential during the 1960s and 70s. The dependency theorists assert that somehow there is concrete division of labour between the ‘centre’ developed countries and the ‘periphery’ developing (or underdeveloped) countries in the world economy. The former take the initiative in organizing and running worldwide capitalist activity, into which the latter are integrated in ‘concrete situations of dependency’ (Frank 1971; Palma 1978; Cardoso and Faletto 1979). In other words, the developing countries are structurally stuck in an unfavourable economic situation, in which they are exploited by the advanced countries for the benefit of capitalist reproduction. The dependency theory mainly focuses on surplus transfer or unequal exchange, and hence the obstacle to indigenous capital accumulation by the developing countries (Lo 1995: 445). More recently, the New International Division of Labour (NIDL) analysis focuses on the increasingly fragmented global production system,1 in which developing countries tend to be trapped in a vicious circle specializing in low skill/technology production activities, coupled

Late Industrialization and Globalization 15

with a low-income level (Fröbel, Heinrichs et al. 1980; Lo 1995: 445). Both dependency theory and NIDL show a strong inclination towards the structuralist / stagnationist view of late industrialization, emphasizing the disadvantages of backwardness in the world economy. They suggest implicitly and explicitly that it is very difficult, if not impossible, for the latecomers to advance their level of industrialization from the periphery of the world economy. However, their theoretical validity has come to be seriously questioned by the rise of Japan and the East Asian newly industrialized economies (NIEs), which have marked a high economic growth rate and achieved the late industrialization to a significant degree since the 1980s. On the other hand, Gerschenkron (1962) sheds light on the advantages of backwardness for late industrialization. Based on his historical research comparing the patterns in economic growth of the United States and various European countries, Gerschenkron proposes the following hypothesis: Industrialization always seemed the more promising the greater the backlog of technological innovations, which the backward country could take over from the more advanced country. (Gerschenkron 1962: 9, emphasis added) Gerschenkron thus contends that latecomers may learn and use the technologies which are already in use in the advanced countries much more easily than innovating them from scratch. Abramovitz (1986) also examines the so-called ‘catch-up hypothesis’, which asserts that being backward in level of productivity carries a potential for rapid advance by bringing into production a large backlog of unexploited technology (Abramovitz 1986). This catch-up hypothesis is derived from the so-called ‘convergence proposition’ that some students of modern economic growth theory contend (Dowrick and Gemmell 1991; Baumol, Nelson et al. 1994; Maddison 1995). This argues that productivity levels across countries tend to converge in the long run; hence in comparison across countries the growth rates of productivity over any long period tend to be inversely related to the initial levels of productivity (Abramovitz 1986: 221–2).2 Furthermore, according to the product cycle model (Vernon 1966), latecomers would have opportunities to industrialize as technologies of products become standardized as they mature, and accordingly comparative advantage shifts in favour of the less-developed countries. However, Perez and Soete (1988) assert that the production of matured

16 The Challenges of Late Industrialization

products would not provide much opportunity to catch up because the matured products have exhausted their technological dynamism. Hence, by following the product cycle model, the latecomers might face a clear risk of becoming ‘fixed’ in a low wage, low growth pattern (Perez and Soete 1988: 459). Then, Perez and Soete continue: A real catching-up process can only be achieved through acquiring the capacity for participating in the generation and improvement of technologies [that is, innovation] as opposed to the simple ‘use’ of them. This means being able to enter either as early imitators or as innovators of new products or processes. (Ibid: 459–60) According to Perez and Soete, the real ‘window of opportunity’ for latecomers opens during changes in techno-economic paradigm – the concept considers that technology embodies institutional specificity. The forerunner loses the competitiveness in the old paradigm, and must swiftly adjust their institutions to the new paradigm in this transition period. Latecomers may have an advantageous position in this institutional adjustment over the forerunners because the latecomers – unlike the forerunners – do not carry the burden of capital stocks and institutions inherited from the past (Perez and Soete 1988: 477; Lo 1995: 458; Shin 1996: 18).

2.1.2 Latecomers’ capabilities and national innovation systems: the internal factors Another stream of literature focuses on the latecomers’ internal ability to actually utilize the technological backlog. In order to seize the opportunity to catch up, latecomers must exert great efforts to absorb and improve imported technologies because technology transfer is not an automatic or cost-free process. Inward technology transfer requires new investment in learning because technologies embody the tacit knowledge, which resides – for example, for the manufacturing process technology – in operations, process control, problem solving, etc. (Dosi 1988; Radosevic 1999) Moreover, the lower the skill and capabilities of the latecomers, the poorer the technological transfer (Amsden 2001: 51). Hence, latecomers must invest in learning to understand the tacit underlying principles of imported technologies. The latecomers must also carry out innovation in moulding the imported technologies to fit their particular conditions

Late Industrialization and Globalization 17

(Lall 1992). In short, to succeed in catching up by making use of technological backlog, the latecomers must be financially and functionally capable of learning and innovation. Various researchers have identified a wide variety of underlying factors for the latecomers to succeed in learning and innovation. Especially, some authors have termed these factors ‘social capabilities’ (Ohkawa and Rosovsky 1973; Abramovitz 1986; Suehiro 2000) and ‘technological capabilities’ (Lall 1992; Bell 1997; Archibugi and Coco 2004). These factors can be broadly categorized into three different levels of analysis. The micro-level analyses focuses on the factors that reside in the firm and between firms, while the macro-level analyses concern the country’s endowments as well as its economic and political institutions. Moreover, the meso-level analyses shed light on the interactions between the microlevel and the macro-level factors.

Micro-level factors. Lall (1992) elaborates a concept of ‘technological capabilities’ to explain the determinants of technological learning in developing countries. The firm-level technological capabilities mainly comprise: (1) project execution capability that refers to the skills required to establish or expand operations of the firm, including undertaking preinvestment feasibility studies, construction (design, equipment, staff) of the new facility, project management, project engineering and procurement; (2) production capability that refers to the skills required to produce industrial goods at a given level of efficiency and given input combinations; and (3) innovation capability that refers to the skills required to generate and manage technical change (Lall 1992: 166; Amsden and Hikino 1994: 129; Bell 1997: 89). Meanwhile, Suehiro (2000) identifies the micro-level ‘social capabilities’ as entrepreneurship, which may bring about the ‘innovative combination’ of limited managerial resources that the latecomers possess at hand. Suehiro also focuses on the capabilities in the workplace. They reside in the skills and routines of workers, who can demonstrate technical proficiency and improvements through the learning-by-doing process (Nelson and Winter 1982; Suehiro 2000: 60–7). Macro-level factors. Lall (1992) sheds light on the national-specific factors by which countries differ in their ability to utilize or innovate technologies. He calls those macro-level factors in late industrialization ‘national technological capabilities’ (NTC). One element of NTC is human capital that Lall defines broadly to include not just the skills generated by formal education and training, but also those created by

18 The Challenges of Late Industrialization

on-the-job training and experience of technological activities, as well as the stock of inherited skills (Lall 1992: 170). Similarly, Abramovitz correlates macro-level social capabilities with the years and quality of education (Abramovitz 1986). Abramovitz also emphasizes the importance of institutional capabilities, by which he means the experience of organization and management of large-scale enterprises and of financial institutions and markets capable of mobilizing capital for individual firms on a similarly large scale (Abramovitz 1986: 222–3). Gerschenkron (1962) also emphasizes the importance of an organized banking system capable of providing long-term capital for industrial investment. Lall (1992) asserts that institutional functioning, together with market forces and government policies, creates the structure of incentives. Incentives affect the pace of accumulation of capital and skills; the types of capital purchased and the kinds of skills learned; and the extent to which existing endowments are exploited in production (Lall 1992: 171). Suehiro (2000), furthermore, underlines the government capabilities as a competent and independent economic technocracy. It is capable of planning and executing effective policies based on an efficient system of intelligence sharing as well as on its autonomy from the rentseeking (Krueger 1974) of vested interests. Likely, Gerschenkron underlines the government’s leading role in supporting industrial investment (Gerschenkron 1962: 11–21).

Meso-level factors. The organizing concept of ‘National Innovation Systems (NIS)’ is another analytical approach to nation-specific factors for technological learning and innovation (Freeman 1987; Lundvall 1992; Nelson and Rosenberg 1993). Rather than focusing on the individual factors at the micro- and macro-level, the NIS approach tries to delineate a system of interacting private and public firms (either large or small), universities and government agencies, aiming at the creation of learning and innovating processes within national borders.3 Interaction among those units may be technical, commercial, legal, social or financial, inasmuch as the goal of interaction is the development, protection, financing or regulation of technological learning and innovation (Niosi and Bellon 1996: 139). Freeman (1996) asserts that differences in the efficiency and effectiveness of NIS have mainly accounted for the contrasting experiences in late industrialization between East Asia and Latin America (Freeman 1996). For example, Freeman points out that the NIS in East Asia, in contrast to the NIS in Latin America, have brought about the development of strong

Late Industrialization and Globalization 19

science and technology infrastructures, heavy investment in advanced telecommunications, and growing participation in international technology networks and agreements (ibid: 178). These effective NIS in East Asia have provided the embedded firms with information, standards, basic scientific knowledge and various facilities too large to be owned by private firms (Lall 1992: 170). They have also created the virtuous ‘structure of incentives’ in the East Asian economies, which have affected the pace of accumulation of capital and skills; the types of capital purchased and the kinds of skills learned; and the extent to which existing endowments are exploited (ibid: 171). Furthermore, Porter (1990) outlines the four multi-level factors that affect innovative activity in specific firms of specific industries in a specific country (Porter 1990: 71–124): • Factor conditions include not only the existing resource endowment but also the factors of production that the nation can help to create, such as specialized skills and the developed science base. • Demand conditions include both the composition and character of national demand. They can be an important stimulus to innovation if domestic buyers are sophisticated in their assessment of the cost and quality of home products. • Related and supporting industries, which are internationally competitive. They may provide access to cutting-edged components and machinery as well as a flow of updated information. • Firm strategy, structure, and rivalry set a national context, in which companies are created and managed. The nature of domestic rivalry determines the multitude of pressures on firms to invest and innovate. Porter stresses that these four factors work together as a system in interacting each other (Porter 1990: 132–48). What is particularly interesting about Porter’s so-called ‘diamond model’ of national advantage is that Porter does not include the role of government in the core factors. He rather considers the government’s real role in innovative activities of a nation lies in influencing the four factors listed above (Porter 1990: 126–8).

2.1.3 The role of large industrial firms and governments: the agents In the preceding sections, we reviewed the literature by focusing on the latecomers’ external opportunities and internal capabilities for realizing

20 The Challenges of Late Industrialization

late industrialization. We now turn to review the respective roles of the latecomers’ large industrial firms and governments – they have been most extensively discussed in the literature as critical agents of late industrialization.

Large industrial firms. Based on Alfred Chandler’s (Chandler 1977; 1990; Chandler, Amatori et al. 1997) historical analyses on the dynamics of big business during the past century, Chandler and his colleagues assert that large industrial firms have played a critical role in late industrialization (Amsden and Hikino 1994; Hikino and Amsden 1994; Chandler and Hikino 1997). By committing to the extensive long-term investment in human and organizational resources as well as physical assets, according to the Chandlerian approach, the large industrial firms became a locus of learning technological, managerial, and organizational knowledge for an entire economy. This is because the large industrial firms could exploit high complementarity between the investments in tangible capital such as manufacturing facilities and in intangible assets such as human capabilities and organizational innovations: Extensive investments in large-scale plant and equipment created a fertile ground for managers and other personnel to educate themselves about both the technical skills and the organizational process of a new technology. Reciprocally the potential of the new technology could only be realized through the trained skills acquired in the production and distribution of past products. (Chandler and Hikino 1997: 27) Furthermore, the Chandlerian approach underlines the role of large industrial firms in exploiting scale economies, employing lower-cost labour, introducing incremental improvements in production processes, and improving customer services, most of which resulted from learned and accumulated capabilities through the complementary investments described above (ibid). Amsden and Hikino (Amsden and Hikino 1994; Hikino and Amsden 1994) argue that these functions of large industrial firms have been critical in gaining international competitiveness because the latecomers do not have the proprietary technology to exploit firstmover advantage. They also point out that latecomers’ large firms tend to have a conglomerate type of organizational structure as a result of diversifying their limited and concentrated technological capabilities into various capital-intensive industries.

Late Industrialization and Globalization 21

On the contrary, Piore and Sable (1984) assert that the transition from a techno-economic paradigm based on mass production, which is mainly carried out by the large industrial firms – that is, Fordism – to one based on networks of small artisan firms – that is, flexible specialization – has taken place in the advanced capitalist world since the 1970s (Lo 1995: 455). These flexible networks were able to produce smaller production batches of sophisticated quality products for rapidly changing consumer preferences. However, besides the test of its feasibility in advanced countries, Amsden (2001) disregards the significance of flexible specialization in the late industrialization; saying: Nor did small-scale firms circumvent the need for such investments by modernizing artisan production systems and substituting them for mass production    Small-scale firms before World War II, and for most of the postwar period, did not act as an agent of late industrial development. (Amsden 2001: 98)

Government intervention. The role of government in late industrialization has been one of the most extensively discussed topics in the economic development literature.4 More specifically, the social scientists and policy makers at national and international institutions have examined the important agents of rapid economic growth and late industrialization in the East Asian countries (that is, Japan and the Asian NIEs) during the second half of the past century. From the late 1970s, the neo-classical economists started asking why the East Asian countries could sustain fairly stable growth during and after the two oil shocks during the 1970s (Suehiro 2000: 24). They came to a neo-liberal conclusion and disregarded the effectiveness of government interventions. They contended that the stable growth of East Asia was mainly brought about by the healthy market mechanism (Balassa 1982; Little 1982; Lal 1983). The main contribution of the government, according to the neo-classical economists, was to ‘get the “price mechanism” right’ by liberalizing or abolishing various pricedistorting policies and institutions, such as multiple exchange rates and quantitative import restraints. Moreover, the influential Bretton Woods institutions espoused this neo-liberalism idea towards government intervention (World Bank 1992; World Bank 1993). Hence, the neo-liberal economists only admit the ‘minimalist’ (Streeten 1993) and ‘market-friendly’ (World Bank 1992) roles of government in rectifying market failure and creating stable macroeconomic environments. They are basically opposed to government intervention

22 The Challenges of Late Industrialization

that would likely cause government failure by allocating scarce resources to the wrong industries or firms (that is, failing to ‘pick the winners’) or by inviting rent-seeking activities (Krueger 1990; World Bank 1993). On the other hand, the ‘statist’ political economists argue that the extent to which the developing countries suffered market failure was sufficiently severe to make government intervention essential for economic growth. They insisted that, without governmental industrial policies, the East Asian countries could not achieve the rapid production expansion and upgrading in those industries that they intended to nurture (for example, steel, electronics and automobiles) (Johnson 1982; Amsden 1989; Okimoto 1989; Wade 1990). Industrial policy could play a critical role in inducing long-term investment in these targeted industries by purposely distorting the price mechanism (Amsden 1989), nurturing the indigenous large industrial firms by controlling and guiding domestic competition (Singh 1994; Amsden 2001), and coordinating complementary investments in the absence of efficient markets (Chang 1994; Aoki, Murdock et al. 1996). Thus, these political economists assert that by distorting the market signals (‘getting the relative prices wrong’ (Amsden 1989), government intervention in the East Asian latecomers created the ‘structure of incentives’ (Lall 1992) to pursue the ‘Schumpeterian efficiency’, as defined in terms of learning potential (Dosi 1997: 478), rather than ‘static efficiency’ of resource allocation according to their current comparative advantages (Amsden 1989; Chang 1995). They also argue that the government failure could be remedied through the disciplinary mechanism for the firms’ activities (Amsden 1989: 145–7) and through various measures to improve the decision-making capacity and autonomy of the government (Chang 1994: 34–45).

2.2

Globalization literature

The modality of globalization is probably one of the most hotly debated issues today, reaching almost every discipline of social science. However, there is disagreement about the extent to which economic globalization has actually advanced. The advocates of a notion of globalization (hereafter, the globalists), on the one hand, assert that we are witnessing a historical socioeconomic transformation: a new world economic order called the ‘global’ economy is gradually replacing the more traditional order called the ‘inter-national’ economy5 (Drucker 1986; Ohmae 1990; Reich 1991). In general, the logical stream of the globalists (Ohmae 1995; Dunning

Late Industrialization and Globalization 23

1997b) first inducts a hypothetical image of the ‘globalized economy’ (or deepest form of globalization) from the recent trends in the world economy – especially the aggregated statistics that show rapid increase in foreign direct investment (FDI) and financial capital mobility. Then, they assume that a historical transformation towards a global economy would involve most major economic entities on the earth. Hence, the globalists share a deterministic connotation with the modernization theory of economic evolution (Parsons 1956; Rostow 1990). Such futurological, hypothetical, deterministic connotation of the globalists has invited fierce critiques from the sceptics. They counterargue that what we are actually observing in the recent trends of world economy is not a sign of an emerging new order, but rather an extension of interconnection between national economies (that is, internationalization) (Ruigrok and van Tulder 1995; Hirst and Thompson 1996; Wade 1996). By calling attention to the more disaggregated data of FDI – such as its location and its relative importance to ‘home’ activities of transnational corporations (TNCs), the sceptics contend that TNCs still heavily rely upon their ‘home base’ for production, R&D and managerial control. The hard-liners among the sceptics even insist that the historical movement that the advocates call globalization had begun several centuries ago (Kozul-Wright 1995; Hirst and Thompson 1996). Nevertheless, other commentators point out that there are fundamental and qualitative differences between the world economy today and the world economy before 1914. For instance, the world economy now is not solely controlled by the Western colonizing countries (Gray 1998: 65). One of the most remarkable phenomena in the economic history of the twentieth century is the rise of the East and South East Asian economies. Also, internationally dispersed economic activities are now functionally integrated, not merely the exchange of raw materials and processed products between the colonizing and colonized countries (Dicken 1998: 5). In the following subsections, we will closely review the globalization literature by focusing on what globalization generally means to the firm and the state, and more specifically to those of latecomers.

2.2.1

The rise of global firms?

The globalists assert that the rise of ‘global firms’ has been a main driver for economic globalization. According to Dunning (1997a: 34), global firms (1) own or control subsidiaries, and engage in value-added business alliances and networks in each continent and in each major country; (2) source their inputs of labour, capital, raw materials and intermediate

24 The Challenges of Late Industrialization

goods from wherever it is best to do so; (3) engage in financial transactions independent of time and space; and (4) sell their goods and services in each of the main markets in the world. Although Dunning admits that this typical type of global corporation has not exited yet, he deems that the rise of global corporation is an historical trend. Ohmae (1990; 1995) and Reich (1995a; 1995b) believe that the emergence of global firms has made the nationality of companies less important for the economic prosperity of both the countries in which they operate and those of which they are nationals. What is most important for the country’s economic prosperity, Reich argues, is not the nationality of the company’s ownership, but whether it provides good employment (of high wages) to the people of the country in which they are located (Reich 1995a; 1995b). The sceptics, on the other hand, dismiss the emergence of global firms as simply myth or rhetoric. Hirst and Thompson (1996), for instance, point out that between 70 and 75 per cent of TNCs’ value-added was produced on home territory in 1992. They assert that the TNCs from major developed countries still rely upon their ‘home base’ as the centre of their economic activities. It implies that the nationality of a TNC’s ownership does matter for the nature of its economic activities and in turn for the economic prosperity of its home country (Hirst and Thompson 1996: 96–7). Ruigrok and van Tulder also show that of the largest one hundred firms in the world, not one is truly ‘global’, ‘footloose’ or ‘borderless’ (Ruigrok and van Tulder 1995: 159). Hence, by calling attention to the disaggregate data of TNCs activities, the sceptics pose important caveats to the globalists, who inductively assert the rise of global firms by relying mainly on the aggregate balance of payments flow data of TNCs. The sceptics insist that TNCs are not ‘globalizing’ their nature, but simply extending their economic activities abroad while retaining their bases in home countries. However, the sceptics seem to refute the whole notion of economic globalization without considering the recent diversification of TNC activities. Along with the rapid expansion of FDI and cross-border mergers and acquisitions (M&As), we have also observed an explosive growth in inter-firm / cross-border strategic alliances since the early 1990s (UNCTAD 2002). TNCs have also rapidly increased cross-border outsourcing of components and services, as we will see in the next chapter. Thus, the TNCs have been driving economic globalization not only through transnational activities within the boundary of the firm (that is, international production through FDI and cross-border M&A), but also by those beyond the boundary of the firm (that is, cross-border

Late Industrialization and Globalization 25

strategic alliances and outsourcing). Together with FDI, such crossborder inter-firm alliances – both horizontally (that is, strategic alliances) and vertically (outsourcing) – are causes as well as consequences of globalization. Dunning particularly calls these phenomena the advent of ‘alliance capitalism’ (Dunning 1997b).

2.2.1.1

Latecomers in the global economy

In the globalization literature, some globalists hold an optimistic view of latecomers in a globalization process (Ohmae 1995; Dunning 2002). They accept the criticism of the sceptics who argue that the globalization of trade and production has not taken place evenly across the globe, but are highly concentrated within the Triad regions (that is, Western Europe, North America and Japan). However, the globalists contend that a larger numbers of countries, including the latecomers, will eventually join this so-called ‘Interlinked Economy of the Triad’ if they are willing to learn from aggressive economies such as Taiwan, Hong Kong and Singapore. Dunning (2002: 94–9), for instance, believes that the world structural transformation led by globalization (that is, the advent of alliance capitalism) holds out great promise for the latecomers’ future because the world now has the necessary resources, knowledge and experience, as well as the technical means, by which these assets can be transmitted between countries. Regarding developing countries, Dunning asserts: I believe the opportunities and challenges of globalization cut across the traditional North/South divide [that is, international division of labour between a ‘centre’ and a ‘periphery’], and    over the next 25 years, it is likely that many millions of the descendants of yesterday’s impoverished generation will come to enjoy at least the basic comforts which we, in the richer countries, so easily take for granted. (Dunning 2002: 94) For the main factors underlying this optimistic view, Dunning points out that the recent development of flexible production systems and the advent of the ‘alliance capitalism’ have promoted the ‘putting-out’ of some value activities to latecomers. In these transformations in the world economy, latecomers will ‘benefit from a “trickle-down” effect of some kinds of subcontracting’. This ‘trickle-down’ effect in turn will enhance the linking of latecomers with the flagship nations in the global economy (Dunning 2002: 90–7).

26 The Challenges of Late Industrialization

Dunning’s argument here seems to challenge the structuralist / stagnationist view of dependency theory and NIDL. However, Dunning stops short of considering the question of how actually such a ‘trickle-down’ effect will occur or what kinds of subcontracting will be available for latecomers. It is highly questionable to expect that the large numbers of latecomers would benefit from the ‘putting-out’ of high value-added activities by TNCs. Should only small numbers of latecomers benefit from this ‘putting-out’, then the fruits of the globalization process would not trickle-down to many countries, but rather would exacerbate the ‘marginalization’ in the world economy (Martin and Schumann 1997; Bhalla 1998; De Swardt-Kraus 2000).6 Such an account actually seems to support the presence of NIDL. In addition, important questions remain concerning how the globalization has (or has not) transformed the backlog of technology – its nature and availability for latecomers. Nor does it suggest what kinds of social capabilities and government policies are necessary for the latecomers to benefit from the backlog of technology in the epoch of globalization.

2.2.2

The demise of the nation states?

The fate of nation states and the role of national governments in the epoch of globalization are another hotly debated issue. The most extreme argument has been advanced by the so-called ‘hyper-globalists’ (Held and McGrew 1998), who contend that the nation state has lost its legitimacy in the emerging global market, where financial institutions and global firms allocate and move capitals in a ‘footloose’ and ‘borderless’ manner (Ohmae 1990). This polemic talk of the ‘demise of the nation state’ has promptly invited various critiques and counter-arguments from the sceptics who consider that the nation state is still a primarily significant economic entity in the world economy. They often point out that the distribution, origins, and destinations of FDI are highly uneven among the different countries and regions (Ruigrok and van Tulder 1995; Chang 1998; Dicken 1998). By emphasizing the geographically concentrated FDI – particularly within Western Europe, the United States and Japan, they assert that what is often referred to as ‘globalization’ is better described as ‘Triadization’. The uneven distribution of FDI origins and destinations, the sceptics maintain, emanates from the national-specific ways in which business and production are organized and developed (Wade 1996). Those national-specific factors cannot be easily swept away by the globalizing capital movements because

Late Industrialization and Globalization 27

they are institutionally embedded, and their evolutions are path-dependent (Kozul-Wright 1995). Moreover, Gray (1998) is cynical of the sceptics saying that they are attacking a straw man. He insists that nobody except a few in the business community expects the world to become one unified entity, in which nation states have withered away to be replaced by homeless TNCs (Gray 1998: 64). However, the view seems to be largely shared in the globalization literature that, to a certain extent, the states’ capacity to control the national economies has been reduced or eroded by the rapid expansion of TNCs and of international capital flows (Chang 1998: 107). Strange (1996), for instance, argues that: [T]he progressive integration of world economy, through international production, has shifted the balance of power away from states and towards world markets. This shift has led to the transfer of some powers in relation to civil society from territorial states to nonterritorial TNCs. (Strange 1996: 46) By the word ‘power’, Strange points to influence over outcomes rather than mere possession of the capability to exercise control over institutions (Strange 1996: 53). She, therefore, contends that TNCs have encroached on the power of the nation state to influence what goods and services are produced, how, where and by whom within its borders (Stopford and Strange 1991). Petrella (1996: 76) also contends that the TNC ‘privatizes (and internationalizes for its own purposes) the role of the state’. On the other hand, some commentators contend that the role of state has become more important in the age of globalization. Porter (1990: 19) argues that the role of the home nation of firms seems to be stronger than ever as competition globalizes, because it is the source of the skills and technology that underpin competitive advantage. Gray (1998: 76) and Hirst and Thompson (1996: 190–1) assert that nation states remain a decisive mediating structure over which TNCs compete to control. The role of national government remains important in the epoch of globalization not simply because nation states are not withering, but because governments retain decisive power over the economic prosperity of their own population. Referring to Strange’s definition of ‘power’, national government may have abated its influence (that is, power) over what goods and services are produced, how, where and by whom within its borders; but it still and will retain its influence and

28 The Challenges of Late Industrialization

obligation over the economic prosperity of people within its borders. This is partly because people are much less mobile than capitals and goods, ‘in the sense they remain “nationalized” ’ (Hirst and Thompson 1996: 171). We may synthesize the debate on the role of national government in the global economy in the following terms. The globalization literature stresses that national governments have been losing their capacity or power to independently control their national economies, but their policies themselves are still and will remain significant for their national economic prosperity. Then, the outstanding crucial question would be: Given their reduced power to control the outcomes of national economies, what are the new functions for states striving to attain national wealth in the epoch of globalization?

2.2.2.1

Industrial policies in the global economy

Finally we review the policy measures that the globalists often recommend to the latecomers. The globalists largely share the views of neoliberalism concerning government intervention in the economy. We identify three main threads of neo-liberal policy argument, which the globalists would recommend to the latecomers. Firstly, it is argued that the latecomers cannot execute industrial policies in the epoch of globalization. This argument is an extension of the idea of the ‘demise of the nation state’, which we have touched upon earlier. The globalists assert that any policy which conflicts with the interests of TNCs, is not a viable option in the pursuit of economic growth. This is because TNCs can relocate their investment to any location, which offers them a better investment climate; they are therefore ‘footloose’. The contention is that strategic industrial policies are nullified by TNCs’ ‘voting with their feet’ (Stopford and Strange 1991; Dunning 1997a; Chang 1998). Consequently, the globalists recommend latecomers to liberalize their policies towards TNCs and inward FDI, and to concentrate on increasing their attractiveness for FDI by providing tax incentives, developing their infrastructure and human capital, ensuring political stabilization and so on. However, it is questionable how much TNCs are truly ‘footloose’, and whether the latecomers cannot execute industrial policies which conflict with the TNCs’ interests. Chang (1998: 108) argues that the relative bargaining strengths of TNCs and national governments are different for given countries and industries, depending on the degree of freedom in investment relocation. For certain industries, Chang

Late Industrialization and Globalization 29

contends, the feasible investment sites are limited for a number of reasons: [M]any mineral-related industries require investments near the depositories; some industries require particular types of skilled labor at reasonable prices    some countries have locational advantages, say, as an entry point into a big market; some countries have exceptionally large and/or fast-growing markets; and so on. (ibid.) Hence, if the variable sites for a certain industry are limited to certain countries, those countries may possess bargaining power over the TNCs in that industry. Nevertheless, latecomers should have a clear understanding of their bargaining strengths when they formulate their strategies to integrate into the globalizing economy – for example, deciding which industry they enter, what kinds of strategic industrial policies are available, how they can establish and strengthen their bargaining power, and so on. Secondly, it is argued that latecomers do not need to execute the industrial policies, particularly toward TNCs and inward FDI, in the age of globalization. The globalist view largely expresses a strong belief that ‘what is good for TNCs is good for the host country, and that the recent trend in globalization is eliminating whatever minor conflicts of interest may have once existed between the two’ (Chang 1998: 103). For instance, one commentator regards the recent liberalization of policies toward TNCs among latecomers as a ‘fortunate’ sign, showing that latecomers now recognize FDI for what it really is: a source of extra capital, a contribution to a healthy external balance, a basis for increased productivity, additional employment, effective competition, rational production, technology transfer and a source of managerial know-how (Brittan 1995).7 It is, nevertheless, still unclear how much the interests of TNCs and those of latecomers have in fact become merged (Singh and Zammit 1998). To understand how well inward FDI could support late industrialization, we should scrutinize what kinds of employment, competition, technology and managerial know-how the TNCs will bring to the latecomers via FDI. In other words, we should carefully examine whether the TNCs’ presence does actually support the long-term late industrialization of the latecomers. Finally, it is argued that latecomers should not execute the strategic industrial policies towards TNCs and inward FDI. As we have seen, the

30 The Challenges of Late Industrialization

globalists assert that latecomers should establish linkages with the fastgrowing Triad economies in order to achieve their late industrialization. Furthermore, the globalists seem to consider that the only way for latecomers to establish those linkages is to liberalize their policies toward TNCs and to invite inward FDI aggressively by accommodating the needs of TNCs (Stopford and Strange 1991; Dunning 1997a). In addition, the globalists also seem to believe that the industrial policies of individual nations would distort the emerging global market and obstruct the diffusion of the fruits of globalization across the world. This argument often bears a strong normative connotation when it is underpinned by the theory of convergence. The theory of convergence predicts that ‘competition, imitation, diffusion of best practice, trade, and capital mobility naturally operate to produce convergence across nations in the structure of production and in relations among economy, society, and state’ (Berger and Dore 1996: 1).8 According to the globalists, such convergence process has been enhanced by increasing interdependence of globalization, and that all nations would benefit from this diffusion of best practice. Thus, they condemn industrial policies as ‘beggar my neighbour’ actions, which only obstruct this process by distorting the ‘level playing field’ of the open global market (Ohmae 1990; Dunning 1997a). This ethical connotation leads some commentators to condemn the globalization thesis as a rhetorical device (Ruigrok and van Tulder 1995; Hirst and Thompson 1996; Gray 1998). However, it is highly questionable whether the latecomers can attract FDI or subcontracting by simply liberalizing their policies towards TNCs. As Dunning (1997a: 45–6) himself points out, ‘the orientation of the motivation for TNC activity has [recently] changed from that of seeking markets and natural resources to exploit better existing competitive advantages of the investing companies, to that of acquiring created assets perceived necessary to sustain and augment existing competitive advantages’. In addition, the resource-based view of the firm (Penrose 1959/1995; Wernerfelt 1984; Peteraf 1993) and the strategic trade theory (Krugman and Smith 1994) emphasize that the competitive advantages of a firm are internally developed, and they often require a long period and government protection to develop. Then, regarding the TNCs’ asset-seeking motives, it is hard to assume that latecomers would acquire more FDI and subcontracting by simply liberalizing their policies towards TNCs. Another important critique against the anti-interventionist argument based on the convergence theory is that there has never been a ‘level

Late Industrialization and Globalization 31

playing field’ in the world market. Ruigrok and van Tulder (1995: 221) carefully examine the history of how Fortune 100 companies have come to attain a competitive position in world markets and find that ‘virtually all of the world’s largest firms have experienced a decisive influence from government policies and/or trade barriers on their strategy and competitive position’. Furthermore, based on the longer historical perspective, Chang (2002) reveals that almost every country that succeeded in late industrialization – such as the United Kingdom, Germany and the United States – exerted the state intervention to a significant degree for protecting and nurturing their infant industries when they were backward economies. Therefore, there is neither ‘ethical’ nor ‘historical’ obligation for the current latecomers to follow the logic of convergence theory or neoliberalism. Instead, if the fruit of economic globalization is not automatically or evenly diffused across the world, the national government is an ultimate agency that could and should help its population to claim its share of the fruit. National governments have a duty to employ every means at their disposal, including industrial policy, to promote industrialization and enhance the economic prosperity of their population.9

2.3

Concluding remarks

In relation to late industrialization, we have examined three theoretical approaches that focus on (1) the obstacles and opportunities emanating from the structure of the world economy, (2) the latecomers’ internal factors pertinent to the removal of the obstacles and/or taking advantage of the opportunities, and (3) the major agents for advancing the process of late industrialization. On the other hand, the globalization literature, in general, implies that the structure of the world economy has been undergoing a major transformation as a result of the expanding scale, magnitude of growth, acceleration, and deepening impact of interregional flows and patterns of economic interactions. Although there is disagreement about the extent to which economic globalization has actually advanced, there seems little doubt that we need to take into consideration its possible effects when we discuss any socio-economic phenomenon. The issue of late industrialization is not an exception to this. However, the debate on economic globalization tends to be futurological, hypothetical, deterministic or abstract. The globalization literature does not offer focused in-depth analysis as to how economic globalization has actually affected the context of late industrialization.

32 The Challenges of Late Industrialization

Consequently, the debate has resulted in heated discussion but often elusive conclusions. It has largely failed to provide clear implications for the current latecomers’ policy makers and business leader in pursuit of FLI. Meanwhile, the existing literature on late industrialization has largely failed to take comprehensive account of the effects of globalization. The significant exception is Nolan’s studies on China’s late industrialization (Nolan 2001a, 2001b). He conducted meticulous analyses on how the Chinese firms attempt to survive and grow under the global business revolution in various industries such as aerospace, pharmaceuticals, steel, oil among others. Drawing on this analytical approach, we will further scrutinize the effects of globalization on late industrialization by answering the following questions. What are the new obstacles and opportunities for late industrialization in the global economy? How has the economic globalization changed the nature of latecomers’ internal factors required to achieve the late industrialization? What are the roles of indigenous firms and the national governments of latecomers in striving to bring about late industrialization in the advent of alliance capitalism? What are the implications for current latecomers pursuing FLI in the era of globalization? We will attempt to answer those questions in the rest of this study.

3 Changing Context of Firm-based Late Industrialization in the Global Business Transformation

This chapter explores how the global business transformation of the commercial aircraft industry, which accelerated in the 1990s, has changed the context of firm-based late industrialization (FLI). More specifically, we will try to identify what kinds of strategic route towards FLI (hereafter called the FLI strategy) would have a better (or worse) prospect of success under the rapid global shifts in competition and production systems. Global shift in the commercial aircraft industry mainly comprises two trends. One is consolidation of the finished product market and the accompanying fierce oligopolistic competition. The second is the globalization of the intermediate goods market, which is characterized by the stretching and deepening of outsourcing. Putting forward the main argument of this chapter already at this juncture, the global industrial shift has made the catch-up strategy more difficult and riskier than ever, while it has opened ‘windows of opportunities’ for the upgrading strategy. The post-war development of the Japanese aircraft manufacturers illustrates a successful case where advantage has been taken of the changing context of FLI under globalization. The Japanese aircraft industry has long been stigmatized as one of the failures in Japan’s impressive postwar history of late industrialization. Indeed, it failed to catch up in the finished product market in contrast to the well-known success stories of the automobile and electronic industries. However, we will attempt a reassessment of that historical view by shedding light on the different aspects of FLI – upgrading. We will focus on the fact that the Japanese aircraft manufacturers have successfully upgraded their positions in the intermediate goods market and have progressed through FLI gradually and steadily since the 1970s. As mentioned in Chapter 1, Japan is very 33

34 The Challenges of Late Industrialization

special case through the history of late industrialization. But it may delineate the two different aspects of FLI by having clearly failed to catch up, but having succeeded in upgrading. In the following discussion, we will first highlight the differences between ‘catch-up’ and ‘upgrading’ FLI strategies by adapting the conceptual framework from the global value chain (GVC) perspective. Then, we will examine how global industrial shifts have affected the prospects of the two FLI strategies differently with special reference to the commercial aircraft industry. Finally, we will briefly examine how successful the post-war Japanese aircraft industry has progressed in FLI both in terms of catch-up and upgrading FLI strategies.

3.1 Firm-based late industrialization in the global value chain perspective To analyse the impact of such a global industrial shift on the prospects of firm-based late industrialization (FLI), it is first necessary to be clear about how FLI can be pursued by a latecomer firm. Hence, in this section, we will stylize the two strategies by which a latecomer firm pursues FLI; namely, the ‘catch-up’ and ‘upgrading’ strategies of FLI. Clearly separating those two FLI strategies is an important first step in analysing the changing context of FLI because the recent global industry shifts would affect the two FLI strategies differently. However, such a clear distinction between the FLI strategies cannot be simply drawn. In this section, we attempt to develop explanatory definitions of the catch-up and the upgrading FLI strategies by elaborating the significant conceptual issues of FLI, particularly examining the categories of various productive actors and the asymmetric power relations among them.

3.1.1 Catch-up strategy and upgrading strategy of FLI: a first definition Reviewing the various latecomers’ experiences of late industrialization, particularly in Japan and the Asian Newly Industrialized Economies (NIES) (Johnson 1982; Amsden 1989; Wade 1990; Hobday 1995), it is possible to identify two distinct strategies for pursuing FLI: namely ‘catch-up’ and ‘upgrading’. The catch-up strategy of the FLI by definition refers to a strategy in which a latecomer firm in a certain industry aims to narrow the gap in the competitive advantages of a precursor firm, which is usually a system integrator and has a significant market share. Hence, catch-up

Changing Context of Late Industrialization 35

is a radical approach towards FLI in the sense that the latecomer firm attempts to gain and sustain a competitive advantage in the finished product market1 within the targeted (often short) period of time. In this case, the latecomer firm would directly challenge the market shares of the incumbent system integrator by launching its own-brand products. The success or failure of the catch-up FLI strategy is assessed in relative terms, i.e., in comparison with the precursor’s economic and business performance, such as total production, revenue and market share. Upgrading strategy of FLI, on the other hand, refers to a strategy in which a latecomer firm focuses on achieving a higher value-added operation over a period of time. Instead of directly challenging to enter the finished product market, the latecomer firm working with an upgrading FLI strategy primarily aims to upgrade its supplier status step-by-step in the intermediate goods market.2 It is thus an incremental approach towards FLI. The strategic goal of the upgrading FLI strategy is to generate and capture the higher value-added by enlarging the scale and/or scope of supplier activities. The success or failure of the upgrading strategy of a particular latecomer firm is to be assessed in absolute terms taking into account the scale and nature of its supplier activities. In particular, since upgrading is accomplished by changes in the nature of supplier activities, it should be appraised not only quantitatively, for example by total production or labour productivity; but also qualitatively taking into account the technological level and the scope and depth of competences inherent in the supplier activities. However, it might be pointed out that those two FLI strategies are not necessarily mutually exclusive. Taking a broad view, catch-up might be construed as the ultimate stage of the upgrading process. It follows that a supplier in the intermediate market might eventually be able to upgrade its competences sufficiently to gain competitive advantage as a system integrator in the finished product market. In order to do so, nevertheless, the latecomer firm must overcome high entry barriers to the finished product market. What must be emphasized here is that transforming from a supplier into a system integrator is far from linear and is strongly influenced by power relationship. Firstly, a system integrator and a supplier undertake a different scope of activities: a supplier usually confines its activity to component production, while a system integrator undertakes both production and post-production activities, such as marketing and aftersales service. Secondly, there is an asymmetric power relation between them: the system integrator, being the prime contractor, usually has dominant power over the supplier. In addition, those two aspects of

36 The Challenges of Late Industrialization

inter-firm relations between a supplier and a system integrator are deeply interrelated. That is to say, their different scopes of activity might cause the asymmetric power relation between a supplier and a system integrator, as well as vice versa. Furthermore, as we will see later, the logic of such mutual interaction would ultimately demonstrate the underlying mechanism of FLI.

3.1.2 The mechanism of FLI: elaborating the global value chain perspective Returning to the difference between the two types of FLI strategy outlined above, the catch-up FLI strategy primarily aims to become a competitive system integrator while the upgrading FLI strategy primarily aims to become a supplier undertaking high value-added sourcing activities. Hence, in order to form a comprehensive picture of both FLI strategies, we should first scrutinize the inter-firm relations between a system integrator and a supplier. Furthermore, in order to understand those inter-firm relations, we need to explore the underlying mechanism of the FLI. For the purpose of this study, we adopt and enhance the global value-chain (GVC) perspective (Gereffi and Korzeniexicz 1994; Kaplinsky and Morris 2000; Gereffi, Humphrey et al. 2001) in order to examine inter-firm relations between the suppliers and the system integrators in the commercial aircraft industry, and in turn to clearly define the two FLI strategies in that industry.

3.1.2.1

The global value chain perspective

The GVC perspective represents a growing stream of research that focuses on the emergence of a new global production system, in which economic integration goes beyond international trade in raw materials and final products, to encompass centrally coordinated but internationally dispersed production of many activities along the chains of given commodities or manufactured products (Raikes, Jensen et al. 2000: 393).3 It is highly worthwhile to introduce the GVC perspective in some detail at this point because it offers an effective organizing framework to understand the functional division among the different productive actors. The GVC perspective is based on a simple but useful concept of ‘valuechain’, which Kaplinsky and Morris (2000) succinctly define as: The value chain describes the full range of activities, which are required to bring a product or service from conception, through the

Changing Context of Late Industrialization 37

different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. (Kaplinsky and Morris 2000: 4) Due to that the concept of value chain covers the ‘full range of activities’, the GVC perspective broadens our focus from solely the manufacturing activities towards the pre- and after-manufacturing activities from product definition, design and marketing to after-sale services.4 For instance, the sequence of productive activities of a commercial aircraft value-chain can be illustrated as in Figure 3.1. The product development begins with conducting the market and operational researches to conceptualize a newly developing airplane. Having set the specifications for configuration and performance, the aircraft companies move to the design stage, which consists of two phases: the basic design of the whole plane and the detailed design of each component. What is peculiar about the manufacturing stage of a commercial aircraft is that the prototype must prove the absolute product reliability by passing the severe testing and certification procedures conducted by the aviation authorities, such as the Federal Aviation Administration (FAA) of the United States. For post-production activities, the value-chain extends through sale or leasing, delivery and after-sale maintenance services. Various researchers have adapted this simple idea of value-chain, often using different terminology such as the value stream (Womack and

FUNCTIONS

Market research

Design

Manufacturing

Marketing

After-sale service

Leasing

Testing /Certification

Sales

Total system integration

Module system integration

Sub-system assembly

Component manufacturing

Detailed design

Project planning

Basic design

Product conceptualization

Market risk evaluation

Customer needs appreciation

ACTIVITIES

Figure 3.1 A value chain of the commercial aircraft industry

Service

38 The Challenges of Late Industrialization

Jones 1998) and the filiere (Raikes, Jensen et al. 2000). In his well-known conceptual framework for the firm competitiveness, Porter, for instance, regards a value-chain to be completely contained within the individual firm, and poses a different term, value system, for a set of interlinked firms (Porter 1980; Porter 1985). What should be emphasized here is that the GVC perspective emphasizes instead that a firm does not accommodate ‘complete’ value-chain on its own, but specializes in certain value-chain functions, such as design or marketing (Gereffi, Humphrey et al. 2001: 2). In other words, the sequence of productive (that is, value-added) activities leading to and supporting end use are divided between different firms often located in different places (Humphrey and Schmitz 2000; Sturgeon 2001). Furthermore, what makes the GVC perspective distinct from the other industrial analyses is that its emphasis is on the fact that the various firms constituting a value-chain are coordinated and controlled by the powerful firm (or firms). The powerful firm plays a dominant role in organizing and restructuring a GVC. The GVC perspective therefore offers an effective organizing framework to classify the various productive actors, which specialize in the different areas of activities in a value-chain, in regard to the asymmetric power relations in a global value-chain. The issue of power relations is particularly relevant for the FLI because the superior power presumably increases the firm’s capacity to appropriate or retain the value created throughout the GVC. The power relations concern the balance of leverage within GVCs, that is, bargaining power that each firm has in determining who undertakes the most value-added and profitable activities and functions (Kaplinsky and Morris 2000: 2; Palpacuer 2000). Nevertheless, as Gereffi, et al. point out, the issue of power relations within chains has not been given enough prominence in previous discussion of chain dynamics (Gereffi, Humphrey et al. 2001: 4). Existing GVC research has largely failed to provide insights into how the powerful firm might control subordinate firms in a GVC. They have also failed to explain the sources of the asymmetric power relation in a GVC. These shortcomings are the very reason why we regard the GVC perspective as a heuristic device rather than an analytic tool (Kaplinsky and Morris 2000: 25). While a heuristic device offers an effective organizing framework for the systematic presentation of phenomena, an analytical tool must also provide logical insights into the contents and relationships between the variables constituting the organizing framework.

Changing Context of Late Industrialization 39

We will now attempt to elaborate the GVC perspective towards an analytical tool by remedying its weakness through insights from the literature on networks, inter-organizational relations, and strategic management. On the one hand, strategic network research (for example, (Jarillo 1988; Sydow 1992) together with the ‘powerdependence model’ of Emerson (Emerson 1962) shed light on how a GVC is controlled by a powerful firm on the basis of the asymmetric power relations. The sources of asymmetric power relation in a GVC, on the other hand, can be explained by synthesizing the ‘resourcebased view’ of the strategic management literature (for example, Penrose 1959/1995; Wernerfelt 1984) and the ‘resource-dependency perspective’ of the inter-organizational literature (for example, Pfeffer and Salancik 1978).

3.1.2.2

Classifying the various productive actors within a GVC

We begin our elaboration of the GVC perspective by classifying the different productive actors constituting a value-chain. More specifically, we try to define the powerful firm, which dominates and controls a value-chain, and other subordinate firms by focusing on their activities as well as on their power asymmetry in a GVC. For the purpose of the study, we call the former the ‘lead firm’ and the latter the ‘dependent firm’. Lead firms are the principal actors in the GVC. They place themselves at the head of the supply chain as prime contractors and the largest customers for suppliers. Lead firms provide the initiative and enjoy a high degree of independence from the other actors. The main characteristics of a lead firm in GVC can be enumerated as follows: (Ruigrok and van Tulder 1995: 65–6):5 • A lead firm has sheer size and enjoys a high degree of independence from other firms. A lead firm is the principal actor as well as the director of the play; • A lead firm has direct access to domestic and foreign finished product markets and/or customers, either through subsidiary sales and service offices, or through third parties importing/distributing the lead firm’s product and offering service. A lead firm will at all times be able to license and control the use of its own trademark (except for criminal abuse); • A lead firm owes its relative independence [i.e., dominant power] (1) to its control over a series of core technologies and other strategic

40 The Challenges of Late Industrialization

functions, specific to an industry or industrial activity; and/or (2) to its financial muscle. • A lead firm imposes an explicit vision of the organization and management of the GVC. Its vision serves as the focal objective that all members of the GVC strive to accomplish. In short, a lead firm occupies a dominant position in the GVC through its control of strategic competencies, such as proprietary technologies, brand management, marketing network and product definition, and on the basis of its sheer size and financial muscle. According to the strategic network perspective (Jarillo 1988; Sydow 1992), lead firms strategically coordinate and control inter-firm relations within the GVC in such a way that it can gain and sustain the systemic advantages throughout the value-chain vis-à-vis the other competing GVCs. Lead firms control their GVC by taking decisive roles in the management of the chain as follows (Sydow 1992; Humphrey and Schmitz 2000; Humphrey and Schmitz 2001): • Setting the key parameters of production: what, how, when, and how much to be produced; • Integrating the many different components, which are produced by itself or suppliers, into a complete system resulting in the final product (i.e., a system integrator); • Selecting and monitoring the members of the chain; • Sustaining inter-firm relationships by managing conflict; • Positioning and repositioning the chain in the market; and • Building the structure and the culture of the chain. In certain types of GVC, lead firms may have to surrender their role as sole director, yet they will always remain the leading actor, and if given the opportunity will try to regain control (Ruigrok and van Tulder 1995: 65). The competitive advantage of lead firms, therefore, depends not only on efficient corporate management inside the boundary of the firm, but also on its effective systemic management over the entire value-chain as a system integrator. Dependent firms, on the other hand, merely participate in the GVCs as suppliers, not as directors of the play. They are thus under the control of lead firms to a certain degree. They must comply with the lead firms’ decisions regarding the management of the chain listed above; for example, the key parameters of production. Since the supplier’s scope of activities is usually limited to the intermediate goods market, dependent

Changing Context of Late Industrialization 41

firms do not have access to the final purchasers of the product. It means that the fate of dependent firms is largely or totally dependent on how successful lead firms are in gaining the systemic advantage in the finished product market through effective GVC management. Thus, for the purpose of this study: Dependent firms are defined as legally independent manufacturing suppliers in a global value chain, whose activity and fate are dependent on the lead firms’ systemic management of the value-chain. According to Emerson’s ‘power–dependence relations model’, dependency of organization A (e.g., a latecomer firm) on organization B (e.g., a lead firm) means that B possesses the power to make A do what B wants A to do (Emerson 1962). In other words, Dahl (1957) describes power as follows: ‘A has power over B to the extent that he can get B to do something that B would not otherwise do’ (Dahl 1957: 202–03). The relationship between dependency and power in inter-organization relationships can be simply depicted as in Figure 3.2. Thus, although dependent firms are legally independent, their dependency on lead firms for their fate means that their autonomy is limited de facto by the power of lead firms. I have developed this concept of dependent firms by building on what Hobday (1995) calls ‘latecomer firms’ in his study of technological developments in East-Asian locally owned firms in the electronics industry. He describes as latecomer firms manufacturing companies, which face two sets of competitive disadvantage in attempting to compete in export markets. First, located in developing countries, latecomer firms are dislocated from the main international sources of technology and R&D. Second, they are dislocated from the mainstream international markets they wish to supply and from demanding buyers (Hobday 1995: 33–4). While Hobday develops his definition solely with reference to firms located in developing countries, I contend that its concept can be

DEPENDENCY A

B POWER

Figure 3.2 The power–dependence model Source: Developed based on Emerson (1962)

42 The Challenges of Late Industrialization

generalized to apply to any manufacturing firms, which does not possess sufficient power to take the initiative in a GVC – irrespective of whether it is located in a developing or a developed country. I here therefore coin the generalized concept of the ‘dependent firm’. For instance, although the Japanese aircraft manufactures are located in an advanced country, they must also be categorized as dependent firms so long as their activities and successes depend on the lead firm of GVC, in which they participate, that is, the Boeing Company. Furthermore, the number of people who are employed by dependent firms and whose activities and fate are dependent on lead firms could be very large even in the advanced countries. In the value-chain of Coca-Cola within the EU, for instance, Nolan (1999) estimates that at least 180,000 employees of dependent firms work full-time to meet the needs of the Coca-Cola system,6 which itself employs around 27,000 people (Nolan 1999: 75). Latecomer firm, in this study, simply refers to any firm that enters the industry in which it is involved belatedly. The latecomer firm might be either a dependent firm or a lead firm, depending on its power status in a GVC. At the same time, those firms that entered the industry in early days could be also either dependent firms or lead firms in the GVC perspective. For instance, both SAAB Aerospace and Fokker entered the commercial aerospace industry at the early stage of the industry’s development, but have fallen to become dependent firms in the recent global business transformation. Hence, in the rest of this study, the term ‘latecomer firm’ will be used without the consideration of power status; while the term ‘dependent firm’ or ‘lead firm’ will be used to denote its power status from the GVC perspective.

3.1.2.3

The Chain Hierarchy

Dependent firms can be further stratified into different levels in the hierarchy of the value-chain. They can be placed in one of the three tiers of the chain hierarchy according the unit scale of their products as well as to the scope and the technological complexity of their activities. Figure 3.3 summarizes the chain hierarchy. Explaining from the bottom of the hierarchy, (1) a piece-part subcontractor solely provides the manufacturing service to the prime contractor. Asanuma (1985: 49–50) calls this lowest status supplier a ‘drawing-supplied (DS)’ supplier, as the entire design for supplying parts is carried about by the buyers. The second tier supplier is (2) a sub-system supplier, which undertakes the detailed design and assembly of the supplying sub-system. In aircraft production, for instance, those sub-systems include wing skins and major fuselage panels. Compared to DS suppliers, Asanuma calls them ‘design-approval (DA)’ suppliers, as they draw the detailed design themselves and then submit it to buyers

Changing Context of Late Industrialization 43 The Hierarchy of producers in supply chain

Actors in the GVC of a complete aircraft

Actors in the module valuechain of an Aero-Engine

(Modularization) Top: System integrator Medium/Large Jet : Boeing, Airbus Regional Jet: Bombardier, Embraer

Lead firm

1st Tier: Module system maker Aero-Engine: GE, Rolls-Royce, United Technologies, Honeywell, etc. Avionics: Honeywell, Rockwell Collins, etc.

Modular lead firm

2nd Tier: Sub-system supplier Cockpit System: Smiths, Thales, etc. Structures: JADC, Vought, Grumman, Airbus members Aero-engine: JAEC, Fiat, MTU, etc.

Dependent firms Dependent firms

3rd Tier: Piece part subcontractor MHI, KHI, FHI, IHI, GKN, Daewoo, etc.

Figure 3.3 Chain hierarchy of the commercial aircraft industry

for approval (Asanuma 1985).7 Nevertheless, the prime contractor still decides the basic design, such as the shape and specification of the supplying components. The first tier supplier is (3) a module system maker, which builds a complete module system. Sturgeon (2002) named this type of supplier ‘turn-key suppliers’, as they provide the full-rage of product-related services (Sturgeon 2002). What is to be noted here is that a module system maker is not only in the highest higher status of dependent firm, but also often behaves like a lead firm in the industry whose product architecture is of modular rather than integral nature. A product unit in an integral architecture situation is in close proximity to or has a close spatial relationship with elements in other units, and together they are tightly synchronized (Fine 1998: 134–5). In contrast, a module is a unit whose structural elements are powerfully intraconnected but are relatively weakly connected to elements in other units (Baldwin and Clark 2000: 63). Component interfaces with a module are standardized. The important point is that the product architecture shapes the relationship between a system integrator and a first-tier supplier. In the case when the product architecture is integral, a lead firm needs to control the first-tier suppliers strongly in order to achieve tight synchronization of the system integration. On the other hand, the module product architecture makes the first-tier supplier independent from the system integrator, particularly when a module maker has direct

44 The Challenges of Late Industrialization

access to the customer. For instance, the personal computer industry has highly modularized product architecture. First-tier suppliers and module makers, such as Intel for semiconductors and Microsoft for software, have direct access to customers and enjoy high independence from the system integrators, such as IBM or Dell. The aircraft industry has also been visibly modularized within aeroengines. The module makers, such as Rolls Royce, General Electronics and Pratt & Whitney for an aero-engine, often have direct access to customers when the airline operators have the option to select the brand of aero-engine or avionics to be installed on their aircraft. In such cases, the value-chains of the modular systems can be seen as quasi-independent branches, which are sub-sets forming part of the integral GVC of aircraft production. The modular system makers may act as lead firms in these module value-chains. For the purpose of this study, lead firms in module value-chains are called module lead firms. Nevertheless, they are only ‘quasi’-independent because module makers are still dependent upon the main GVCs of the complete aircraft. Table 3.1 summarizes the various productive actors constituting a GVC.8 The lead firm of a GVC, as mentioned earlier, coincides with a system integrator, carrying out the final assembly as well as market-

Table 3.1 Various actors in global value chains Productive actors

Piece-part subcontractor

Manufacturing Component parts manufacturing

Scope of activity Design

Market-related

Position in GVCs

Dependent firm

Sub-system suppliers

Module system maker

System integrator

Sub-system manufacturing

Module system integration

Total system integration Production of strategic components

Detailed design

Module basic design

Product conceptualization Basic design

Marketing and after-sales service of module system

Operational research Marketing After-sales service

Module lead firm

Lead firm

Source: Developed based on Asanuma (1985); Sturgeon (2002); Ingersoll Engineers (1994)

Changing Context of Late Industrialization 45

related activities, such as operational research, marketing, sales and after-sales service. For the product unit of modular architecture (an aero-engine in this case), the module system makers, such as Rolls Royce and GE, act as the module lead firms within the module value-chain of the aero-engine.

3.1.2.4

Sources of the asymmetric power relations in a GVC

In the preceding section, we have emphasized that an asymmetric power relationship exists in a GVC between a lead firm and a dependent firm. On the basis of Emerson’s ‘power-dependency model’, the logic put forward was that a lead firm has superior power over a dependent firm because the latter is dependent on the former for its activity and fate. However, the above discussion begs a more fundamental question: how does a lead firm have superior power over a dependent firm and not vice versa? All firms are interdependent on each other because no firm can survive and gain competitive advantage without depending on others for the resources and capabilities they lack (Pfeffer and Salancik 1978; Sanchez and Heene 1997). In general, according to Pfeffer and Salancik (1978), interdependence exists in social systems and social interactions: whenever one actor does not entirely control all the conditions necessary for the achievement of an action or for obtaining the outcome desired from the action. (Pfeffer and Salancik 1978: 40) Firms are neither self-contained nor self-sufficient organizations in any economic activities but are like ‘islands of planned co-ordination in a sea of market relations’ (Richardson 1972: 883). The resources and capabilities for which a firm depends on others are important and sometimes critical for its survival. Inevitable interdependency among firms further implies that all firms have power over other firms to a certain degree. The essence of the GVC analysis underlines the fact that the asymmetric power relationship exists within such interdependency.9 Then, what makes a dependent firm more dependent on the lead firm, and why not vice-versa in a global value-chain? The answer lies in the relative importance of resources and capabilities which the firms offer each other, and which determines superiority or inferiority in inter-firm power relationships. The importance of the firm’s resources and capabilities in turn depends on how essential they are for the competitive advantage of the GVC. If firm A can offer more important resources and capabilities to gain and sustain competitive advantage than another participant firm B within the GVC, A would

46 The Challenges of Late Industrialization

have superior power over B. Then, what makes the particular resources and capabilities of a firm more important than others? To answer this question, it is first necessary to clarify what ‘resource’ and ‘capability’ of a firm mean here because various definitions are proposed and often used interchangeably. The concepts of resource and capabilities of a firm have been elaborated by emerging streams of research called ‘resource-based view of the firm’ (Penrose 1959/1995; Wernerfelt 1984; Peteraf 1993). It is interested in linking the explanation of the existence, structure and boundaries of a firm as well as its competitive advantage to the characteristic of internal resources and capabilities of that firm (Foss 1997; Hodgson 1998).

3.1.2.5

Resource-based View of the Inter-firm Dependency

The term resources is here defined as inputs into the firm’s production and marketing activities, which are principally tradable at ‘strategic factor markets’ (Barney 1986). Usually, three general types of firm resources are identified: physical resources, financial resources and intangible resources. Intangible resources are much more difficult to delimit and value than physical resources (plant and its physical technology, raw materials, etc.) and financial resources. Intangible resources are restricted here to those which are tradable, such as patents, trademarks, individual skills (accountancy and legal skills, etc.) and formal organizational procedures (but not informal relations). Thus the term ‘resources’ does not include the team-based and experience-based human and organizational ‘capital’, which are rather included in the concept of ‘capabilities’. The term capabilities is here defined as intangible and experiencebased knowledge capital, which structures and directs the firm’s bundle of resources at hand to carry out the production and marketing activities in the intended ways, and typically to do so more efficiently than others (Foss 1996; Dosi, Richard et al. 2000). In terms used by Penrose – one of the founders of the resource-based view of the firm – capabilities bring forth ‘the services that the resources can render’ (original emphasis, Penrose 1959/1995: 25). Capabilities are not tradable like resources because of their tacit components, which are elaborated by Christensen in the following way: First, it [capabilities] involves the internally accumulated ‘stock’ of experience in mobilizing (and possibly acquiring) and orienting these or similar resources for productive [and marketing] purposes    Second, this experience-based capacity is embedded in social teams

Changing Context of Late Industrialization 47

(or networks of people) and not in discrete individual skills    (Christensen 1996: 114) Capabilities involve organized activity and the exercise of capability is typically repetitious, that is they are embodied in the routine of a firm (Nelson and Winter 1982; Teece, Rumelt et al. 1994; Dosi, Richard et al. 2000). In the following, the term ‘competence’ is used as a common denominator for resources and capabilities. We now return to the question posed above – ‘what makes the particular competences of the firm more important than others?’ The hierarchy of the firm’s competence is a function of the following three attributes of competence: • Criticality for product performance, • Difficulty to reproduce, and • Scarcity.

Criticality. Firstly, a firm can exercise superior power by possessing the competences which are critical for the performance and market value of products. To put it differently, the closer to the core source of production definition and development, the more critical the firm’s competence will be within a value-chain of the product. If the product concerned is developed based on a technology-push process, the competences necessary for technological innovation are more essential for developing new products than other competences. On the other hand, if the product is developed based on a demand-pull process, the competences necessary for identifying demand preference and market condition are more crucial than others for successful product definition and development. Furthermore, among product-related competences, the competences that support the production of critical components would generate superior power than those supporting non-critical components. Critical components vary from industry to industry. In the case of the commercial aircraft industry, wings, avionics or engines can be considered of high strategic importance because they largely condition the performance of the aircraft. A commercial aircraft is a typical product developed in the demand-pull process. Aircraft makers in the commercial market must concentrate on their customers’ (that is, airline companies) demands for the low unit price of the aircraft and low direct operation cost (DOC) with reliable safety features rather than solely on technological superiority (see Section 3.2.2). Moreover, since new aircraft development projects can be launched only after having secured

48 The Challenges of Late Industrialization

FUNCTIONS

Market research

COMPETENCE

Marketrelated

Design

Manufacturing

Marketing

Product-related

Service

Market-related

Figure 3.4 Functions and competences underpinning a GVC Note: See also Figure 3.1

a certain minimum number of orders, aircraft makers must attract as many launch customers as possible by reflecting their demands in the product conceptualization. Among different competences, marketrelated competences, which support market research, marketing and after-sale service, are fundamental in arriving at the specification for product design and manufacturing (Figure 3.4).

Difficulty to reproduce. Secondly, a firm can exercise superior power by possessing unique competences, which are difficult to reproduce. If a latecomer firm could easily obtain the similar competences of a lead firm by imitating or replicating, the latter’s superior power dissipates quickly. However, reproducing the competences require a firm the intra-firm investments both in strengthening the resource base and in nurturing the capabilities over a period of time. Especially, it is hard to reproduce those competences, which consist of a large stock of experience – and organization-based capabilities, due to the following three factors (Dierickx and Cool 1989; Teece, Pisano et al. 1997): • Causal ambiguity: Due to its intangible nature, it is difficult to understand and copy the mechanism of experience- and organizational capabilities; • Time compression diseconomies: Experienced-based capability by definition can be acquired only after spending a certain amount of time and resources to master the activity; • Asset mass efficiency: Experienced-based and organization-based capabilities can be more effectively and efficiently developed after gaining a certain level of knowledge about the activity and sharing it among the member of organization.

Changing Context of Late Industrialization 49

In short, attempting to reproduce such unique competences requires a long period of time and considerable sunk costs. It further exacerbates uncertainty and increases the risk of intra-firm investment in reproducing such competences. The competences underlying marketing and after-sales service are typical examples of unique competences. They require establishing long-term customer relations by bearing significant sunk costs for customer information gathering, advertising, customer service facilities and so on (Lall 1991; Keesing and Lall 1992; Roberts and Tybout 1995). Returning to the case of a commercial aircraft, market-related competences are harder to replicate or imitate than product-related ones because they are more difficult to codify or standardize, leading to causal ambiguity.10 Moreover, such competences underlying the functions of marketing and customer needs appreciation could be consolidated only after a firm establishes close and trusting customer relations through long experience and reputation. It is hard for latecomer firms to catch up with the market-related competence of lead firms because the same quality of ‘experience-based’ customer relations is hard to acquire in a short period of time (that is, time compression diseconomies). Neither can latecomer firms build up those competences effectively without having a ‘critical mass’ of experiences to start with (that is, asset mass efficiencies). In addition to these qualitative difficulties, the significant amount of investment – such as in establishing marketing channels, training sales persons and preparing equipment and facilities for after-sale service – make it difficult and risky for latecomer firms to attempt acquiring those competences. The larger the sunk cost and the longer the period required to reproduce the competences, the more difficult and risky it will be for a firm to do so. Furthermore, the more difficult and risky it is to reproduce them, the more important those competences must be, which in turn gives stronger power to the firm that possesses them.

Scarcity. Finally, the importance of a firm’s competences also depends on their scarcity within the industry. If firm A can find alternative sources for the competences on which it depends from firm B, the degree of A’s dependency on B can be limited. In other words, if the competences are highly concentrated in a few firms, their significance as a source of power increases (Thompson 1967: 31; Pfeffer and Salancik 1978: 50). In the case of the commercial aircraft industry again, marketrelated competences are now highly concentrated in a few oligopolistic final assemblers as a result of frequent M&A activities starting in the

50 The Challenges of Late Industrialization

1930s and accelerating in the 1990s, as described in the final section. All suppliers have no choice but to depend on the few final assemblers for market-related competences: Boeing and Airbus in the medium and large aircraft market, and Bombardier and Embraer in the regional jet market. This concentration of market-related competences in turn gives those final assemblers superior power over suppliers in their global value chains. In short, the asymmetric power relationships between the various productive actors in the GVC arise from the difference in hierarchical level of competences, for which one depends on the others. More specifically, a lead firm has superior power over a dependent firm in a GVC because the latter depends on the former for the more important competences in terms of quality and/or quantity. The lead firm utilizes those high-ranking competences to implement the core technologies and strategic activities, by which they gain and sustain their competitive advantage.

3.1.2.6

Dual-faceted competences: the underpinning of the FLI

It is essential to point out that the power-generating competences, discussed above, also enable a firm to earn high and sustainable profit. This linkage between power and profit can be encapsulated by the concept of rent. Rent refers to the supranormal profit, which arises from the possession of scarce productive factors. To put it differently, productive factors create rent if they are scarce in supply due to the difficulty in reproducing them or to imperfect mobility (Peteraf 1993; Kaplinsky 1998). Rent-generating productive factors are either fixed factors which cannot be expanded (for instance, high-yielding mineral deposits and land), or quasi-fixed in the sense that their supply cannot be expanded rapidly (for instance, technology, human resource and organizational capabilities, and brand-name). Such rigidity of rent-generating factors also acts as a barrier to entry. To the extent that the barriers to entry protect a firm from being challenged by potential competitors, the rent can avoid dissipation by competitive pressures, and a firm is in turn able to earn a high and sustainable profit.11 At the same time, to the extent that the barriers to entry block a firm from being challenged by potential competitors, the rent-generating competences may become exclusive to the firms already possessing them. Those firms could in turn be in a position to exert superior power over the others who have to depend on them for those competences.

Changing Context of Late Industrialization 51

It is clear by now that the aforementioned attributes of powergenerating competences coincide with those of rent-generating productive factors – that is, scarcity and difficulty of reproduction. To put it differently, the scarce and unique competences play a dual-faceted role in the FLI: (1) making the firm’s activities rent generating, that is, lucrative, on the one hand; and (2) giving the firm the bargaining power to reserve for itself the lucrative activities within the GVC as well as appropriating the generated rents, on the other. Therefore, the core logic of the FLI may be described as follows: Firm-based late industrialization is the process by which a latecomer firm acquires the dual-faceted competences that would generate rent as well as bargaining power. Rent, to the extent that entry barriers protect it, makes the firm’s activities profitable over a period of time. Bargaining power, on the other hand, gives the firm the leverage to gain access to those profitable activities within the global value-chain as well as to appropriate the generated rent. The mechanism of the FLI may be illustrated as in Figure 3.5. First of all, a latecomer firm must acquire new competences by overcoming the barriers to entry.12 The barriers to entry emanate from such elements of the competences that are scarce, difficult to reproduce or critical for product performance. Once having acquired those competences, the latecomer firm would be now able to overcome the barriers to entry. To the extent that it is protected by those barriers to entry, the latecomer

Latecomer firm Rent Learning Source of supernormal profit Competence

High value-added activity

Scarce

High/Sustainable profit

Difficult to reproduce

Critical Barriers to entry

Leverage to undertake the lucrative activities in GVCs

Power to appropriate the rents

Bargaining power

Figure 3.5 Mechanism of firm-based late industrialization

FLI

52 The Challenges of Late Industrialization

firm could generate rent, which in turn makes the firm’s activities higher value-added. At the same time, again protected by the barriers to entry, the latecomer firm could gain bargaining power, which in turn would give the firm access to the lucrative activities as well as the leverage to appropriate the rent generated throughout a GVC. As a result, the latecomer firm could enjoy profit and achieve growth over a period of time, and could ultimately contribute to overall industrial development at the national level – that is, firm-based late industrialization.

3.1.3 Defining the two FLI strategies: the alternative set of strategic route and essentials to succeed In the preceding sub-sections, by elaborating the GVC perspective, we classified the various types of productive actors playing different parts in a value-chain, into lead firms and dependent firms. Also, by synthesizing the resource-based view of the firm and the resource-dependency perspective of inter-organization theory, we explained the nature and sources of the asymmetric power relationships in a GVC. Furthermore, on the basis of those analyses, we identified the nature of competences underpinning the mechanism of the FLI. Returning to the problem put forward at the beginning of this chapter – the difference between the catch-up FLI strategy and the upgrading FLI strategy – we are now in a position to comprehensively illustrate the distinct strategic routes by which a latecomer firm pursues FLI. That is to say, aiming to become a different type of productive actor in a GVC (namely, a lead firm or a high-ranking dependent firm), a latecomer firm employing catch-up FLI strategy would take a different strategic route towards the FLI from the one employing upgrading FLI strategy. On the one hand, a latecomer firm pursing catch-up FLI strategy directly aims to become a lead firm in a GVC. The latecomer tries to become a lead firm either by seizing the dominant power from the incumbent lead firm in an already existing GVC or by establishing a new GVC from scratch. In order to do so, it must acquire the superior dual-faceted competences that would generate the high rent and strong bargaining power in a GVC. In other words, the catch-up FLI strategy primarily tries to undertake the strategic functions in a value chain. The strategic functions are those employing the competences critical for product performance, or difficult to reproduce, and scarce. Hence, the strategic route of the catch-up FLI strategy can be conceptualized as in the upper half of Figure 3.6. In the case of a commercial aircraft valuechain, as seen earlier, the strategic functions include the production of

Changing Context of Late Industrialization 53

critical components (such as the wing or the cockpit) as well as market research, the early stages of design (such as product conceptualization, basic design and project planning), the late stages of manufacturing (such as total system integration), marketing and after-sales services. On the other hand, a latecomer firm employing upgrading FLI strategy would begin its endeavours toward FLI by entering the existing GVC at the point of the lowest entry barriers (see the lower half of Figure 3.6). Such entry point for upgrading is usually the low-skilled manufacturing of non-strategic components. Hence, the latecomer firm attempts, in the first place, to become a dependent firm of the lowest status in a GVC, that is, a piece-part subcontractor. Then, it aims to incrementally increase the value-added of its activities through upgrading its status as a dependent firm towards a sub-system supplier and even higher status. The dependent firm has two ways to increase the value-added of its supplier activities. One is to widen the scope of its activities towards both upstream and downstream by complementing manufacturing with design and sub-system assembly (Figure 3.6). The other way is to move into the product lines of larger unit value either by producing more strategic components or by combining multiple interfacing parts together into larger sub-systems, which might eventually lead to module system integration.13 Such a movement towards upgrading can be also seen as the rightward shift in Table 3.1.

Catching-up strategy High entry barriers

Strategic functions Market research

Strategic functions

Design

Manufacturing

The lowest point of the entry barriers

Upgrading strategy Figure 3.6 The alternative strategic routes towards FLI

Marketing

Service

54 The Challenges of Late Industrialization

Moreover, what must be underlined here is that the strategic route of catch-up entails much higher risk than that of upgrading. The catch-up FLI strategy entails high risk because latecomer firms face two kinds of barriers to entry. Firstly, they have to overcome from the outset the high barrier to entry emanating from the nature of the dual-faceted competences necessary to become a lead firm in a GVC. Secondly, since the lead firm, as a system integrator, has to gain and sustain the systemic advantage against the other GVCs in the finished product market, the catch-up FLI strategy also has to overcome the high barriers to entry arising from the competitive environment of the finished product market. Hence, the feasibility of catch-up FLI strategy depends on the degree of difficulty necessary to overcome the barriers to entry. It is highly uncertain whether a latecomer firm would be able to overcome those high entry barriers with the limited intra-firm resources and limited time available. It requires significant amounts of intra-firm investment over a significant period of time, and moreover strong support from the state might be essential. If a firm should end up failing to overcome the entry barriers after making significant intra-firm investments, or if the state supported such a latecomer firm and failed (that is, ‘picking a loser’), either or both the firm and the state could be left with massive debts without achieving a significant position in a GVC. Nevertheless, it is also true that once a latecomer firm could safely secure its position as a lead firm, it would be able to enjoy great self-esteem as an independent leader in the industry concerned. By taking the upgrading strategy, a latecomer firm faces a much lower risk. It initially focuses on overcoming the entry barriers at the lowest level in the GVC; then moves on to challenge the higher entry barriers one step at a time always taking into consideration the available resources at hand. Thus, the upgrading FLI strategy does not oblige the latecomer firm to overextend its investments and commitment to learning efforts as much as in the case of catch-up. Since the latecomer firm remains a supplier in the intermediate goods market, it can also avoid the fierce competition and volatility of the finished product market. Nevertheless, as long as it is pursuing an upgrading FLI strategy, the latecomer firm remains a dependent firm, whose activities and fates are still largely controlled by the lead firm. Being a supplier, it is subject to being told by the lead firm what, how and when and how much to produce. Thus, there is not much scope for dependent firms to upgrade unless the lead firm makes available to it an increasing amount of higher value-added sourcing work in the intermediate goods market. In other words, the feasibility of implementing the upgrading FLI strategy still

Changing Context of Late Industrialization 55

largely depends on the lead firm’s sourcing strategies – more specifically, their willingness to outsource the larger amount of higher valueadded activities. Furthermore, even if the dependent firm is successful in upgrading in a certain GVC, it might still end up failing overall FLI if its lead firm mismanages the GVC and fails to gain the systemic advantages in the finished product market. Therefore, the basic characteristics of the two stylized FLI strategies are summarized in Table 3.2. The catch-up FLI strategy and upgrading FLI strategy are distinct in their strategic routes and in their essentials for success. The former pursues a radical and high-risk strategic route. In this case, a latecomer firm directly attempts to seize the dominant power of the lead firm. To be successful, it must not only learn the competence that would enable it to generate the dominant power in the GVC, but must also gain a systemic advantage in the fiercely competitive finished product market. On the other hand, the upgrading FLI strategy entails a much lower risk due to its limitations in being a dependent supplier firm in the intermediate goods market. Nevertheless, its success depends on the nature of the intermediate goods market, which is in turn partly affected by the lead firm’s sourcing strategies. It also must incrementally learn the competences to carry out higher value-added sourcing activities.

Table 3.2 Two stylized strategies of firm-based late industrialization Catch-up

Upgrading

Type of approach Assessment methods Type of market in action Type of productive actor targeted

radical in relative terms

incremental in absolute terms

finished product market

intermediate goods market higher-status of depended firm

Essentials for success

• learning the competences that would generate the dominant power in a GVC • gaining the systemic advantage in the finished product market

lead firm

• learning the competences to carry out higher value-added sourcing activities • availability of high value-added sourcing activities in the intermediate goods market

56 The Challenges of Late Industrialization

3.2 Global business transformation and its consequences for FLI in the commercial aircraft industry In the previous section, as the first step in analysing the changing context of FLI in the global economy, we stylized the two FLI strategies – namely catch-up and upgrading – and highlighted their different strategic routes and the essentials for their success. We now turn to focus on the extent to which recent global shifts in GVC patterns have changed the context of those FLI strategies in different ways, with special reference to the commercial aircraft industry. The recent global shifts in the commercial aircraft industry have transformed not only the entry barriers of the finished product market but also the nature of the intermediate goods market. On the one hand, the finished product market in the commercial aircraft industry has become highly concentrated. Indeed, there is currently an effective global duopoly in each of the two major market segments – the medium/large jet market (110 seats and above) and the regional jet market (30–110 seats).14 On the other hand, the scale and scope of the intermediate goods market has expanded. This is mainly because the strategic sourcing of the lead firms has become dominant, particularly in the form of the international collaboration project (ICP) for developing a new aircraft. As we have seen in the previous section, one essential for the success of the catch-up FLI strategy is to overcome the entry barriers in the finished product market emanating from fierce competition. The chances for the upgrading strategy, on the other hand, are strongly affected by the nature of the intermediate goods market, which is in turn strongly affected by the lead firms’ sourcing strategies. In the following section, we try to illustrate that the global business transformation in the commercial aircraft industry has not only raised the entry barriers in the finished product market, but has also transformed the nature of sourcing in the intermediate goods market.

3.2.1

Consolidation of the finished product market

Ever since the very early stage of its history, the aircraft industry has experienced a process of consolidations, in which the small workshops originally established by adventurous entrepreneurs developed into massive global giants during the 20th century (Bilstein 1996). The consolidation process accelerated during the 1990s and has resulted in the finished product market in the aircraft industry being more concentrated than in any other industry (Figure 3.7).

Changing Context of Late Industrialization 57

As the result of the vigorous consolidation process which occurred throughout the 1990s, reaching its peak with the acquisition of McDonnell-Douglas by Boeing in 1997, the industry has become a duopoly in the major market segments: Boeing and Airbus Industrie in the large (over 120 seats) jet aircraft market; and Bombardier and Embraer in the regional jet market.15 (Fairchild Dornier, previously standing third in the regional jet market, filed for bankruptcy in April 2002.) In particular, the oligopolistic competition in the regional jet market became so severe that the even some established forerunners, such as Fokker, British Aerospace and Fairchild Dornier, were forced to exit from the market (Table 3.3). As for the commercial large-scale aeroengine market, the top three manufacturers – General Electric, United U.S.A. 1994

1995

1996

1997

1998

Acquired Rockwell's aerospace and defense department in Dec., 1996

1999

2000

2001

2002

SBS Int'l

Boeing Rockwell McDonnell Douglas

Boeing Completed merging with MDC on Aug. 1, 1997

Sold arms dept. to GD

Sold commercial helicopter dept. in Jan.,1999 Acquired Hughes' satellite manufacturing dept. in Oct., 2000 Acquired Jeppesen of flight info services in Oct., 2000

Hughes Space & Communications Jeppesen Galaxy Aircraft

Acquired Galaxy Aircraft in May, 2001 Acquired Gulfstream in Jul., 1999

Gulfstream General Dynamics

Sold IMP Corp to software company in Jul., 2001

Sold combat planes dept. in Aug., 1994

Lockheed

Lockheed Martin

Merges in March, 1995

Acquired Loral in April., 1996 Sold aero-electronics systems dept. to BAE Systems in Jul., 2000

Martin Marietta Loral TRW

Agreement for Northrop to buy TRW was made on Jul., 2002

Merged in May, 1994 Northrop Grumman

General Dynamics

Acquired on Aug., 1994

Vought Aircraft

Acquired defense and electronics dept. in Mar., 1996

Westinghouse Electric

Sold commercial aero structure dept. to Carlyle Group in Aug., 2000. Went back to its original name Vought.

Northrop Grumman

Vought Aircraft

Acquired Litton in April, 2001 Litton Industries Acquired Newport News of the U.S. in Nov., 2001

Newport News Shipbuilding

Fairchild Dornier

Fairchild Aerospace Dornier Acquired Dornier from Daimler-Bentz

Acquired by CD&R (inverstment group) in April 2000

Figure 3.7 Recent restructuring of the aircraft industry Source: JADC (2003): VIII–15–16

Filed the bankruptcy in April 2002

58 The Challenges of Late Industrialization Europe 1994

1995

1996

1997

1998

1999

2000

2001

2002

Withdrew from regional jet in 1999

Saab (Sweden)

Saab (Sweden) Nov. 2001: Announced the end of regional jet production

Acquired 35% shares from Saab AB in June, 1998 BAe (U.K.)

BAE Systems (U.K.)

GEC's defense electronics dept and Marconi Electric Systems completed merging in Dec., 1999, and became BAE Systems

Marconi Electric Systems (U.K.)

Acquired Lockheed Martin's aeroelectronics systems dept in Jul., 2000

Airbus Industrie (France, Germany, U.K., Spain) Matra Hautes Technologies (France)

20%

Airbus Industrie was founded in Jul., 2001

Airbus SAS (France) 80%

Merged with Lagardere Group's Matra Hautes Technologies and was privatised in June, 1999, and became Aerospaciale Matra

Aerospatiale (France)

EADS was founded on Jul 10, 2001

EADS NV (Netherlands)

DASA (Germany)

CASA (Spain)

Figure 3.7 (Continued)

Table 3.3 Market shares in the commercial aircraft industry (% of total ordered unit) 1990

2004

Medium-Large Jet

Boeing Airbus McDonnell

60 25 15

Boeing Airbus

40 60

Regional Jet

Fokker British Aerospace Bombardie

48 31 21

Bombardie Embraer Fairchild

53 45 2

Source: JADC (2005: II-3–4; II-19–20)

Technologies and Rolls Royce – account for more than 60% of the total market (Society of Japanese Aerospace Companies 2002b: 76).

3.2.1.1

Driving Forces for Market Consolidation

There are a number of forces driving the industry towards larger firm size and higher levels of market concentration. First of all, the cost of developing new aircraft is higher than for any other industrial goods because of its large scale and high technological complexity. As the technology becomes more advanced, and the scale of aircraft grows even larger, the development cost has risen exponentially. The development cost of the Douglas DC-8 (173 seats),

Changing Context of Late Industrialization 59

which was developed in the late 1950s, was estimated to be US$440 million (US$2.6 million per seat) in current price. But that of the Boeing B777 (375 seats), which was developed in the early 1990s, jumped to about US$4,800 million (US$12.7 million per seat) (Table 3.4). That of the Airbus A380 (550–650 seats), a super-jumbo expected to enter service in 2006, is estimated to be around US$10.7 billion. At the same time, to keep abreast of rapid technological progress, the system integrators in the aerospace industry must maintain a high level of intra-firm R&D investment. As Table 3.5 shows, the top system integrators spent more than US$1 billion (in current price) on R&D in 2004. Such large development costs of new aircraft and the R&D investment involved

Table 3.4 Development costs of new aircraft (in current price) Aircraft

DC-8 (−50) A300 (B2/B4) B767 (−200) B777 (−200) A380(−800)

Number of seats1

Year entering service

Development cost2 (US$ million)

173 267 216 375 555

1959 1974 1982 1995 (2006)

440 263 1,700 [6.5] 2,100 [9.8] 4,800 [12.7] 10,700 [19.3]

Notes: 1 This number of seats applies to two-class configuration 2 Current value 3 Development cost per seat Source: JADC (2003: VII-15); JADC (2005:VII-22); SJAC (2000b: 2)

Table 3.5 R&D investment by the leading system integrators and module system makers in the aerospace industry in 2004/05 fiscal year (in current price) Company EADS BAE Systems Finmeccanica Boeing Snecma (now part of SAFRAN) Lockheed Martin Honeywell Rolls-Royce

R&D spend ($ million) 3,119 2,131 1,976 1,879 1,025 962 917 541

Source: Financial Times (24 October 2005) ‘R&D Scoreboard 2005’

% of sales 72 122 193 36 111 27 36 47

60 The Challenges of Late Industrialization

make economies of scale in production a critical competitive advantage in the aircraft industry. This high cost and investment can only be recovered by achieving a large number of aircraft sold. Consequently, the market concentration inevitably narrows because the total aircraft market is only large enough to be shared among a few large firms. If the large volume of delivery by one aircraft manufacturer comprises a series of aircraft of different sizes and flight ranges, the economies of scale in production would coincide with the economies of scope in marketing, sales and after-sale service. Once the system integrators have established their marketing and after-sales service networks, they can diversify their product line-up with lower additional costs by using the same network. From the point of view of customers, economies of scope also emerge when there is compatibility among the product series offered by a certain manufacturer. The airline companies can save direct operational cost (DOC) if the spare parts or pilot and engineer training are compatible across the series of aircraft of different sizes and flight ranges. From the point of view of manufacturers; offering such diversified product series – a so-called ‘full product line’ – produces strong competitive advantages. Furthermore, the high development cost and large intra-firm investments have a long gestation period, as the product life cycle of an aircraft is much longer than that of other industrial goods. For example, compared to the aircraft’s product life cycle of over 20 years,16 that of the automobile is 3–4 years. Moreover, the aircraft market is extremely volatile because the demands for air travel (Revenue Passenger Miles: RPM), and in turn the demand for aircraft, are closely linked to the world economic trends (for example, GDP trends and exchange rates) and to the political environment (for example, war and terrorist threats). Only large firms with a strong financial base can withstand the long gestation period of large investments as well as the severe market volatility, and survive as lead firms in the aircraft industry. Finally, market consolidation has been led and strongly supported by the governments of major aerospace countries. In particular, the change in the US government’s attitudes towards anti-trust regulation accelerated the consolidation process in the aircraft industry during the 1990s. In 1993, Les Aspin, the then USA Defence Secretary, invited the executives of the biggest US defence and aerospace companies to dinner. He told his guests that there were too many players in the industry to enable full benefits to be gained from economies of scale and to undertake the necessary R&D to keep the industry advancing at the desired pace (Nolan 2001: 152). The event was known as the ‘Last Supper’.

Changing Context of Late Industrialization 61

Although the Pentagon blocked Lockheed Martin’s attempt to acquire Northrop Grumman in 1998, and the European Committee blocked GE’s attempted acquisition of Honeywell in 2001, the basic attitude of the anti-trust regulators seems to remain favourable to consolidation within their own domestic and regional markets. This is because the governments of both the USA and Europe have fully understood that the battlefield in the aircraft market exists at the global level, and that further consolidation at the domestic and regional levels might be necessary for their companies to survive.

3.2.1.2

Virtuous circle of competitive advantages

As the aircraft industry has become more concentrated, oligopolistic competition in the finished product market has become much greater. There are mainly three sources of competitive advantage in the finished product market for commercial aircraft: project launch competence product-related competence and market-related competence. Project launch competence enables a firm to take the initiative in launching the development project for a new aircraft. Taking the initiative at the project launch stage is the first step for a system integrator to establish itself as a lead firm in a GVC. Project launch competences include: 1) a strong financial base to tolerate the large burden of project costs; 2) skills to evaluate correctly the potential risk and expected return; and 3) a sufficiently good reputation and strong brand image to secure a sufficient number of the launch customers. The ‘launch customer’ is idiosyncratic to the aircraft industry, and refers to those airline companies which place orders for the new aircraft even before the project has been formally launched. For the manufacturers, it is necessary to secure sufficient launch customers to reduce the initial risk of the new project to a tolerable level.17 What this means is that a lead firm has to be already trusted by the airline companies for its reputation and brand from the very beginning of the new project. Secondly, to be competitive lead firms also need to have productrelated competences, consisting of 1) control over the key technologies, 2) economies of scale and of scope, and 3) project management skills, such as production planning and supplier (GVC) management. Finally, the market-related competences are represented by effective and efficient marketing, sales, and after-sales service networks. These three categories of competence together constitute the entry barriers against any latecomers attempting to catch up in the finished product market. Moreover, each type of competence interrelates systematically and creates a virtuous circle of competitive advantages (Figure 3.8). Project

62 The Challenges of Late Industrialization

Project launch competences • Strong financial base • Project evaluation skills • Reputation/branding

• Experience • Revenue

• Large and focused investments The ever-higher barriers to entry

Product-related competences

Market-related competences • Marketing and sales networks • After-sales service networks

• Low cost • Full product line-up

• Control over key technologies • Economies of scale and scope • Project management

Figure 3.8 The virtuous circle of entry barriers of the finished product market of the commercial aircraft industry

launch competences enable lead firms to invest in core competences and strategic activities on a large scale and in a clearly defined manner. The focused investments strengthen the lead firms’ control over key technologies and project management. The large-scale investments enable the lead firms to achieve economies of scale and scope. Such product-related competences reduce the production cost and expand the product lineup, which in turn strengthens the lead firms’ positions when it comes to market-related competences. Finally, a successful aircraft development project equips the lead firm with more experiences and greater financial revenue, which in turn strengthens their project launch competences.

3.2.1.3

The ever-higher barriers to entry for catch-up

Extreme market concentration on the global scale has left only a few large firms in the finished product market. As the firm size has enlarged, lead firms have employed ever-larger amounts of resources and capabilities throughout the virtuous circle of competitive advantages. In addition, due to the prevalence of strategic sourcing based on the concept of ‘core competence’, the lead firms have concentrated their investments on strengthening their control over core technologies and strategic activities. As a result, the fiercely oligopolistic competition in the finished product market has presented latecomers with ever-higher entry barriers for catch-up. Such a virtuous circle of competitive advantage also results in a Catch-22 dilemma for the latecomer firms. When trying to gain competitive advantage in the finished product market,

Changing Context of Late Industrialization 63

the latecomer firms need to have project launch competences in the first place. However, it is extremely difficult, if not impossible, for latecomer firms to evaluate the project risk accurately, or to gain the trust of airline companies, while lacking established experience and reputation as system integrators. Furthermore, governments play a critical role in enhancing their lead firms’ competitiveness, and in turn further raise the barriers to entry (Nolan 2001a: 174–6). There are mainly four sources of government support. First of all, the vast military procurement, particularly in the USA and Europe, has nurtured product-related competences in military aircraft manufacturing. Many important commercial aircraft products, including airframes, aero-engines and avionics, had their origins in military production. Also, since the aircraft companies usually undertake both commercial and military production, the military procurement contribution provides stability and solid financial foundation (that is, the product launch competence). Secondly, governmental export credit guarantees have played a vital role in promoting aircraft exports by European and USA manufacturers (that is, enhancing the market-related competence). Also, the national government might put the pressure on domestic airline companies to buy the indigenously produced aircraft instead of importing foreignmade ones. This could be a very effective industrial policy for a country with a large potential domestic flight market – such as Japan or China – to nurture the indigenous aircraft industry. Thirdly, some governments in advanced economies, notably Britain, have provided launch aid for a new development project (that is, enhancing the project launch competence). Launch aid constitutes a risksharing, success-conditional, long-term loan, to be repaid at an agreed rate when sales pass a certain point, but non-repayable if the project fails. Finally, governments of all advanced economies carry out the large spending to support the R&D activities, much of it emanating from military expenditure. The aircraft industry has consistently been one of the main recipients of government support for R&D (that is, enhancing the product-related competences). In short, such government support for the aircraft industry creates formidable barriers to entry for latecomer firms if their governments cannot meet such expenditure. It seems that the catch-up FLI strategy has become harder than ever, if not impossible, as a result of global shifts in the aircraft industry. It is not illogical that a latecomer firm might be able to overcome the barriers to entry at some time if its government were to provide effective, large-scale and long-term support to develop and nurture the three types

64 The Challenges of Late Industrialization

of competences. However, the scale of resource needed and the risk of failure entailed in such massive government support have been inflating remorselessly. One industry report estimates that even an aggressive and well-financed competitor would need 23 years to attain a business position alongside the incumbents in the finished product market; they conclude that the aircraft industry is the most difficult in which to succeed with catch-up among all the major global industries (Morgan Stanley Dean Witter 1998: 6).

3.2.2

Globalization of the intermediate goods market

While the aircraft’s finished product market has consolidated, the intermediate goods market has also transformed in nature. The recent transformation of the intermediate goods market of the aircraft industry has shown the typical trends of globalization. According to the often-quoted definition by McGrew (1992), the globalization process can be identified by two following general phenomena: Globalisation has two distinct phenomena: scope (or stretching) and intensity (or deepening). On the one hand, it defines a set of processes which embrace most of the globe or which operate worldwide    On the other hand it also implies an intensification of the levels of interaction, interconnectedness or interdependence between the states and societies which constitute the world community. (McGrew 1992: 23) Although ‘globalization’ is an elusive term due to its multi-disciplinary concept, which encompasses politics, sociology, economics, business and anthropology, as discussed earlier, McGrew’s definition of the globalization process quoted above is still useful as a focusing tool to understand the dynamics of the intermediate goods market in the aircraft industry. Applying the above general definition, the globalization process of the intermediate goods market could be illustrated by the following three phenomena. Firstly, the scope and scale of aircraft value-chains have expanded, as they have come to involve more suppliers located away from the major aircraft manufacturing countries. Secondly, the intermediate goods market has deepened, as some suppliers have come to play a more significant role in the value-chain both technically and financially. Thirdly, the level of interaction, interconnectedness or interdependence between actors of value-chains has intensified, as the system integrators adopt ‘lean’ production principles in value-chain management by making best use of fast-advancing IT systems.

Changing Context of Late Industrialization 65

Stretching. First of all, in regard to the geographical scope, the aircraft’s value-chains stretch out into a truly global-wide dimension. Airbus Industrie, for instance, has more than 1,500 suppliers in 27 countries, including over 500 US companies, and suppliers in Singapore, India, Australia, Indonesia, Korea, Japan and China among others (Nolan 2001a: 145). Boeing’s supply chain is even more massive and global. It comprised more than 13,000 suppliers (7,650 production suppliers and 5,441 non-production suppliers) in 2001 located on every continent (Morris 2002). From the latecomers’ point of view, as the aircraft valuechain extends globally, they would have greater opportunities to be involved in the value-chains and to become supplier of intermediate goods even though they are located away from the major system integrators’ bases. The scale of the intermediate goods market has also enlarged internationally. Table 3.6 indicates that the major aircraft manufacturing countries, in which most system integrators are located, have rapidly increased their imports of aerospace parts in total and particularly from latecomers: for 66% and 116% respectively between 1995 and 2000. Also, the latecomers’ share has risen from 25% to 32% during the same period.

Table 3.6 Aerospace parts1 imports by the major aircraft manufacturing countries ($ million) Origins

USA France UK Germany Spain Total

1995

2000

World

Latecomers2

2,592 3,052 2,756 1,183 296 9,879

1,766 484 n/a 186 42 2,4783

World 5,354 4,925 3,609 2,189 358 16,435

Latecomers2 3,617 1,313 n/a 371 54 5,3553

Notes: 1 The data of aircraft parts are based on the Standard International Trade Classification system, Revision 3 (SITC, Rev.3). Aerospace parts are categorized in STIC 792.9, which includes parts of aircraft and associated equipment; spacecraft (including satellites) and spacecraft launch vehicles; parts thereof. It does not include tyres, engines and electrical parts. 2 Latecomers refer to all countries other than the five major aircraft countries listed here 3 This value does not include the imports by the United Kingdom due to lack of data Source: Computed from United Nations COMTRADE database

66 The Challenges of Late Industrialization

It is noteworthy here that the aircraft industry historically has not been characterized by high levels of foreign direct investment of transnational corporate organization. This is because the industry’s high level for a minimum critical scale is large relative to the size of the world market. Additionally the need for strong plant-specific learning and cost reduction factors, may incur prohibitive cost penalties in establishing multiple facilities for offshore production (Mowery 1987: 11). Thus, the large proportion of aircraft part imports shown in Table 3.6 can be considered not to result from ‘international production’, that is intra-firm trade within transnational corporations, but rather as a result of ‘global sourcing’, that is transactions between independent firms located in different countries (Levy and Dunning 1993: 14). This seems to further imply that the indigenous aircraft firms of latecomer countries have been entering the expanding market as global suppliers.

Deepening. Secondly, the intermediate goods market has deepened, as the system integrators have begun to outsource larger components and higher value-added functions to selected suppliers. It is extremely difficult to elucidate such a deepening process quantitatively due to its qualitative nature. One way to follow the process can be to focus on the increase in ‘significant suppliers’. For the purpose of this study, a significant supplier is here defined as a dependent firm with high status in a GVC. It undertakes not only manufacturing, but also design and sometimes even marketing and co-financing in the development/production project of new aircraft. In particular, such significant suppliers are apparent in the so-called international collaboration project (ICP), which has become a popular organizational framework to develop and manufacture new aircraft and aero-engines. It is now common for the system integrators to select project partners, with whom they create significant levels of inter-firm cooperation in research, design, production and marketing. They also expect significant contribution by all partners in the form of development funds or risk capital (Mowery 1987: 3). There are two types of partners in the ICP: a ‘programme participant’ and a ‘programme partner’. They differ in their scope of activities, the scale of risk burden,18 the payment method, and the contractual period. The ICP partners are also termed ‘risk-sharing partners’ or ‘risk and revenue sharing partners’, depending on whether the payment method is linked to the overall project revenue. The different types of ICP partner are summarized in Table 3.7, which is also related to the generic category of productive actors developed in Table 3.1.

Changing Context of Late Industrialization 67 Table 3.7 Various partners of an international collaboration project Generic Piece-part Terms Subcontractor Dependent Terms Firms in the ICPs

Sub-contractor

Sub-System Suppliers or Module System Makers

Participant

Partner

Programme Partner

Risk Sharing

Revenue Sharing

Risk Burdens

Tooling costs

Component development costs

Project level costs

Payment Methods

Fixed price

Fixed price linked to incurred tooling costs

Fixed price linked to incurred development costs

Flexible price linked to sales price

Contractual Period

Short-term

Long-term

Project life

Revenue sharing based on assessed value-added shares

Source: Field interviews; see Table 3.1

All major system integrators of airframe production have pursued international collaboration since the 1980s. Airbus Industrie is itself an international collaboration of the ‘national champions’ in Europe: the United Kingdom, Germany, France and Spain. Boeing also pursued international collaboration for their large aircraft (over 200 seats) projects. Boeing’s international collaboration emerged out of international subcontracting relationships that began with the fabrication of components for the B747. A consortium of the Japanese aircraft firms has developed into the most important partner of Boeing’s international collaboration in the B767 and B777 projects, as will be discussed in detail for a case study in Chapter 5. Conversely, McDonnell-Douglas largely failed to establish effective international collaboration as the result of a series of unsuccessful attempts at collaboration with European aerospace firms.19 Also in the regional jet market, both Bombardier and Embraer are active in establishing effective international collaboration. The number of significant suppliers has also risen outside the organizational framework of international collaboration. They mainly include the sub-system suppliers, who carry out not only manufacturing but also the detailed design of supplying components. In the case of Boeing, the number of such sub-system suppliers increased from five for the B747 project in the 1960s to 15 for the B717 in the late 1990s (Table 3.8). Airbus is recently even more proactive in raising the number

68 The Challenges of Late Industrialization Table 3.8 The number of ‘significant’ suppliers in selected commercial aircraft

Boeing

Airbus Bombardier Embraer

B747 B767 B777 B717 A330/340 A380 CRJ-700 ERJ-170

Year of first flight

International collaboration partners

1969 1981 1994 1998 1992 (2005) 1999 2002

0 3 4 0 4 21 13 13

Sub-system suppliers* 5 11 14 15 4 35

Note: * It does not include the aero-engine makers Source: JADC (2005): VIII-20–23

of significant suppliers, both international collaboration partners and sub-system suppliers. There were only four international collaboration partners and four sub-system suppliers for the A330/340 project in the early 1990s, but Airbus have already contracted 21 international collaboration partners and 35 sub-system suppliers (as of September 2002) for the new A380 project. What should be emphasized here is that the expanding scale and scope of the intermediate goods market as well as the increasing number of significant suppliers indicates that more opportunities are now available for latecomer firms to upgrade themselves towards the higher level of suppliers in the aircraft industry.

3.2.2.1 Driving Forces for Globalization of the Intermediate Goods Market One of the driving forces behind the expanding scope/scale and the deepening of the intermediate goods market is the system integrators’ motives for sourcing. There are mainly three motives for system integrators to source an increasing number of components and higher valueadded functions from latecomer firms: (1) access to market, (2) access to technology, and (3) access to capital (Mowery 1999; Radosevic 1999). For instance, Boeing effectively combines all these motives in sourcing from Japanese firms. Boeing has succeeded in dominating the Japanese finished product market, in all probability due to the close relationships with they have established with Japanese manufacturers, bureaucrats and politicians, through long sourcing experience. Boeing has also been successful in transferring a significant amount of risk to the Japanese ‘risk-sharing partners’, who are subsidised with cheap capital from the government. Finally, Boeing learned efficient manufacturing process technologies from the Japanese suppliers, as will be further discussed below.

Changing Context of Late Industrialization 69

The second major driving force is the development of strategic management thinking about ‘core competence’. The logic of this is that the lead firms should concentrate on those resources which they possess which are relatively unique, provide a valuable service to customers and which are difficult to replicate, and that they should outsource the remaining competences to other firms in the value chain (Prahalad and Hamel 1990; Kaplinsky and Morris 2000: 10). Facing ever-fiercer global competition and technological complexities, Boeing, again, is deliberately focusing on the strategic functions, such as product definition and marketing, while being willing to outsource the manufacturing functions. The rapid advancement of information technologies is another important driver of globalization in the intermediate goods market. System integrators can now integrate very closely with their first-tier suppliers in globally diverse locations, working on their basic design and project planning through EDI (electronic data interchange), which brings about an increasingly detailed, instantaneous exchange of information.20 In addition to the driving forces mentioned above, the system integrators also face increasing cost pressures from customers. In particular, deregulation of the airline industry was initiated by US with the Airline Deregulation Acts of 1978, and was spread to Europe in 1988 with ‘Package 1’ as well as to Australia, Korea and China among others in the 1990s. Such deregulation has led to severe airline competition, and in turn compelled airlines to put great cost pressure on the aircraft producers. Consequently, the definitions of ‘good’ aircraft by airline companies have changed from solely technological superiority towards the low unit price of aircraft and low direct operation cost (DOC) with reliable safety.21 In such a market environment, pursuing a ‘good’ aircraft, the makers have little choice but to aggressively reorient the production approach from the technology-oriented towards the customer-oriented. More specifically, to achieve cost reduction and a shorter production cycle, they have come to seek out systemic efficiencies in the value-chain as a whole by adopting the ‘lean’ production principles pioneered by Toyota. Thus, it finally brings us to the third phenomenon of globalization of the intermediate goods market: that is the intensification of the level of interaction, interconnectedness or interdependence between the different actors throughout the value-chains.

3.2.2.2

Intensification: the rise of the ‘lean’ global value-chain

The aircraft makers have tried assiduously to adopt the lean production principles from the automobile industry since low cost became

70 The Challenges of Late Industrialization

the crucial source of competitive advantage in the aircraft industry in the early 1990s. Lean production principles involve eliminating unnecessary steps, aligning all the steps in an activity in a continuous flow, recombining labour into cross-functional teams dedicated to that activity, and continually striving for improvement. Applying these principles, companies can develop, produce and distribute products with less human effort, space and time, and fewer tools and overall expense inputs (Womack and Jones 1994: 93). For example, as will be discussed in Chapter 5, Boeing has been extremely enthusiastic in creating a lean value-chain on the global scale under slogans, such as ‘working together’ and ‘global lean enterprise’, where engineering, production and supplier management are to be aligned and globalized (Morris 2002). Originally developed to further in-plant efficiency in the automobile industry, it soon became apparent that the benefits of adopting the lean principles would be limited unless the various tiers of component suppliers also adopted similar practices throughout the value-chain. Thus, the system integrators of a lean value-chain decided to promote systemic (or collective) competitiveness throughout the value-chain, on the one hand, by intensifying the level of interaction with its first-tier suppliers through making the best use of the advancing information technologies; on the other hand, they also synchronized the activities at the various links in the value chain by ensuring that the firsttier suppliers adopted similar processes throughout the supply chain (Kaplinsky and Morris 2000: 10; UNCTAD 2002: 121). Consequently, adopting the lean value-chain has intensified the level of inter-firm linkages throughout the supplier system. The rise of the lean value-chain has further involved the overall restructuring of the supplier system and particularly the inter-firm relations between the system integrators and the first-tier suppliers (Watkins 1999; Society of Japanese Aerospace Companies 2000b). First of all, the system integrators tend to align closely with a smaller number of ‘significant’ suppliers, with whom they develop partnership-style relationships through intensive, collaborative and long-term interactions.22 The system integrators are trying to identify such significant suppliers – so-called the ‘centers of excellence’ – who, they believe, are capable of taking on greater responsibilities in production and risk sharing. Secondly, the system integrators tend to delegate to a smaller number of significant suppliers larger bundles of goods and services. They expect those suppliers to undertake R&D, design, assembly and input procurements at the sub-system or the modular system levels, as long as the sourcing components are confined to non-strategic technologies or

Changing Context of Late Industrialization 71

functions. Finally, the stratification of the supply chain increases as the system integrators gradually delegate to suppliers the responsibility for managing lower-tier suppliers of components and raw materials. Boeing, for instance, reduced the number of suppliers from over 30,000 in 1998 to around 13,000 in 2001, and expects to further reduce to around 10,000 in 2004 (Morris 2002). There are around 3,500 suppliers for Boeing’s commercial sector. Among them, only 250 suppliers account for 80% of the total value of Boeing’s sourcing (Society of Japanese Aerospace Companies 2000b: 15). Boeing benefits from working closely with a smaller number of significant suppliers by optimizing planning and spreading risk. It also gains economies through large volume purchase and through obtaining better quality inputs and faster R&D. This trend to a lean form of GVC can be observed in many globalizing industries. It has been initiated and most advanced in the automobile industry, and adopted by many other industries – for example, the soft drink industry – in the last couple of decades (Nolan 1999: 45).

3.2.2.3

New opportunities and challenges for upgrading

Returning to the context of firm-based late industrialization, the globalization of the intermediate goods market presents new opportunities as well as new challenges for those pursuing an upgrading strategy. The expanding scale and scope of the intermediate goods market have opened routes for latecomer firms to enter the global value-chain as international suppliers even though they may be located far from the system integrators. The deepening of intermediate goods market implies that the latecomer firms would have more scope to upgrade their supplying activities and functions within the global value-chain by becoming ‘significant’ suppliers. Therefore, the globalization of the intermediate goods market has opened ‘windows of opportunities’ for those relying on the upgrading strategies for FLI. However, the globalization of the intermediate goods market has also created some new hurdles, which the latecomer firms now have to overcome in order to upgrade themselves to become significant suppliers. Although the aggregate size of the intermediate goods market has increased, competition among suppliers to upgrade or even simply to retain their positions and status within the value-chain has been exacerbated as the result of the system integrators reduction of their supplier bases. More specifically, to be selected as significant suppliers in the ‘lean’ global value-chain, the suppliers are obliged to strengthen their financial base to be able to share the development risk with the system

72 The Challenges of Late Industrialization

integrators. They also have to build the competencies in electronic data interchange links, lower-tier supplier management, and module/subsystem integration in addition to the wider scope of competence, such as component design and testing (Ingersoll Engineers 1994). In order to meet these financial and competence requirements, subsystem suppliers have recently tried to expand their businesses mainly relying on mergers and acquisitions (Nolan 2001a: 103). They are striving to attain sufficient scale and scope to produce and integrate ever-larger bundles of goods and services. In other words, the intensifying competition in the intermediate goods market has created a similar environment to the finished product market in experiencing greater consolidation. Medium-scale M&A (50–150 million dollars) in the global aircraft industry, which largely influences the intermediate goods market, jumped from 15 transactions in 1995 to 53 in 1998 (Society of Japanese Aerospace Companies 2000b 27). Such a trend is most apparent in the avionics, landing gear and auxiliary power unit (APU)/electrical systems.23 In sum, the globalization of the intermediate goods market has had a mixed impact for the prospects of the upgrading strategy. The expansion and deepening of the market has created more opportunities for latecomer firms to upgrade within the global value chain. However, to take advantage of those opportunities, the latecomers should already have the large scale of capital resource and a high level of technological, marketing, and manufacturing capability.

3.3 An overview of the post-war development of the Japanese aircraft industry We have thus far expatiated the two strategies for firm-based late industrialization in addition to examining how the global shifts in the commercial aircraft industry have affected the respective contexts of catch-up and upgrading. We now turn to a brief review of how successful the Japanese aircraft industry has been in achieving FLI in the post-war era. Various commentators have repeatedly called down its post-war experience as one of a few failing cases of Japan’s attempt in late industrialization.24 Indeed, Japan has largely failed to implement catch-up FLI strategy. As mentioned earlier, the success or failure of the catch-up strategy can be assessed in relative terms, that is, in comparison to the forerunners’ performance. As Table 3.9 shows, the scale of the Japanese aircraft industry is much smaller than that of the leading countries in the industry. For instance, Japan’s total aircraft sales and

Changing Context of Late Industrialization 73 Table 3.9 International comparisons of the aerospace industry (2000)

USA (Aircraft only) UK France Japan (Aircraft only) Germany Canada Brazil (Embraer)

Sales (billion US$)

Contribution to GDP (%)

Employees (thousand)

1462 821 276 226 127 92 125 125 29

148 082 193 174 027 019 067 176 na

800 (465) 151 99 32 (25) 62 83 na

Military demand (% of total sales) na (41) 46 24 na (63) 22 19∗ na

Note: * Data in 1998 Source: SJAC (2002b: 6); Flight International, 21 August 2001: 46

workforce are about one-seventh and one-eighteenth respectively of that of the United States in 2001. Also at the firm level, unlike the wellpublicized stories of its steel, shipbuilding, automotive and electronic manufactures, Japanese aircraft manufacturers25 have failed to become leading competitors in the international market. In 2001, the sum total of aerospace sales of the four major Japanese aircraft manufacturers, that is, Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Fuji Heavy Industries (FHI), and Ishikawajima Harima Heavy Industries (IHI) reached only 14 per cent of that of Boeing (Table 3.10). Japanese aircraft manufacturers have not been able to gain a competitive position in the world aircraft market, as have Toyota or Sony in their respective sectors. However, the Japanese aircraft firms have successfully upgraded their status as global suppliers. As mentioned earlier, the success or failure of the upgrading strategy can be assessed in absolute terms both quantitatively – for example, by total production or labour productivity – and qualitatively – for example, by the technological level and the scope/depth of competences implanted in the supplier activities. As for the Japanese aircraft industry as a whole, its total production has increased twenty fold from 55 billion yen to over 1 trillion yen (in current price) between 1965 and 2001 (Figure 3.9). The industry’s dependency ratio on military procurement has also been gradually decreased from it peak of near 80 per cent in the late 1970s to less than 60 per cent in 2001.

74

Table 3.10 Top ranking of the aerospace companies (2001) Company (country) division [% of total sales] 1

2 3 4

5 6 7 8 9 10

Aero sales (mil$)

Total sales (mil$)

Employees (1000)

R&D (mil$)

57,871

58,194 35,056

1869

1,936 858

28,599

27,572 18,397 23,990 18,922 4,351

1030 455 1250 7277

1,832 1,459 607 1,432

16,867 27,897 7,679 13,558

872 1520

475 1254

968

342

125,913 11,389 23,652 9,653 13,966 7,774

219

2,349

1150

832

324

151

639 76 11,048 243 51 292 54 265 26

831∗

Boeing (USA) Commercial Airplanes [60.2%] EADS (Netherlands) Airbus [66.7%] Lockheed Martin (USA) BAE Systems (UK) Commercial Aerospace [23.0%] Raytheon (USA) United Technologies (USA) Engines [27.5%] Northrop Grumman (USA) General Electric (USA) Engines [9.0%] Honeywell Int’l (USA) Aerospace Solutions [40.8%] Bombardier (Canada) Aerospace [55.7%]

23,968 20,264

15,462 12,971 11,458 11,389 9,653 7,774

··· 19 22 31 34 61 89

Mitsubishi Heavy Ind. (Japan) Aerospace Systems [16.5%] Embraer (Brazil) Ishikawajima-Harima (Japan) Aero-Engines [21.5%] Kawasaki Heavy Ind. (Japan) Aerospace [20.4%] Fuji Heavy Ind. (Japan) Aerospace [4.8%] Nippon Aircraft Manufact. (Japan)

3,883 2,897 1,916 1,779 546 252

23,560 3,883 2,897 8,905 1,916 8,724 1,779 11,209 546 227

127 209 162 434

Notes: ‘Aero Sales’ refers to aerospace division’s sales for 2001 fiscal year, including aircraft, aero-engine, avionics, missiles, space and aero structures. The top line of financial figures refers to consolidated results for the overall group, including non-aerospace business. The divisional figures are for those businesses that are fully or largely concerned with commercial aerospace. ∗ The figure for 2000. Sources: Flight International, ‘Aerospace Top 100’, 13 August 2002, 36–53; Nihon Keizai Shinbunsha (2001) 2002 Nendo Kaisha Nenkan (Japanese Company Yearbook 2002)

Changing Context of Late Industrialization 75 1,100 100

1,000 900

Total production (bil yen)

700 Military demand ratio

600

60

500 Total production (left)

400

40

Military demand ratio (%)

80

800

300 20

200 100 Export 0 1965

0 1970

1975

1980

1985

1990

1995

2000

Figure 3.9 Total production, exports and military dependency of the Japanese aircraft industry Source: SJAC (various years) K¯ok¯ u Uch¯u K¯ogy¯o Nenkan (The Aerospace Industry Yearbook) Original Source: Research Institute of Economy, Trade and Industry, Kikai T¯okei Nenp¯o (Manufacturing Statistics Yearbook)

At the same time, the Japanese aircraft manufacturers have upgraded their supplier status incrementally. In the airframe sub-industry, for instance, the Japanese manufacturers started their supplier activities as piece-part subcontractors for Boeing’s B747 in the late 1960s. They have expanded the scale and upgraded their activities throughout the 1970s and 1980s. In particular, Japanese aircraft firms have become single source sub-system suppliers for the B767 and B777 undertaking the detailed design and manufacturing for most of the fuselage and a part of wing. Such upgrading of supplier activities can also be illustrated by the steady increase of total production as well as the rise of capital intensity and the value-added per labour scale in major Japanese aircraft manufacturers (Figure 3.10). It seems safe to conclude that the Japanese aircraft firms and industry as a whole have succeeded in upgrading their scale and quality throughout the post-war era. Moreover, a larger picture of Japanese post-war FLI can be attained when it is compared with those of other latecomers, such as Brazil, China, Indonesia, Korea and Taiwan.26 Those latecomers have aggressively tried to nurture the indigenous aircraft industry as a ‘strategic industry’ both for national security reasons and for advancing to

76 The Challenges of Late Industrialization 20 Value-added per employee (left) Capital intensity of labour (left)

Value-adding per employee (mil yen)

18 16 14 12 10 8 6 4 2 0 1965

1970

1975

1980

1985

1990

1995

2000

Figure 3.10 Productivity of aerospace divisions of the major Japanese aerospace companies∗ Notes: Includes the eight major Japanese aerospace companies MHI, IHI, KHI, FHI, Nippi, JAMCO, ShinMeiwa, and Showa Aircraft (Value-adding per employee) = (Capital intensity of labour) × (capital productivity) Sources: SJAC (various years) K¯ok¯ u Uch¯u K¯ogy¯o Nenkan (The Aerospace Industry Yearbook)

the higher level of industrialization. In particular, China has aggressively tried to nurture an indigenous aircraft industry, whose scale is much larger than Japan.27 However, apart from the impressive success of Embraer of Brazil within the niche regional jet airliner market, no aircraft company from the latecomer countries has succeeded in catching up in any significant way. Meanwhile, China’s, Korea’s and Indonesia’s records in upgrading to become global suppliers has been extremely limited compared to that of Japan (Table 3.11). Their supplier status has mainly stagnated at the level of piece-part subcontractor or sub-system supplier with no design or finance function. One might draw two inferences in relation to the changing context of firm-based late industrialization. One is that catch-up FLI strategy seems next to impossible in the aircraft industry of the twenty-first century, while it is extremely difficult, if not possible, to create a niche market. It is also clear that Japan has taken the greatest advantage of the globalization of the intermediate goods market. Japanese aircraft manufacturers have long been stigmatized for demonstrating a case of regrettable failure

Changing Context of Late Industrialization 77 Table 3.11 Aircraft parts exports from selected latecomers∗∗∗ ($ million)

Japan China Korea Indonesia

1988

1990

1995

2754

4176 949∗ 1634 144

5730 1,484.5 619 3700 2083 1977 300∗∗ 170

504

2000

2001 1,702.9 3452 2299 184

Notes: ∗ The value of year 1992 ∗∗ This is the value of 1996 as the data for 1995 is not available ∗∗∗ Taiwan, Province of China, is not included here because it is not an official member state of the United Nations. For political reasons this UN database is not allowed to show Taiwan as a reporting entity. Source: United Nations COMTRADE database

in Japan’s impressive post-war industrialization. However, instead the post-war upgrading of the Japanese aircraft manufacturers should be admitted as a successful case of FLI in the global business transformation. It therefore presents an ideal example of how latecomer firms may seize emerging opportunities to upgrade in the fast globalizing commercial aircraft industry. In the empirical part of this study, we will carry out in-depth case studies of Japan’s post-war FLI in commercial aircraft production.

3.4

Concluding remarks

The commercial aircraft industry has been undergoing a drastic business transformation on a global scale. Facing ever-fiercer global competition and technological complexity in the commercial aircraft market, the lead firms have strengthened their competences in strategic activities through organic growth as well as M&A. This has given rise to extreme market consolidation and intensified the oligopolistic competition. Meanwhile, the lead firms have increased their outsourcing of non-strategic activities on a global scale. The globalization of the intermediate goods market has expanded, deepened and intensified the scope of global sourcing. These global business transformations have also changed the context of firm-based late industrialization. On the one hand, the extreme market consolidation has raised the barriers of entry to the finished product market in a self-perpetuating manner. The ever-fiercer oligopolistic competition has made it remorselessly more difficult, if not impossible, for a latecomer firm to succeed through catch-up FLI

78 The Challenges of Late Industrialization

strategy – that is, endeavouring to gain a systemic advantage in the finished product market. On the other hand, globalization of the intermediate goods market has increased opportunities for high valueadded sourcing activities. The rise of global sourcing has thus opened windows of opportunity for latecomer firms to achieve the upgrading FLI strategy – that is, incrementally upgrading their supplier status as a dependent firm in a GVC. However, a latecomer firm would be able to take advantage of such windows of opportunity only if it has a sufficient level of competence for responding quickly and flexibly to the lead firm’s needs within the ‘lean’ global value chain. Therefore, the global business transformations in the commercial aircraft industry have shifted the context of FLI towards one in which an upgrading FLI strategy would have a greater prospect of success than a catch-up FLI strategy. Given those contextual changes in FLI, the impressive post-war development of the Japanese commercial aircraft industry may be judged a successful case of seizing emerging opportunities for upgrading FLI in a GVC. All these phenomena seem to indicate that any latecomer firms that are eager to achieve FLI in the commercial aircraft industry should acquire a comprehensive understanding of the process of and examine the determinants for upgrading FLI.

4 Upgrading in Global Value Chains: Analytical Framework

This chapter develops the analytical framework for understanding how and why a latecomer firm in a global industry – particularly, the commercial aircraft industry – could upgrade its status as a dependent firm in a GVC. In the preceding chapter, we tried to show that the recent global business transformations have opened the ‘window of opportunity’ for the upgrading firm-based late industrialization (FLI) strategy. More specifically, by taking advantage of the globalization of the intermediate goods market, a latecomer firm might be able to incrementally enlarge the scale and scope of its supplier activities. In so doing, the latecomer firm could in turn generate and capture a higher value-added role and consequentially stronger bargaining power within the GVC, and ultimately to contribute to the overall industrial development at national level – that is, achieving FLI. However, as we can see from the literature review in Chapter 2, the traditional literature on late industrialization largely confines its analysis to ‘catch-up’ rather than the ‘upgrading’ process of FLI. The process of upgrading FLI has only been presented anecdotally, but the detailed analysis of the process is almost non-existent either theoretically or empirically. Only the global value chain (GVC) perspective sheds light on the upgrading process. However, the GVC perspective largely fails to provide analytical insights into the underlying factors of the upgrading process. In particular, the GVC perspective is not sufficiently profound to deal with critical issues, such as how and why a latecomer firm may (or may not) upgrade within a GVC. Filling this critical void in the literature on late industrialization is the main purpose of this chapter on analytical framework and the following chapter that incorporates a case study of post-war Japanese commercial aircraft production. 79

80 The Challenges of Late Industrialization

In order to obtain an analytical understanding of the upgrading process, we should first reaffirm the significance of the fact that a dependent firm, which is a main actor in the process, has an inferior power relation to the lead firm of a GVC. We have already explained the causes of such asymmetric power relations in a GVC in the preceding chapter. Then, how does the lead firm exert its superior power in order to control the dependent firm? Indeed, the answer to this question leads to the core issue in the GVC perspective, which underlines the lead firm’s control over the dependent firms in such a way as to align them closely with its own business needs. What should be noted here is that the lead firm’s control largely extends beyond the legal boundaries of the firm in the GVC. The rise of strategic sourcing and of the ‘lean’ global value chain has raised deep issues concerning the nature of the firm as well as of industrial organization. It has created a ‘stark social division of labour’ among the legally independent firms between the ‘activities related to product definition’ (that is, design and marketing), and ‘activities related to production’ (that is, process development and manufacturing) (Sturgeon 2000). These legally independent firms are dispersed globally while their activities are functionally integrated and coordinated by the lead firms in the non-arm’s length hierarchical relationship. In other words, all production activities in a GVC are coordinated and controlled by lead firms in a network form of industrial organization.1 Hence, the command structure in a GVC differs from that of traditional international production, which is usually organized by the common ownership and control structure of transnational corporations.2 In this chapter, therefore, we propose an analytical framework for understanding the underlying factors of the upgrading process. Our analytical framework takes into account the various forces inside, outside and across the boundaries of the firms, which would affect the upgrading of the dependent firm in the GVC. The first section elaborates the upgrading process as the ‘controlled’ growth of the dependent firm, whose domains of activities and learning are controlled by the lead firms. The second section narrows its analytical focus to concentrate on the individual upgrading process of a particular dependent firm. Drawing on the multi-disciplinary literature as well as the in-depth case studies on the post-war development of the Japanese aircraft manufacturers that will be put forward in Chapter 5, our analytical framework identifies the three important determinants for a particular dependent firm to upgrade its position in a GVC. The final section looks into the interactions between those determinants, which systemically create the

Upgrading in Global Value Chains: Analytical Framework 81

forces that shape the prospects for successful upgrading by a particular dependent firm in a GVC.

4.1 The upgrading process: the ‘controlled’ growth of the dependent firm in a GVC According to the mechanism of the FLI illustrated in Figure 3.5, we can identify the very origin of the upgrading process as the learning by a dependent firm,3 in which it acquires and adapts its competences over a period of time in order to carry out higher value-added sourcing activities within a GVC (Dosi, Richard et al. 2000: 16). Having acquired the higher level of competences, the dependent firm may upgrade from the lowest-tier of supplier, that is, a piece-part subcontractor, towards the higher tiers; that is, a sub-system supplier, and further towards a module maker (See Figure 3.3). Then, what kinds of competences do the dependent firms have to learn for upgrading? What is the context in which the dependent firms may learn in a GVC? What must be emphasized in the analysis of the upgrading process in a GVC is that the lead firms try to control the growth of dependent firms such a way as to make it closely aligned with their sourcing strategies. Lead firms may do so by exerting what Susan Strange (1988) calls ‘structural power’ throughout the GVC – the power to decide how things shall be done in the GVC, or the power to determine the surrounding structure of the sourcing relationships in the GVC (Strange 1988: 25).4 More precisely in regard to the upgrading process, the lead firms exert the ‘structural power’ over the dependent firms by deciding ‘what’ and ‘what not’ the latter will do within the GVC, and thereby moulding and controlling the latter’s learning dimensions.

4.1.1

Learning dimensions in the upgrading process

Lead firms must make sure that the suppliers are sufficiently competent to meet their business needs effectively and efficiently. They thus decide what kinds of competence are required for selection for each supplier level. From the point of the view of the dependent firm, to achieve upgrading by being selected for the higher levels of supplier, they must advance through distinct learning phases, each with specific learning dimensions (Radosevic 1999: 217). In short, the lead firms set the specific learning dimensions for each level of supplier; while the dependent firms must achieve those learning dimensions in order to be selected as suppliers. Consequently, the lead firms control the rate and trajectory of

82 The Challenges of Late Industrialization Table 4.1 Learning dimensions in the upgrading process Targeted level of suppliers

Learning dimensions

(1) Piece-part Subcontractor

QCD for ‘drawing-supplied’ manufacturing Value engineering (VE) / Value Analysis (VA) QCD for detailed component design, manufacturing and assembly Relation-specific skill with lead firms All product-related competences at module level Supplier management in a module value chain

(2) Sub-system Supplier

(3) Module Maker

growth of dependent firms by setting learning dimensions for each stage of the upgrading process. Table 4.1 summarizes the learning dimensions of the three major stages in the upgrading process (also refer to section 3.1.2.2 and Table 3.1). (1) To begin with the lowest status of supplier, the learning dimensions for becoming a piece-part subcontractor consist of the basic productrelated competences to achieve ‘drawing-supplied’ manufacturing at the required level of quality-cost-delivery (QCD). Furthermore, those under severe competitive pressure might also be expected to bring about the value engineering (VE) and the value analysis (VA), that is, cost cutting prior to and during the mass production process by improving component design (Asanuma 1989: 20). (2) The learning dimensions for upgrading towards sub-system supplier status include technical and process competences sufficient to carry out detailed component design and medium-scale assembly according to the product specifications laid down by the prime contractors. For a sub-system supplier to be successful, it must at least achieve competitive QCD. It must also be able to thoroughly understand the prime contractors’ specific needs and to efficiently accommodate them. Asanuma (1989) calls such competences relationspecific skills, which enable a supplier to respond flexibly to the prime contractor’s specific needs (Asanuma 1989: 21). Suppliers can acquire relation-specific competences5 only after repeated interaction with the particular prime contractors through a close and collaborative inter-firm relationship. To upgrade to sub-system supplier status, therefore, a dependent firm needs to attain relation-specific competences with the particular prime contractor, in addition to the general product-related competences required for competitive QCD. Moreover, those relation-specific competences could constitute significant barriers to entry for suppliers because

Upgrading in Global Value Chains: Analytical Framework 83

it is time-consuming and expensive to develop them through repeated interaction. The prime contractors would also incur the cost of switching suppliers, from those which have already acquired the relation-specific competences attuned to their specific needs (Monteverde and Teece 1982a; 1982b). (3) The learning dimensions required to upgrade to the status of module maker consist of all the product-related competences at the module system level, such as module basic design and module system integration, and sometimes contributing to product conceptualization. The module system is normally interchangeable because its interface with other components is highly standardized. Hence, module makers might not be required to acquire a high level of relationship-specific competences. Instead, they need to impose effective supplier management throughout a module value chain. They may also have to acquire market-related competences – such as market risk evaluation and aftersales service – in the case where the end-users choose among the various makers which module system is to be provided in the final product. This is the case for aero-engines for medium and large commercial aircraft. Aero-engine makers – such as General Electronics, Pratt and Whitney and Rolls Royce – carry out the full range of product- and market-related competences. Indeed, they act as the module lead firms in an aeroengine GVC (see section 3.1.2.2).

4.1.2

The lead firm’s control over sourcing activities

Secondly, a lead firm must also make sure that the dependent firm’s sourcing activities are closely aligned with its sourcing strategies. Any misalignment in the vertical sourcing relations could not only degrade the systemic competitiveness of the whole GVC, but also weaken the legitimacy of the lead firm as a director of the GVC. To avoid those negative outcomes, lead firms try to keep the sourcing activities of dependent firms under control in three ways: (1) control over quality, cost and delivery (QCD), (2) control against opportunistic behaviour, and (3) control over the domains of activity and learning.

4.1.2.1

Control over quality, cost and delivery

Lead firms try to buy components from suppliers at the lowest possible price while ensuring a satisfactory level of quality and on-time delivery. To prevent their suppliers from failing to achieve the required levels of QCD, the lead firms give them the detailed directions with a set of parameters that define the sourced product and its production processes. Such directions include, in addition to the price setting: 1) what is to

84 The Challenges of Late Industrialization

be produced; 2) how it is to be produced; 3) when it is to be produced and delivered; and 4) how much is to be produced (Humphrey and Schmitz 2001: 21–2).6 Moreover, they ensure that the suppliers actually follow their directions in the best possible way through (i) selection, (ii) inspection and evaluation, and (iii) training. In the first instance, the lead firms try to select as their suppliers, dependent firms, which can offer the highest level of QCD in the intermediate goods market. The lead firms often instigate competition between suppliers through multiple sourcing. By implying the threat to switch suppliers with short-term inter-firm relations, lead firms have strong leverage to squeeze the better offered prices out of the suppliers. More stringently, lead firms may directly control the suppliers’ profit margin through open-book or open cost measures (Ruigrok and van Tulder 1995: 83). In long-term inter-firm relationships, lead firms often control the suppliers’ profit margin in such a way as to encourage continuous cost reduction through ‘value-engineering (VE)’ and ‘valueanalysis (VA)’ (Asanuma 1997: 181–4). Lead firms with a long-term perspective also employ various measures for quality control over sourcing activities. Those measures include ‘quality audits’ in the supplier selection process. For instance, to be selected, dependent firms are required to adopt quality control techniques and facilities, such as ‘statistical process control’ and ‘numerically controlled (NC) machines’, and will be required to maintain control charts always available for examination by the lead firms (Ruigrok and van Tulder 1995: 82). Another powerful quality control measurement is that of ‘vendor rating’, in which the lead firms regularly evaluate suppliers, and an overall rating tells both parties how suppliers measure up against each other (Ruigrok and van Tulder 1995: 83). Such evaluations cover all aspects of QCD and reward those with high score. The system is also designed to promote competition among the suppliers with long-term inter-firm relations. If a lead firm is unable to find the suppliers already proven to be capable at the required level in the intermediate goods market, or in a case where a lead firm has to select an unqualified supplier for other business reasons, it often selects the most favourable supplier available and assists its learning through knowledge and capability transfer. Lead firms may transfer such knowledge and capability through sales, granting of licenses or patents, transfer of know-how, sale or transfer of second hand machinery, technical assistance, quality control, occupational training, or access to technical information, etc. (Radosevic 1999: 153). In such cases, becoming a supplier could in itself become a

Upgrading in Global Value Chains: Analytical Framework 85

significant learning opportunity for dependent firms. However, the lead firms carefully restrict such knowledge and capability transfer to the minimum level, only sufficing to make the suppliers capable of meeting their needs. In other words, they are not interested in supporting the learning of dependent firms per se.

4.1.2.2 Control against opportunistic behaviour and double-crossing diversification As we saw in the preceding chapter, aircraft GVCs have been adopting ‘lean’ production principles. Consequently, lead firms have become closely aligned with a smaller number of ‘significant’ suppliers (section 3.2.2). These aligned suppliers share the information intensively with the lead firm through the fast-advancing electronic data interchange (EDI) in order to work in a collaborative fashion and to promptly respond to the needs of the lead firm. Nevertheless, such closely aligned sourcing relationships may well be a double-edged sword for lead firms. On the one hand, it enables lead firms not only to optimize planning and spread the risk, but also to gain economies through large volume purchase and through obtaining better quality inputs through faster R&D. On the other hand, lead firms become vulnerable to opportunistic behaviour or double-crossing behaviour by such closely aligned suppliers. It is because, as transaction cost economics assert, in order for the lead firms to benefit from the close alignment with their suppliers, they need to bring about a synergic inter-firm combination of complementary competences as well as idiosyncratic investment in relationspecific assets (Williamson 1985). Opportunistic behaviours includes ‘shirking’ under situations where the indivisibilities of inter-firm joint efforts make it difficult to detect such behaviour (Alchian and Demsetz 1972; Barzel 1982); and the post-contractual ‘hold up’ of the relational rents by taking advantage of asset-specificity (Klein, Crawford et al. 1978; Monteverde and Teece 1982b). Then, according to transaction cost economics, safeguarding against the hazards of such opportunistic behaviour would incur increasing transaction costs (that is, the costs of searching, contracting, monitoring and enforcing), which often reach a sufficiently high level to prevent inter-firm collaboration altogether. If the lead firms maintain a long-term perspective, there are nevertheless a few effective ways for them to control suppliers’ opportunistic behaviour while incurring only a manageable level of transaction cost. One way is to create a situation of a repeated-game in long-term sourcing relations. Under such a situation, any untrustworthy behaviour by the

86 The Challenges of Late Industrialization

suppliers would result in costly sanctions that exceed any potential benefits that opportunistic behaviour may provide (Axelrod 1984; Gulati 1995). Such sanctions might be termination of the sourcing contract, which entails banishment from the GVC, or acquiring a reputation as an untrustworthy supplier throughout the whole industry. Lead firms may also control the supplier’s opportunism by nurturing inter-firm trust founded upon mutual expectations of learning more about each other through repeated interaction (Bachmann 2001: 350). Sako (1992) particularly calls such inter-firm trust ‘goodwill trust’, being based on mutual expectation of unrestricted commitment between the sourcing partners (Sako 1992). In recurring sourcing relationships, to the extent that the lead firms meet the suppliers’ expectations, suppliers will develop a sense of obligation to conform with the lead firm’s expectations in return, refraining from opportunistic behaviour (Macaulay 1963; Gulati 1995).7 Such safeguards against supplier opportunism work in a ‘self-enforcing’ manner in the long-term. They presumably have high initial ‘set-up’ costs, but once in place they have relatively low maintenance costs (Dyer 1997: 547). The underlying mechanism of these safeguards implies that the transaction costs are bound to diminish over a period of time as the sourcing partners learn more about each other through repeated interaction (Langlois and Robertson 1995: 29). It can also be understood that the lead firms exercise power over the suppliers by influencing, shaping, or determining their very wants through repeated interaction (Lukes 1974: 23). This is the most ‘subtle’ way of controlling the suppliers’ activities, and is what Ruigrok and van Tulder (1995) call ‘structural control’ (Ruigrok and van Tulder 1995: 75). It tries to secure the suppliers’ compliance by influencing their thoughts and desires even when no obvious power attempt has been made (Lukes 1974: 75; Hart and Saunders 1997: 27). In any event, if the lead firms effectively exercise structural control taking a long-term view, they could establish an ‘informal command structure’ to prevent suppliers’ opportunistic behaviour in closely aligned sourcing relations.8 Structural control is conducive to goal homogeneity in sourcing relations, while subduing open conflict and leaving room to forms of latent conflict at worst (Ruigrok and van Tulder 1995: 75). It will therefore result in what Nishiguchi (1994) calls ‘problem solving’ sourcing, which is characterized by a stable, long-term, and collaborative inter-firm relationship. Indeed, it has been repeatedly pointed out that effective structural control over suppliers is an important source of competitive advantage in the Japanese

Upgrading in Global Value Chains: Analytical Framework 87

automobile industry (Sako 1992; Nishiguchi 1994; Dyer 1997). From a supplier’s point of view, such ‘problem solving’ sourcing is beneficial because it brings about long-term and stable sourcing contracts. However, those closely aligned suppliers may find themselves ‘locked in’ to the structural control exerted by certain lead firms. In such cases, suppliers are obliged to refrain not only from opportunistic behaviour, but also from any strategic options that would be likely to conflict with their current lead firm. For instance, they may be pressured or sometimes forced to give up supplying other lead firms, which are direct competitors of their current lead firms. The lead firms may try to prevent their suppliers – particularly those competent and/or those with whom they share the information intensively – from taking part in the rival lead firms’ GVC – here, we call it ‘double-crossing’ diversification. In so doing, the lead firms attempt to block any possibility that their own suppliers might enhance the systemic advantage of rival firms by becoming their competitive suppliers, and/or by leaking the company’s confidential information to rival firms.

4.1.2.3

Control over the learning dimensions

Finally, a lead firm tries to control the learning dimensions of a dependent firm by restricting the latter’s sourcing activities to nonstrategic ones. In doing so, the former tries to prevent the latter from becoming a potential challenger by replicating its own competitiveness. As discussed above, the lead firm demands that its supplier should be capable of meeting its business needs effectively. More precisely, the lead firm requires its suppliers to possess the general competences to achieve a satisfactory level of QCD. The former also requires the latter to have relational competence in order to respond promptly and flexibly to its business needs. If necessary, the lead firm will support the suppliers’ learning through knowledge and capability transfer. However, a lead firm must guard against its suppliers becoming so competent and powerful that they may encroach upon the lead firms’ competitive edge as the system integrator in the GVC. So the lead firm must ensure that the learning dimensions of the dependent firm do not impinge upon the core technologies, neither upon those competences underlying the strategic functions – such as system integration, marketing, and after-sales service. A firm’s learning can be exercised in various ways.9 Most obviously, learning can take the form of formal education and R&D. Such formal learning may equip a firm with the codified (or tangible) knowledge; for instance, the operational manuals of new equipment that is to be

88 The Challenges of Late Industrialization

introduced into sourcing activities. In many cases, more significantly, learning is largely experience-based rooted in ordinary economic and social activities, as summarized by Lundvall (1992: 9): Such activities involve learning-by-doing, increasing the efficiency of production operations (Arrow 1962), learning-by-using, increasing the efficiency of the use of complex systems (Rosenberg 1982), and learning-by-interacting, involving users and producers in an interaction resulting in product innovations. (Lundvall 1988) Such experience-based learning enables a firm to acquire tacit (or intangible) knowledge and to perform given activities better and more quickly through repeated trial-and-error. In a dynamic sense, moreover, both formal and experience-based learning may also equip the firm with the so-called ‘absorptive capacity’ (Cohen and Levinthal 1990) that enables it to assimilate related, but new knowledge effectively, and apply it innovatively to the firm’s activities.10 This implies that firm learning is a reinforcing process: the more the firm has learned, the more efficiently the firm is able to absorb related knowledge. Especially, experience-based learning also underlines the pathdependency and domain-specificity of the firm’s competence and of the path of its upgrading. To paraphrase the words of Teece, Pisano et al. (1997): the notion of path dependencies imply that where a dependent firm can go in the upgrading process is a function of its current position and the paths ahead. Its current position is often shaped by the path it has travelled (Teece, Pisano et al. 1997: 522). This follows because the firm’s learning is cumulative – a set of competences and the absorptive capacity that a dependent firm currently possesses are a product of what they have thus far learned within the previous domain of activity. As a result, the learning opportunities of the firm might be ‘closed in’ (Teece, Pisano et al. 1997: 523) to previous activities. To put it differently, the firm learning dimension could be ‘locked out’ (Cohen and Levinthal 1990: 136) from unrelated activities. Hence, the firm learning is domainspecific; and such nature of firm learning gives rise to the so-called ‘learning trap’ – that is, the firm is confined to a certain domain of activities (Aoshima and Kato 2003: 172–7). In turn, the lead firms could exploit such learning traps in order to control the growth of dependent firms. By strictly restricting the domain of current sourcing activities and keeping them tightly aligned with actual business needs, lead firms can affect the learning path of dependent firms concentrating on making them into more useful

Upgrading in Global Value Chains: Analytical Framework 89

and reliable suppliers for them. Those dependent firms will only be competent to effectively meet the lead firms’ sourcing requests, and they will not possess the competences for directly challenging the lead firms’ competitive position. From the dependent firm’s point of view, the closer they align their sourcing activities to those of the lead firms, the more they will link their growth and future to performance of the lead firms. By exploiting the social attributes and path-dependency of the learning process, therefore, the lead firms can control the growth of dependent firms at the deepest level – moulding the latter’s learning trajectory. To summarize the lead firm’s control over the growth of dependent firms, the lead firms exert the ‘structural power’ throughout the GVC, by determining ‘what to do’ and ‘what not to do’, and more fundamentally ‘what to learn’ and ‘what not to learn’ in the sourcing activities. On the other hand, to achieve upgrading, the dependent firms must pursue a discontinuous learning process by mastering the specific learning dimensions, which the lead firms require for each tier of suppliers. If necessary, they often support their suppliers’ learning through the limited knowledge and capability transfer. Nevertheless, they most carefully try to prevent the dependent firms from upgrading to a higher level – through acquiring the critical, difficult to reproduce, or scarce competences – enabling them to encroach into their dominance in a GVC or to challenge their competitiveness as a system integrator. Fine (1998) puts it in a metaphoric way: every time that lead firms make sourcing decisions, ‘it is planting a “capability seed” that has the potential to grow into a valuable and powerful organizational competency’ (Fine 1998: 159). Thus, lead firms must be careful neither to plant those ‘capability seeds’ to their suppliers beyond what is absolutely necessary, nor to allow them to sprout and grow so powerfully that the suppliers come to pose a potential threat to their own competitiveness. In other words, by carefully confining the sourcing activities into the non-strategic activities, the lead firms must block the chance for dependent firms to gain experience-based learning in the core technologies and strategic functions. The lead firms often exercise the power to be deaf to the suppliers’ demands to take part in strategic activities in the contract negotiation (Kaplinsky and Morris 2000: 66).11 Moreover, such lead firms’ control over the growth of dependent firms in a GVC seems to highlight the structural limitations of the upgrading strategy of FLI. It seems to imply that there is a ‘glass ceiling’ inherent in the upgrading process. Dependent firms will inevitably hit the glass ceiling as a result of the ‘controlled’ growth of the firm in a GVC. In

90 The Challenges of Late Industrialization

the empirical part of this study, we will examine the possibilities and limitations of upgrading in the case studies on the Japanese aircraft industry.

4.2

Determinants of upgrading

We have thus far discussed the upgrading process in general terms. In this section, we turn to further focusing our analysis on the individual prospects for upgrading. What determines the prospects of upgrading for a particular dependent firm? Why can (or cannot) a particular dependent firm achieve upgrading as a supplier within a GVC? To answer these questions, we identify three critical factors, which will promote and/or impede a dependent firm in upgrading its activities towards a higher value-added level; these are: • Lead firms’ sourcing strategies: Lead firms’ strategic goals for outsourcing that in turn determine a mode of sourcing relationships. They determine whether the sourcing activities will create a learning platform that may bring about knowledge transfer and experiencebased learning. • Dependent firms’ dynamic strategic fit: The fitness of dependent firms’ strategies over time in relation to the ever-changing external factors – primarily, the nature of available global sourcing – and the internal factors, including a current portfolio of competences and learning potential. It determines the likelihood of a dependent firm’s potential to upgrade its sourcing activities in the long run. • Local institutional setting: The nature of industrial networks and policy networks, in which dependent firms are locally embedded. By influencing the way the embedded firms operate, it either supports or hinders the dependent firms in their efforts to attain a dynamic strategic fit. We derive these three determinants for upgrading from the in-depth case studies conducted on the post-war development of the Japanese aircraft manufactures (see Chapter 5). On the basis of the multi-disciplinary literature that concerns the global sourcing, the supplier system, the firm strategies, and the institutional aspects of the firm among others, we also examine the logic behind those determinants, how and why they are important factors underlying the upgrading process as well as how they interrelate with each other.

Upgrading in Global Value Chains: Analytical Framework 91

We try to argue in this section that the upgrading prospects of dependent firms are largely shaped by the three determinants listed above both individually and jointly. More specifically, they create opportunities for and/or the barriers against a dependent firm’s attempts to acquire those dual-faceted competences that generate higher rent as well as stronger bargaining power within a GVC. In the following sections, we will delineate those determinants’ individual and systemic influences on the dependent firms’ prospects for success in upgrading within a GVC.

4.2.1

Lead firm’s sourcing strategies

Due to their dominant role in a GVC, the lead firms’ sourcing strategies should be considered the first determinant for the upgrading of dependent firms. The prospect of upgrading by dependent firms in general depends on the nature of the intermediate goods market. The larger and deeper the intermediate goods market, the wider the ‘windows of opportunities’ for upgrading become. As we saw in the preceding chapter, such ‘windows of opportunities’ for upgrading have been opening even wider in the commercial aircraft industry. Facing ever-fiercer competition and increasing technological complexities with the limited resources and capabilities at hand, lead firms have been compelled to outsource more value-added activities in the GVC to their suppliers. Hence, as a result of the recent (on-going) global business transformation, which we discussed in Chapter 3, the lead firms have enlarged the scale and scope of global sourcing, raising the quality of sourcing activities, and intensifyed sourcing relationships (see section 3.2.2). The above account of better prospects for upgrading should be seen as a general trend in the whole industry. Nevertheless, the individual prospect of upgrading is different for each dependent firm engaged in the discrete types of global sourcing. Thus, whether a particular dependent firm will be able to upgrade through undertaking sourcing activities is not a given a priori. In order to upgrade, the dependent firm must undertake such global sourcing that will create learning opportunities. Those sourcing activities will give the dependent firm the opportunity to carry out experience-based learning – such as learning-bydoing, using, searching and interacting – to acquire new dual-faceted competences for upgrading. On the other hand, the lead firms, as we discussed in the preceding section, try to keep the learning potentials of the dependent firms under control by carefully selecting what categories of sourcing activities they will make available to their suppliers.

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Referring once more to Fine’s metaphor; every time lead firms make sourcing decisions, ‘it is planting a “capability seed” [that is, learning opportunities through experience-based learning] that has the potential to grow into a valuable and powerful organizational competency’ (Fine 1998: 159). At the same time, however, lead firms try to limit the extent to which each ‘capability seed’ may sprout and grow in each dependent firm in order to keep them aligned with their own sourcing strategies. The lead firms’ sourcing strategies can be broadly categorized into three groups on the basis of their different strategic goals. Although it is difficult to clearly separate those strategic goals since they usually work in combination and are complementary, we can heuristically identify the following strategic goals; they are (i) short-term cost reduction, (ii) long-term value-creation, and (iii) various business issues.

4.2.1.1 Short-term cost reduction versus long-term value creation Cost reduction sourcing (CRS). Lead firms may primarily pursue reduction in production cost by outsourcing non-strategic and low-skill activities to dependent firms from which they can buy those services more cheaply than it would cost them to carry it out themselves. Also, following the logical stream of transaction cost economics, externalizing certain activities can be seen as a means of minimizing the transaction cost in the make-or-buy choice over intermediate goods – when the administrative costs for internalizing those activities surpass the transaction cost for sourcing from suppliers. Clearly, the primary strategic goal for such ‘cost reduction sourcing (CRS)’ is to purchase non-strategic and low-skill products and services from suppliers at the lowest price given a satisfactory level of quality, cost and delivery (QCD). The CRS usually leads to a short-term sourcing contract, which is characterized by arm’s-length and ‘bargaining oriented’ inter-firm relationships (Nishiguchi 1994: 174). In such situations, the lead firms try to bargain with suppliers for a cheap price by always making clear their option to switch suppliers in the short term. This sourcing strategy can be well illustrated by following Helper (1993) to adopt Hirschman’s (1970) ‘exit/voice’ dichotomy of strategic behaviour. A lead firm using the ‘exit’ option – which is the case of CRS – will look for a new supplier, whereas the ‘voice’ option – which is the case in the ‘value creation sourcing (VCS)’, as we will see below – implies that the lead firm will work together with the supplier in order to fix the problem (Hirschman 1970; Helper 1993; Ruigrok and van Tulder 1995). To make the ‘exit’ option available all the time, the lead firms in CRS maintains an armlength distance from suppliers.

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The lead firms in CRS are interested in the suppliers learning no more than what is absolutely necessary for them to carry out non-strategic and low-skill sourcing activities at the required level of QCD. In other words, dependent firms cannot expect that much learning will derive from CRS, in which the experienced-based learning is strictly low-level and shortterm. Nor do they have much room for learning through trial-and-error because the lead firms give them detailed directions with a clear set of parameters that define the sourced product and the production process, as seen above. Furthermore, the knowledge and capability transfers are minimal since the sourcing relationship is essentially arm’s length. Therefore, the CRS may simply reaffirm the advantages that lead firms have in a GVC and their ability to internalize strategic and high value-added activities and externalize cost cumbersome and low skill activities (Radosevic 1999: 185). It may be also seen – in the Marxist term – as a mechanism for lead firms to appropriate a part of the value produced by dependent firms. It may take shape in offshore sourcing or in sourcing to exploit temporary advantages in labour cost and tax advantages (Radosevic 1999: 184–5).

Value creation sourcing (VCS). As for the strategic goals of global sourcing, lead firms may primarily emphasize the creation of new values through sourcing relationships, rather than solely focusing on the reduction of procurement costs of intermediate goods and services (Zajac and Olsen 1993; Chesnais 1996). Such ‘value creation sourcing (VCS)’ pursues what Zajic and Olsen (1993) call ‘transaction value’, which is contrasted with the more traditional notion of transaction cost. Transaction value emanating from global sourcing implies synergic inter-firm collaboration between the sourcing partners, giving rise to the so-called relational rents in addition to what could have been achieved by either firm in isolation (Dyer and Singh 1998: 662; Madhok and Tallman 1998: 328). Various scholars have traced the sources of those relational rents, which are in turn the source of transaction value in global sourcing; these are: • Investments in relation-specific assets (Klein, Crawford et al. 1978; Dyer and Singh 1998); • Synergic combination of complementary resources and capabilities (Chesnais 1996; Dyer and Singh 1998); • Unique informational efficiency and substantial knowledge exchange brought about by repeated interactions and joint learning (Aoki 1988; Dyer and Singh 1998).

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In short, the above factors give rise to relational rents through intimated alignment and intensified information sharing between the sourcing partners. However, as discussed in the previous section, such close sourcing relationships may also induce opportunism, particularly by the suppliers, and result in high transaction costs, which may negate the relational rents (Madhok and Tallman 1998). ‘Transaction value’ and ‘transaction cost’ should be seen as two sides of a coin. Thus, the lead firms must be sure to exert effective control to prevent suppliers’ opportunistic behaviour when they aim to create new transaction value through VCS (see section 4.1.2.2). VCS leads to a long-term sourcing contract, which is characterized by a closely aligned and ‘problem-solving oriented’ inter-firm relationship. In such situations, the lead firms exercise the ‘voice’ option, in which they work together with the supplier in order to achieve continuous quality improvement and cost reduction for sourced products and activities over a period of time. When the suppliers face problems and fail to achieve their objective, as Nishiguchi (1994: 172–3) elaborates, the lead firm would usually resort to exhaustive data collection from the suppliers, data analysis and recommendations in order to find a solution. If the problems were found to be more serious than expected, on-site inspections and rigorous retraining of the supplier would follow. It is unusual for the lead firm to fire or switch their suppliers in the shortterm without attempting such collaborative attempts to solve the problems. As documented in many studies on sourcing relations, such VCS policies have been well developed in Japan, and constitute important sources of competitive advantage for some Japanese industries, particularly the automobile industry (Nishiguchi 1994; Dyer and Singh 1998). VCS may provide dependent firms with dynamic learning opportunities. Lead firms tend to be more interested in nurturing the suppliers’ capabilities than they are in the case of CRS. This is because the lead firms usually try to employ VCS as a mechanism to make use of their suppliers as so-called ‘external capabilities’ (Langlois and Robertson 1995: 68) or ‘external firms’ (Nolan 1999: 75) according to their own needs. Rather than simply benefiting from the suppliers’ cheap labour or tax advantages, which is often the case with CRS, lead firms engaging in VCS pursue joint learning through intensive information sharing with the suppliers in order to achieve the systemic competitiveness throughout the GVC. However, it should be reiterated that the lead firms are not interested in the suppliers’ learning per se. Instead, they always try to control the suppliers’ learning to be closely aligned with their needs as

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well as to prevent the suppliers from becoming sufficiently competent enough to be a potential competitive threat (see section 4.1.2.3).

4.2.1.2

Business issues

There are mainly two types of business goal for global sourcing. One is to pass on an element of risk to suppliers throughout a GVC. Another is to enter the local market of the suppliers. Such business issues, for instance, play a significant role in global sourcing in the commercial aircraft industry. The industry bears very high risk due to its high development costs with long gestation period. On the other hand, marketing competition is extremely severe in the commercial aircraft industry due to the small unit number of total demand in the global market. It is common conduct that lead firms in the industry strategically use global sourcing as a political tool to gain favourable access to the suppliers’ local market. Such sourcing is specifically called ‘offsets’, which Mowery (1999) defines as: An offset is a provision in an international export transaction that commits the seller firm [that is, lead firm] to provide technology, to procure locally produced components, or to provide other forms of technical and other assistance to firms in the purchaser nation that go beyond those deemed economically necessary to support the sale. Offsets typically are undertaken by the selling firm in response to formal or informal demands made by the government of the purchasing nation. (Mowery 1999: 85) [emphasis added.] Global sourcing driven by such business issues may share the nature of either CRS or of VCS, as a result of a complex contractual negotiation between sourcing partners (Table 4.2). Therefore, a particular dependent firm would have more learning opportunities and in turn a better prospect for upgrading in the GVC Table 4.2 Alternative types of global sourcing Lead firm’s primary strategic goal

Cost reduction

Value creation

Lead firm’s strategic behaviour Sourcing relationship Sourcing period Dependent firm’s learning potential

Exit Bargaining Short-term Small

Voice Problem solving Long-term Large

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when it engages itself in ‘value creation sourcing’ rather than in ‘cost reduction sourcing’. In practice, the lead firms would make strategic decisions on the nature of global sourcing through a contractual negotiation with suppliers by taking into account various factors, including economic (cost), business (risk dispersion and market access), political (favourable treatments from the local governments of latecomer firms), and technological (learning potential of dependent firms).

4.2.2

Dependent firms’ dynamic strategic fit

The firm-level approach employed in this study places the factors directly concerning dependent firms at the centre of our analytical framework for the upgrading process in a GVC. As is the case with any other firms, successful formulation and implementation of corporate and business strategies are key factors for dependent firms wishing to grow and upgrade. However, the active role for managerial strategy has been largely neglected in the discipline of development economics (Chesnais 1996: 27). It tends to see the firm as a passive reactor to factor endorsements, in the case of the neoclassical school, or to transactional circumstances in the case of the transaction cost school. It is surely unacceptable in the context of globalization, where a small part of a firm’s success as well as a nation’s industrial development can be explained by the efficient allocation of endorsed factors of production or by the economization of transaction costs. Our analytical framework thus takes fully into account the dynamic roles of dependent firms in the upgrading process, namely the strategic intent and learning effort. To gain and sustain competitive advantage either as a system integrator in the finished product market, or as a supplier in the intermediate goods market, a firm needs to formulate its strategy in an effective way to cope with, and if possible influence the changing environment. As for the first step towards successful corporate strategies, a firm needs to grasp clearly the opportunities and threats existing in its environment, which is in turn a product of competition, customer’s preference and technology. At the same time, a firm also needs to identify correctly its strengths and weaknesses on the basis of its internal factors – the nature of its competences and organization. Then, a firm has to formulate and implement its strategies so as to be consistent with both its external and internal environments (Grant 1998: 13). The consistency of corporate strategies in regard to both a firm’s external and internal environments can be encapsulated by the notion of ‘dynamic strategic fit’ (Itami and Roehl 1987). The concept of strategic

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fit postulates that a successful strategy enables a firm to make the match between its internal competences and organization, on the one hand; and the opportunities and risks created by its external environment, on the other (Hofer and Schendel 1978: 12). Moreover, to achieve upgrading over time – adapting what Itami and Roehl (1987) contends – a dependent firm must attain the strategic fit dynamically in relation to the ever-changing environment in the intermediate product market as well as in relation to the ever-increasing level of competences required for upgrading. Figure 4.1 illustrates the dynamic strategic fit of a dependent firm.

4.2.2.1

External fit

In general, a successful corporate strategy, on the one hand, has to achieve dynamic external fit by setting its domain of activities in line with the characteristics and trends of the firm’s external environment, such as customer preference, competitor behaviour and technological progress. A firm sets its domain of activities through articulating its own product/market portfolio and operational sphere. The product/market portfolio in turn includes decisions such as in which product areas and

External Factor Lead firms’ sourcing strategies Learning opportunities Lead firm’s competitiveness

Setting the domain of activities in line with the dynamic trends of external factors

External fit Domain of activities Dependent firm’s strategy

Dynamic strategic fit

Internal fit Internal factor Competence backing Relation-specific competence

Learning to fulfil the competence gap

Figure 4.1 Dynamic strategic fit of a dependent firm Source: Developed based on Itami (1987: 1–11)

Targeted higher value-added sourcing activities

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market segments to operate by answering the question ‘what to sell, and to whom’; and the operational sphere includes decisions on what activities in the value chain to undertake internally by answering the question ‘what operations to do in-house’ (Itami and Roehl 1987: 3–5). In particular, being a supplier in a GVC, a dependent firm can attain the dynamic external fit for its strategy by setting its domain of activities in line with the characteristics and trends of the lead firms’ sourcing strategies. At the same time, the dependent firm should try to focus its domain of activities to provide it with opportunities to learn and grow over time. There are mainly three building blocks for the dynamic external fit of a dependent firm. First of all, aiming to achieve upgrading, dependent firms must be selected as suppliers by lead firms and be involved in a GVC. In order to do so, dependent firms must swiftly identify which intermediate goods and activities the lead firms are likely to outsource by carefully observing changes in the lead firms’ sourcing strategies. Then, dependent firms must dynamically adjust their domains of activities and be ready to undertake the sourcing activities emerging in the intermediate goods market. Secondly, the dependent firm should focus on the domains of activities, which will provide it with a dynamic platform for learning and upgrading. We shall examine in the following section what kinds of sourcing activities may induce the dynamic learning of the dependent firm. Thirdly, a dependent firm must make a correct decision about which lead firm’s GVC it attempts to enter and upgrade. As explained in the preceding chapter, a dependent firm by nature depends for its fate on the lead firms’ competitiveness in the finished product market. Even though a dependent firm might be successful in upgrading within a certain GVC, if the lead firm of the concerned GVC fails to gain competitive advantage in the finished product market, then the dependent firm won’t be able to achieve firm-based late industrialization. It is very difficult to identify the correct lead firm a priori, but the dependent firm must carefully investigate which lead firm is likely to have the better chance to gain sustainable competitive advantage, by examining its core competences, financial strength and GVC management.

4.2.2.2 Internal fit: (static) competence backing and (dynamic) learning potential On the other hand, successful strategies must also obtain internal fit by being sufficiently supported by the firm’s internal competences – that is, competence backing. It is costly and time-consuming for firms to

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acquire new competences, especially those relating to high value-added products and activities due to their technological complexity, tacitness and high barriers to entry. Since a firm cannot expand its competence base in a short period of time, it needs to have sufficient competence resources to carry out its intended strategy. Nevertheless, competence backing is only one element of the internal fit of a dependent firm’s strategy. It is a static element, but upgrading is a dynamic process by nature. The dependent firm cannot achieve upgrading in a GVC as long as it contents itself with a static strategic fit – undertaking sourcing activities to the extent that the firm’s static competence backing allows. Pursuing upgrading FLI strategy, a dependent firm must aim to become a higher level supplier in the GVC. It further must learn the new competences necessary to accomplish the specific learning dimensions to reach the upper hieratical levels of suppliers, which were delineated earlier (see Table 4.1). For example, to upgrade from a piece-part subcontractor to a sub-system supplier, a dependent firm needs to learn how to carry out effectively detailed design and manufacturing of components, together with the relation-specific skills in the sourcing relationship. In other words, whether a dependent firm succeeds in upgrading itself to the targeted higher level of supplier largely depends on its (dynamic) learning potential – how efficiently it can accumulate the newly required competences to upgrade itself to the targeted supplier level in the GVC.12 Such learning potential is manifested in both formal and experiencedbased learning processes (see section 4.1.2.3).

Dependent firm learning. Particularly, in the case of a dependent firm, its learning process is dominantly incremental and cumulative in nature rather than radical and path-breaking because they are usually lagging in the technology and market frontiers (Hobday 1995: 46–7). Hence, the core learning process of a dependent firm is to absorb external knowledge that already exists in other firms as well as in the market. The learning potential of a dependent firm is largely a function of (1) the scale and scope of the new external knowledge to which the dependent firm is exposed; (2) the ability to absorb the new knowledge and apply it to sourcing activities in an innovative way, and (3) sufficient financial resource to invest in learning. First of all, the extent of external knowledge to which a dependent firm is exposed in turn depends on (i) the intensity of information sharing with lead firms in sourcing relations; and (ii) the knowledge inflow from the institutional setting, in which the firm is embedded. Since the latter factor will be discussed in the following section, we

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here only give a supplementary explanation for the first factor. In the preceding section, we explained that the intensity of information sharing in sourcing relationships was largely affected by the lead firm’s sourcing strategy, that is, either ‘short-term cost reduction’ or ‘long-term value creation’ (see section 4.2.1.1). Furthermore, it is also determined by the nature of the parts that the dependent firm supplies. For example, piece-part subcontractors have very limited information sharing with lead firms because they simply manufacture exactly according to the designs handed over from the latter – that is, ‘drawing-supplied’ manufacturing. In this case, knowledge inflow to dependent firms is largely limited to what is necessary to put the pieces together at the required level of QCD and no more. On the other hand, by playing a part in product development, subsystem suppliers can expect a much larger scale and scope of knowledge inflow from lead firms. This is because to design and manufacture the sub-systems that fit smoothly into the whole system, the dependent firm has to learn beyond ‘component knowledge’ particular to its own work package. To a certain degree, sub-system suppliers need to acquire ‘architectural knowledge’ of the whole system.13 In product development of multi-component/multi-technology products, firms are required to ‘know more than they make’ (Brusoni, Prencipe et al. 2001) to achieve coherence in a GVC (Takeishi 2002). It would lead to considerable information sharing with lead firms. Such information sharing would be particularly intensive for ‘significant’ suppliers – such as a risk-sharing/a programme partner – in the international collaboration project. Thus, those high-level supplier positions in the GVC are likely to provide a dependent firm with the platform for learning. Secondly, to make the knowledge inflow actually productive, dependent firms should be able to efficiently assimilate the external knowledge, and to put it to use in carrying out sourcing activities effectively and innovatively. As briefly described earlier, Cohen and Levinthal (1990) term such firm’s ability ‘absorptive capacity’ (see sections 4.1.2.3 and 4.2.2.2). Drawing on the classical work of cognitive psychology, they assert that a firm’s absorptive capacity is largely a function of the level of prior related knowledge. Cohen and Levinthal refer to studies in the area of cognitive and behavioural sciences at the individual level, which suggest that prior knowledge enhances learning in a cumulative and self-enforcing way (Lindsay and Norman 1972; Bower and Hilgard 1981). Those studies imply that, according to Cohen and Levinthal, the learning is self-enforcing – ‘learning performance is greatest when

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the object of learning is related to what is already known’ (Cohen and Levinthal 1990: 131). Although Cohen and Levinthal (1990) only consider the assimilation of external knowledge, the notion of absorptive capacity also has relevance for experience-based endogenous learning, such as learningby-doing and learning-by-using. The firm can bring about endogenous learning by reflecting on its own experience – finding lessons to be learnt from its own experience and implementing them in their future activities. A firm’s capacity to reflect its own experience is also largely a function of the level of prior related knowledge. In this case, therefore, the object of learning is internal to the firm rather than external to the firm. Furthermore, applying the notion of absorptive capacity to the upgrading process, a dependent firm with long experience of manufacturing, for example, is likely able to learn product-related competences (such as component design and assembly) more efficiently than the market-related competences (such as marketing and after-sale service) (see Figure 4.1). More generally, this suggests that the learning process required to upgrade from a piece-part subcontractor to a sub-system supplier is usually easier than that from a sub-system supplier to a module maker or to a system integrator. In the former case, the learning dimension is largely contained within the product-related knowledge (that is, acquiring the related knowledge to enhance what is already known). Whereas in the latter case, the dependent firm needs to acquire the market-related competences, which may be unrelated to what the firm already knows. We have thus far discussed absorptive capacity in general terms. Nevertheless, a dependent firm must also attain the so-called ‘relationspecific’ competence in relation to the particular lead firm. As discussed earlier in section 4.1.1, relation-specific competence enables a dependent firm to be sufficiently responsive to understand and accommodate the lead firm’s specific needs (Asanuma 1989). Hence, relationspecific competence can be regarded as that special absorptive capacity, by which a dependent firm may effectively assimilate and utilize the knowledge inflow from a particular prime contractor. It can be attained only after repeated interactions with the particular lead firm. Relationspecific competence is particularly critical for a sub-system supplier that needs to have intensive information sharing with its lead firm. In turn, such intensive information sharing will bring about a larger knowledge inflow into the dependent firm.

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Thirdly, for a dependent firm learning is not free nor is it an automatic process, such as what traditional neoclassical economics assume to be the international technological ‘diffusion’ (Baumol 1986; Dowrick and Gemmell 1991). Successful learning actually incurs significant costs in carrying out continuing innovation to further the original knowledge – such as (i) moulding to fit particular conditions of use in a widening range of specific situations, and (ii) further improvement to attain higher performance standards beyond those originally achieved (Lall 1992; Bell 1997: 86). More essentially, to take advantage of an effective learning opportunity that would bring about a large knowledge inflow, a dependent firm must, in the first place, be able to mobilize sufficient finance to take part in the GVC as a significant supplier, such as a subsystem supplier. The amount of finance necessary to be a significant supplier, as seen in section 3.2.2.3, has increased since the system integrators began to adopt lean production principles and to rely upon fewer significant suppliers to provide an ever-larger bundle of goods and services. Especially, securing sufficient finance to bear component development cost is a precondition for a dependent firm wishing to enjoy large knowledge inflow by becoming a sub-system supplier in a GVC. Component development cost includes, for instance, purchasing and/or creating new tooling, building new facilities, carrying out the trial-and error in designing, manufacturing and testing new components. Hence, the dependent firm must carefully examine the required extent of financial resource for undertaking supplier activities that bring about learning opportunities. It must also discover access to sufficient financial resources. If the firm should not be able to raise sufficient money for the investment internally, it must look for other possible sources of financing externally – such as co-financing with collaborative firms, or loan and subsidy provided by government agencies and/or the business association. Such external financial support for the dependent firm learning will be further discussed in the following section.

4.2.3

Local institutional setting

The last, but not the least determinant of upgrading is the institutional setting in which dependent firms are locally embedded. By directly and/or indirectly influencing the way the dependent firms operate, the local institutional setting can either support or hinder them in their efforts to attain a dynamic strategic fit and in turn to achieve upgrading.

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The local institutional setting of dependent firms consists of an industrial network and a policy network.

Industrial network. An industrial network is a collection of various relationships that dependent firms maintain with other organizations, of which a firm is one kind (Håkansson 1990). Such inter-firm relationships consist of vertical ones (for example, with suppliers, prime contractors, sales dealers and so on) and horizontal ones (for example, with partnering firms in collaborative projects, other organizations such as research organizations, government agencies, trade associations and so on). There are two basic functions of industrial networks; deriving from the literature of network14 and institutionalist15 approaches in economics, sociology and management studies: (1) To create ‘the dense network of co-operation and affiliation by which firms are inter-related’ (Richardson 1972: 883). It facilitates consolidation and/or coordination of the resources and capabilities of the different firms’ with the intention of jointly carrying out complementary activities.16 No firm is in itself a self-sufficient organization; firms are interdependent on each other to a certain degree (Pfeffer and Salancik 1978; Sanchez and Heene 1997). To the extent that the individual firms specialize in a certain domain of activities, they need to supplement their own resources and capabilities with those of others in order to form an efficient value chain (Håkansson 1990; Edquist and Johnson 1997). This coordinating function of industrial networks is particularly important for dependent firms, whose resources and capabilities are individually limited. (2) To bring about interactive learning among the embedded firms. It combines different trenches of knowledge in new ways, and/or simply shares it through interaction within and between the various firms (Lundvall 1988). The former may result in knowledge creation (Håkansson and Johansson 2001) and the latter in knowledge diffusion, and both may be considered a form of innovation (Nelson and Rosenberg 1993; Hobday 1995). Such interactive learning may occur within firms (between different individuals or departments) (Nonaka and Takeuchi 1995), between firms and consumers (Lundvall 1988), between different firms, or between firms and other organizations like public agencies (Håkansson 1990; Edquist and Johnson 1997). Such multi-faceted interactive learning jointly creates a so-called ‘knowledge system’ (Bell and Albu 1999). It highlights the knowledgecentred process taking place within an industrial network, in which knowledge stocks within firms and acquired knowledge flow throughout

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the network. Thus, the efficiency of the knowledge stock and flow support the learning potential of the embedded dependent firms. Furthermore, the knowledge system cannot sustain its dynamism in the long run unless it is an open system into which new knowledge constantly flows from outside. This openness of the knowledge system within local industrial networks can be secured if the embedded firms simultaneously participate in a GVC, which consists of firms belonging to the different local knowledge systems (Bell and Albu 1999: 1726; Humphrey and Schmitz 2000).

Policy network. A policy network is a hybrid of public–private governance consisting of business associations, technology centres, as well as government agencies (Esser, Hillebrand et al. 1996; Messner 1997). It regulates the behaviour of individual firms as well as inter-firm relations in the industrial network. In other words, the policy network structures the institutional framework in which industrial networks evolve and are maintained.17 It influences both directly and indirectly the embedded firm’s strategy and operations in relation to other organizations through their three basic functions: (i) to reduce uncertainty by providing information; (ii) to manage conflict and cooperation; (iii) to provide incentives and/or constraints (Edquist and Johnson 1997: 51). For example, it might support the learning of embedded firms by facilitating knowledge inflows and providing additional resources for intrafirm investments for knowledge absorption. More specifically, business associations can facilitate the knowledge flows throughout the industrial network. Technology centres can increase the flow of new knowledge into a latecomer firm. The industrial policies executed by government agencies, such as subsidies, can increase the resources available to the firm for intra-firm investments. Especially, pursuing late industrialization, the governments of latecomers may actively mould institutional frameworks through industrial policy.18 Industrial policy can be an effective device to coordinate investments in complementary projects and promote the industrial changes in a certain direction (Chang 1994: 74–6). However, the change in direction promoted through industrial policy does not necessarily enhance, but often hinders the upgrading of embedded dependent firms, as will be seen below. Moreover, the positive influences of a local policy network on the upgrading process are most effective when the supporting activities are systemically coordinated between the various actors.

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4.2.3.1

Influences on the dependent firm’s dynamic strategic fit

We have thus far expounded the possible influences of the local institutional setting on the embedded firms in general. We will now point to their specific influences in relation to the external and internal strategic fit and learning of embedded dependent firms.

External strategic fit. Providing the firm with a certain bundle of information and incentives, the institutional setting may help or hinder dependent firms to understand and position themselves in line with the characteristics and trends of external factors, that is, customer demands and competition. While the dependent firm tries to align its domain of activities with the opportunities existing in its external environment, its decisions on product/market portfolio and the operational sphere would be moulded and guided in a specific direction by the information and incentives the institutional setting presents. More specifically, government agencies and trade associations can provide the firm with up-to-date information about customer demands and competitors by conducting market and operational research. The results of that research can be disseminated through various interorganizational relationships within the industrial network, such as government–industry joint councils and an industrial association’s PR activities on behalf of its member firms. The firm often makes the decision on its domain of activities (that is, product/market portfolio and operation sphere referring) having reference to the information available in its institutional setting. The government, in particular, can be more active or commanding in guiding the firm into a certain domain of activities by using industrial policy as a device to create artificial incentives and constraints in industrial activities. Japan’s MITI (Ministry of Industrial Trade and Industry), for instance, is well known for its active involvement in firm’s strategic decisions through administrative guidance as well as through provision of various financial incentives such as export credits, tax break, subsidies and so on for producing and exporting certain products. The aforementioned influences of an institutional setting can be either positive or negative for the firm’s efforts to achieve external fit. The firm’s strategy would be helped in achieving an external fit if the provided information were accurate and updated, and if the guided direction were to match the volatile characteristics and trends of the firm’s external factors. On the contrary, such information and guidance would become a handicap if they were inaccurate and/or not flexible

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enough to keep up with the changes in characteristics and trends of volatile competition and customer demands.

Internal strategic fit and learning. The institutional setting influences the firm’s efforts to attain the preferred balance between internal competence (i.e., resources and capabilities) and strategy, that is, internal fit, in three ways. Firstly, the institutional setting may induce the firm to choose an overextension strategy that is too ambitious or too passive. The strategy has to set its upgrading goals within the scope of learning potential. In other words, the strategy needs sufficient ‘competence backing’ (Itami and Roehl 1987: 111). It is closely related to the role of the institutional setting in respect of external fit discussed above. The firm may be encouraged or sometimes forced to target a domain of activities, where the tasks are overwhelming and/or the competition forces too severe for the firm, having regard to competence it currently possesses and its realistic prospects of learning. In such a case, the corporate strategy becomes a mere slogan. On the other hand, if the firm was encouraged or forced to employ a strategy that was not sufficiently challenging, it would lack the incentive to improve and would become slack. Secondly, the institutional setting may help the firm to utilize its competences effectively by facilitating consolidation and coordination with other firm’s competences. Any activity, whatever its position in the value chain requires that a certain set of resources and capabilities be brought together, as no firm can possess all the resources and capabilities by itself. By coordinating its own competences with others’ to carry out the complementary activities, the firm can minimize waste in competence utilization. Moreover, by consolidating its competences with others’, the firm may be able to challenge a particular domain of activities, which would be too difficult or too competitive on its own. By regulating and controlling conflicts and corporations within the interorganizational relationships, as seen above, the industrial network and institutions would thus facilitate the firm’s competence coordination and consolidation with others. Thirdly, institutional setting influences the firm’s efforts to acquire new competences, that is, learning. Institutional setting could directly increase the available resources for the firm to invest in learning. The government, for instance, may provide firms with financial support – such as subsidies and tax breaks – to purchase new equipment, to conduct in-house R&D, and so on. At the same time, the institutional setting could support the firm’s learning and innovation processes by providing technical support – such as public-funded research projects,

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External factors

• Providing market information • Pressing the administrative guidance • Creating artificial incentives and constraints

External fit

Firm strategy

• Selecting only the information and incentives that match its own strategy • Initiate and create the changes it desires

Internal fit

Internal factors

LOCAL INSTITUTIONAL SETTING

public research facilities and so on – as well as by facilitating interactive learning with other organizations, as discussed above. Such influences of the institutional setting on a firm’s learning are also important in terms of reducing the degree of uncertainty in the learning process. Learning usually requires a long gestation period and has an unforeseen outcome. Financial and content support provided by the institutional setting could reduce the uncertainty in the learning process. Moreover, the institutional setting could indirectly affect the firm’s trajectory of learning by influencing the firm’s decisions on product/market portfolio and its operational sphere. This is because, as discussed above, the firm’s current activities become the platform on which the firm could develop its competences through the learning-bydoing and learning-by using processes. Therefore, the local institutional setting may further influence the path dependencies of the dependent firms’ learning. In sum, the local institutional setting may enhance or hinder the dynamic strategic fit and learning of its embedded firms by directing their domain of activities as well as by competence backing, competence utilization and learning. Figure 4.2 summarizes the possible influences of the local institutional setting on embedded dependent firms.

• Affecting competence backing • Coordinating/consolidating the individual competences • Providing financial and learning supports

Figure 4.2 Two-way interactions between strategies and local institutional settings

108 The Challenges of Late Industrialization

4.2.3.2 Two-way interactions between the firm’s strategy and its institutional setting We have thus far focused on the influences of local institutional settings on the embedded dependent firms. However, the firm is not always passive towards the influences of its institutional setting, but can also be active in taking advantage of the institutional setting to create its own system in a material way (Texier 2000: 33). In a passive manner, the firm reacts to the institutional setting by adapting its own activity. As the institutional setting changes, the firm tries to adapt its strategy to the newly provided incentives or constraints. Taking an active approach however, the firm may select which institutional incentives and/or constraints to take into account on the basis of its strategic intent. The firm thus tries to avoid such institutional influences that might obstruct its strategic goals. Furthermore, in a proactive manner, the firm is able to influence the institutional setting. The firm can initiate and even create the changes it desires in the institutional setting in a strategic way through formal and informal interorganizational channels, such as industrial associations, policy councils and study groups among others. The initiative in these dynamic relations between the firm’s strategy and its institutional setting can change over time depending on the level of the firm’s competence and on the authoritarian nature of the institutional constraints. Therefore, for dependent firms to upgrade successfully, their strategies need to achieve optimal strategic fit and learning effect by taking advantage of the positive influences of their institutional setting, and at least minimizing its negative impact (Figure 4.2).

4.3

The dynamics of upgrading

The preceding sections discussed how each of the determinants affects the prospects for the upgrading of dependent firms in a GVC. Dependent firms are likely to upgrade when lead firms increase the global sourcing, which may provide them with learning opportunities. Dependent firms are likely to upgrade when they not only achieve a static strategic fit, but also formulate viable ‘overextension’ strategies and demonstrate effective learning to remedy their competence gap. Dependent firms are likely to upgrade when the local institutional setting in which they are embedded enhances their dynamic strategic fit and learning. Furthermore, as briefly stated above, these determinants also interact amongst each other and create a dynamic system underlying the upgrading process in a GVC. As these two-way interactions proceed,

Upgrading in Global Value Chains: Analytical Framework 109

the causes and effects of the individual determinants become blurred. This section shows how the individual determinants combine into a dynamic system by summarizing the interactions among the determinants. Nevertheless, some interactions are stronger and more important than others. The interactions among the determinants can be conceptually depicted as in Figure 4.3. (1) As we discussed in section 4.2.3.2, there is a two-way interaction between the dependent firm’s strategies and its surrounding local institutional setting. The outcomes of such two-way interactions often delineate a ground roadmap towards the firm-based late industrialization (FLI); for instance, determining which FLI strategic routes between catch-up and upgrading are to be pursued. (2) The learning potential of a dependent firm is influenced by the lead firm’s sourcing strategies. To learn through global sourcing in the

Global value chain

Lead firm’s sourcing strategies

(4)

(2)

(3)

Dependent firm’s dynamic strategic fit (Embedded) (1)

Local institutional environments

Global value chain Figure 4.3 Interactions among the determinants Note: Refer to the content for the numbers in the figure

(5)

110 The Challenges of Late Industrialization

first place, a dependent firm should be selected as a supplier to undertake sourcing activities in a GVC. Once taking part in the GVC, a dependent firm may gain the experience-based learning as well as knowledge and capability transfers from a lead firm. Moreover, as seen above, the nature of global sourcing – cost-reduction or value-creation – also shapes the learning potential of the dependent firm. (3) On the other hand, the lead firm’s decisions about which intermediate goods and/or activities to outsource are influenced by the availability of competent latecomer firms as potential suppliers. A lead firm may outsource a larger amount of work if competent suppliers are easily available. A lead firm may also favour a value-creating sourcing over a cost-cutting one if it anticipates effective learning potential in a dependent firm. (4) The lead firm’s sourcing strategies may be influenced by the local institutional setting in which the potential suppliers are embedded. A latecomer firm subsided by its government, would be more attractive as a supplier than others. More importantly, a lead firm may be attracted to establish a sourcing relation with latecomer firms, which are part of an efficient local industrial network. In so doing, the lead firm can improve and enlarge the knowledge system of its GVC. (5) On the other hand, the local institutional setting may transform itself to better accommodate the lead firm’s sourcing strategies, so that its embedded latecomer firms will have a better chance to be selected as global suppliers. Consequently, these interactions between determinants together create a dynamic system and form a context in which a dependent firm endeavours to upgrade in a GVC (Figure 4.3). Most fundamentally, they systemically create the forces that shape the possibility for a dependent firm to acquire those dual-faceted competences, which would generate higher rent and stronger bargaining power within a GVC. Nevertheless, these systemic interactions among the determinants do not capture the evolutional or the power-related aspect of the upgrading process. As we discussed in section 4.1, the upgrading process in a GVC can be seen as the incremental / path-dependent growth of the dependent firm, whose activity and learning trajectory are controlled by the lead firm. In the empirical part of this study, therefore, we will aim to explore how and why a dynamic system of upgrading has been created, implemented, developed and transformed in the context of Japanese aircraft manufacturers in the post-war era.

5 The Post-war Development of the Japanese Commercial Aircraft Production: Case Study

This chapter carries out an in-depth case study analysis of the postwar development of the Japanese aircraft industry on the basis of the analytical framework developed in the preceding chapter. As we briefly reviewed in Chapter 3, Japan has largely failed with catch-up strategy pursuing firm-based late industrialization (FLI); that is, the Japanese aircraft manufacturers have not been able to gain competitive advantage as system integrators in the finished product market. From the perspective of upgrading FLI strategy, however, they may be said to have been successful in gradually increasing total aerospace production and productivity as well as export of component parts. The Japanese post-war experience offers an apt case to examine both the difficulties and the possibilities of these two FLI strategies in the fast-globalizing commercial aircraft industry. How and why did Japan pursue the FLI catch-up strategy? What are the factors for Japan’s failure to catch up? How and why did Japan shift its FLI strategy towards upgrading? How and why has Japan achieved upgrading of FLI? How have the determinants of upgrading, which we identified in the analytical framework of Chapter 4, influenced the process of Japan’s upgrading both individually and systematically? How has the growth of Japanese aircraft manufacturers been controlled within the GVC? In this chapter, we try to answer these empirical questions by scrutinizing the transformation of the Japanese aircraft manufacturers’ competences and strategies, in relation to the evolution of the historical and institutional contexts. After briefly reviewing the pre-war and wartime period to set out the historical background, we will divide the post-war development of the Japanese aircraft production into four periods: (1) 1952–early 1960s: Japan tried to rebuild the industry through the licensed production of US 111

112 The Challenges of Late Industrialization

military aircraft; (2) Late 1950s–early 1970s: Japan pursued a catch-up FLI strategy by the YS-11 national project; (3) Late 1970s–mid 1990s: Japan shifted to an upgrading FLI strategy and achieved a successful outcome within Boeing’s GVC; (4) Late 1990s–present: Japan has become aware of the limitations of an upgrading FLI strategy and has attempted to diversify into different GVCs. Especially, we try to illustrate how and why Japan has been able to seize new opportunities for an upgrading FLI strategy having emanated from the global business transformation in the commercial aircraft industry, which we discussed in Chapter 3. On the basis of our analytical framework, we try to delineate the underlying factors contributing to the failure to catch up in the second period as well as for the success in upgrading achieved in the third period. We also shed light on how Boeing has prevented Japan from growing into a system integrator and therefore potential competitor.

5.1 5.1.1

Historical background Rise and fall of the Imperial aircraft industry

An aircraft was first introduced to Japan in 1910. Only five years later, some military research institutes started licensed production of both airframes and aero-engines by inviting aircraft engineers from France and Britain. Having observed that aircraft were deployed in combat operations in the First World War the Japanese military recognized the strategic importance of aircraft as a crucial factor in the next generation of warfare. Several private aircraft manufactures were established around 1921 – including Nakajima, Mitsubishi, Kawasaki and Kawanishi among others, and they started to take orders from both the Army and Navy. Each manufacturer signed licensing agreements with leading French, German and British firms to assemble modern aircraft and engines in Japan. Before and during the Second World War, the Japanese aircraft industry rapidly modernized and expanded under the aggressive promotion of the imperial military. The Japanese imperial military tried to accelerate the development of an independent aircraft industry after its naval force was limited by the Washington Naval Limitation Treaty of 1922 and the London Naval Arms Limitation Agreement of 1930. The military adopted the ‘Independent Aircraft Technology Plan’ in 1932, in which it declared that it would henceforth procure only aircraft and engines designed by Japanese engineers. In particular, the Imperial Navy – principal target of the arms reduction treaties – created the ¯ Naval Air Arsenal (Kugish¯ o) in 1932, to coordinate the development of

Japanese Commercial Aircraft Production: Case Study 113

independent aircraft technology. To nurture the design and production capabilities of aircraft manufactures, both the Imperial Army and Navy ordered various types of military aircraft and engines. Due to jurisdictional disputes, the Army and Navy refused to share technology or even manufacturers1 until Japan entered the Second World War. Nevertheless, they both made their manufacturers compete for orders through prototype production. To be successful, the manufacturers had to satisfy the high performance requirements set by the military. As the result of determined promotion by the Military together with the manufacturers’ diligence in improving their technological capabilities, the Imperial aircraft industry had produced several outstanding attack planes and engines by the time the Pacific War broke out. Mitsubishi’s legendary ‘Zero’ fighter equipped with Nakajima’s ‘Sakae’ engine was introduced in 1935 and dominated the skies in battle in the early years of the Pacific War. It demonstrated the superior Japanese technology – at least of a small fighter aircraft and engine – around 1940. In terms of production scale, annual aircraft production jumped more than 60 times from merely 445 planes in 1930 to 28,180 planes in 1944, and the total production during those years amounted to 88,920 planes (The United States Strategic Bombing Survey 1947: 155) (Figure 5.1). It should be noted that this stunning success of independent aircraft technology and the rapid expansion of production scale during this period 30,000

Number of aircraft

25,000 20,000 15,000 10,000 5,000 0 1930

1935

1940 Year

Figure 5.1 Japanese aircraft production 1930–1945 Source: The United States Strategic Bombing Survey (1947: 155)

1945

114 The Challenges of Late Industrialization

would become a source of post-war nostalgia of many Japanese for the Imperial aircraft industry, as we shall see later. However, Japanese superiority in the air battle began to decline in 1942 as the USA introduced cutting-edge fighters – such as the P51 ‘Mustang’ and the F6F ‘Hellcat’ – as well as large bombers such as the B29. This was partly because the Japanese manufacturers had to place precedence on increasing the number of aircraft produced rather than improving their aircraft technology, in response to the three ‘production expansion orders’ from the military. Indeed, a total of 62,400 military aircraft were produced during the Pacific War (1941–1945), accounting for three-quarters of the total number produced since 1932 (Adachi 1981: 9). Towards the end of the Second World War, the Japanese aircraft production became chaotic and its technological limits became apparent. Reviewing the problems of the Imperial aircraft industry in ¯ the post-war, the leading Kugish¯ o engineers succinctly pointed out the following weaknesses among others:2 • Although the Japanese aircraft engineers achieved Western technological levels in one after another functional area, their knowledge often remained shallow and disjointed. • They had not yet mastered mass production when production expansion orders were issued, and so the designers and production workers were in unfamiliar territory. • Military conscription deprived the factories of skilled workers and quality materials. • Inefficiencies resulted from jurisdictional disputes between the Army and Navy. • Basic technological expertise required further support and development. When Japan was defeated in 1945, its Imperial Aircraft Industry was the fifth largest in the world; comprising 12 airframe makers and seven engine makers, together with one million employees (Society of Japanese Aerospace Companies 1985: 4). However, it turned out to be impossible for an industrially backward Japan to keep up with the top levels of the world aircraft industry, which demanded high technological levels in a wide range of related industries.

5.1.2

The seven-year prohibition of aircraft activity

One of the first tasks the US Occupation executed was to dismantle the Japanese aircraft industry, which symbolized Imperial military power.

Japanese Commercial Aircraft Production: Case Study 115

In November 1945, the Occupation banned all aircraft and aerospace component manufacture, repair, instructing, research and testing. All aircraft production and research facilities were seized for reparations or destroyed. The large aircraft manufactures were broken up into several small firms and forced to produce non-military products, such as bicycles, agricultural tools and motorcycles amongst others. This prohibition of all aircraft activity lasted for seven years which later became ¯ known as the ‘seven-year blank’ (Nana Nen no Kuhaku) in the history of Japanese aircraft industry. This ‘seven-year blank’ was a critical period of dramatic advancement in world aircraft technology. It was the dawn of the jet age. Military jet aircraft became prevalent from around 1946. Also, the first commercial jet airplane, the Comet of the British De Havilland, was introduced into the market in 1952. The appearance of a jet airplane brought about a technological revolution not only in aero-engines, but also in airframe design, wing structure, materials and production process among others. This was because a jet aircraft flies much faster than a propeller aircraft. High flight speed poses the new technological challenges in aerodynamics; such as how to avoid the shock wave around the wings, or how to control high temperatures in engines and on airframe surfaces (Adachi 1981: 11). Having missed such a critical period of technological advancement, Japan suffered a critical handicap when it was allowed to resume aircraft activity in 1952. The ‘seven-year blank’ irrevocably handicapped post-war development of the Japanese aircraft industry. Nevertheless, the industrial base, which had expanded rapidly during wartime, was not completely destroyed. Each of the dismantled aircraft manufacturers would be reunited soon after the prohibition on aircraft activities was lifted. The successors of the three largest manufactures during wartime – Nakajima, Mitsubishi and Kawasaki – eventually reemerged as Fuji Heavy Industries (FHI), Mitsubishi Heavy Industries (MHI) and Kawasaki Heavy Industries (KHI) respectively (Table 5.1). As we shall see later, these three so-called ‘heavies (Juko)’ would continue to be the central force spearheading the post-war development of the Japanese aircraft industry. There is therefore some degree of continuity from the pre-war to the post-war era, in terms of industrial structure – such as collaborative research institutions and close state-industry relations – as well as the manufacturers’ resources and capabilities – such as capital, production facilities and engineers.3

116 The Challenges of Late Industrialization Table 5.1 Relative importance of Japanese aircraft and aero-engine producers 1941–1945 Firm

Airframes

Nakajima Mitsubishi Kawasaki Tachikawa Aichi Nippon Kyushu Manchuria Nippon International Kawanishi Hitachi Tachiarai Fuji Showa Tokyo Mitsui Mining Matsushita Ishikawajima Nissan Auto Toyota Auto

19,561 12,513 8,243 6,645 3,627 2,882 2,620 2,196 2,134 1,994 1,783 1,220 871 616 258 17 4

Subtotal Navy air depots Army air arsenal

67,184 1,700 1,004

Total

69,888

(%)

Aero-engines

280 179 118 95 52 41 37 31 31 29 26 17 12 09 04

24 14

(%)

36,440 41,534 10,274

31.3 35.6 8.8

1,783

1.5

2,169 837

1.9 0.7

13,571

2,286 1,633 160

2.0 1.4 0.7

110,686 4,452 1,439

3.8 1.2

116,577

Source: The United States Strategic Bombing Survey (1947: 156–7)

5.2

Rebuilding the industry (1952 to early 1960s)

On 9 April 1952, the US Occupation (SCAP) lifted the ban on aircraft and component production in Japan. This was mainly due to changes in post-war Asian geopolitics and the rise of the US containment policy against communism. Facing the naissance of communist China and the military aggression of communist expansion during the Korean War, the US decided to rebuild Japan militarily and economically in order to make it ‘a bulwark against communist expansion in Asia’. After seven years of frustration, the Japanese government and aircraft manufactures were yearning nostalgically for the aircraft engineering and industry which was part of their wartime legacy, and they quickly moved to re-establish the institutions and production facilities to rebuild the aircraft industry.

Japanese Commercial Aircraft Production: Case Study 117

5.2.1

Origins of the local institutional setting

Even before formal resumption of the aircraft industry, the bureaucracies were struggling for control over jurisdiction over the industry. The Ministry of Transportation (MOT) was in charge of civil aircraft production during the war, and had also been given jurisdiction for aircraft operations by SCAP4 during the 7-year prohibition period. Consolidating its jurisdiction over the aircraft industry, MOT drafted an Aircraft Law, which would direct not only operational matters, such as type certification, but also production matters, such as a manufacturer’s technological and production facilities’ certification. However, this Aircraft Law was opposed by the Ministry of International Trade and Industry (MITI), which tried to monopolize jurisdiction over all post-war industrial production. As soon they discovered the MOT’s intention, MITI quickly moved to set up a special task force for aircraft production administration and drafted the Aircraft Manufacturing Law countering the MOT’s Aircraft Law. In July 1952, the Diet5 passed both the MOT’s Aircraft Law and MITI’s Aircraft Manufacturing Law, but it divided aircraft administration, recognizing MOT jurisdiction for the airline’s operational activities and MITI jurisdiction for the manufacturers’ production activities. Such bureaucratic rivalry and jurisdictional divisions have lasted throughout the post-war period and decisively influenced the institutional setting. More specifically, they put the Japanese aircraft manufacturers under the strong control of MITI and its industrial policies. The Aircraft Manufacturing Law enabled MITI to use fiscal measures, including depreciation benefits and subsidies, and administrative guidance to coordinate entrepreneurial activity and manage distribution of work and technological diffusion in the industry (Samuels 1994: 204). Nevertheless, MITI’s jurisdictional monopoly over aircraft production prevented manufacturers from collecting up-to-date information about the end-users, that is, airline operators, who were under the jurisdiction of the MOT. As will be seen later, this caused some fundamental problems in the design and production of the first and only Japanese indigenous civil aircraft, the YS-11 (Yamamura 1995). Meanwhile, the relationships among the firms themselves as well as between the firms and the government gradually became closer. Responding to the formal resumption of aircraft activities, nine companies which had engaged in aircraft production in the prewar period created a discussion group in July 1952. This private group provided the basis for intra-industrial collaboration, which later developed into a formal industrial association, the Aircraft Industry

118 The Challenges of Late Industrialization

Association in 1954. Keidanren (the largest cross-industrial business association in Japan) also established a Defence Production Committee (DOC) in 1952. On the public side, MITI established an aircraft division – ¯ Bukika) – within later called the Aircraft and Ordinance Division (K¯okuki its Heavy Industries Bureau. MITI furthermore modified the Aircraft Manufacturing Law in 1954 to gain a tighter grip over the industry, aiming to avoid over-investment in the industry by facilitating collaboration between the firms. A communication channel between the firms and the government was also established with the creation of the Aircraft Production Council (Shingikai) in September 1952. The Aircraft Production Council has developed into an important forum, where MITI and the aircraft manufacturers sit together and discuss crucial issues concerning the industry’s development. Thus, the seeds of the local institutional setting quickly sprouted to affect aircraft manufacturers in the first couple of years after the post-war resumption of aircraft activities in Japan.

5.2.2

Learning through licensed production

The aircraft manufacturers started rebuilding their production capabilities through repair and maintenance contracts from the US Force stationed in Japan. The first such contract went to Showa Aircraft in July 1952 for the overhaul of US Navy liaison planes, trainers and transports. Kawasaki started entering into similar contracts with the US Air Force in December 1952, followed by Mitsubishi in 1953 and Shin-Meiwa in 1955. At the same time, Japanese component vendors (including Nihon Musen, Kabaya and Fuji Precision) started repairing US equipment. These activities enabled the Japanese aircraft manufacturers to advance their aircraft engineering skills rapidly, but also confronted them with the harsh reality that their aircraft technologies were far behind those of Europe and North America following the seven-year prohibition period. Studying technological papers sent from the United States and by visiting aircraft factories in the United States, the Japanese manufacturers learned the new methods of process engineering, such as tooling, inventory and quality management.6 These US military orders were also crucial in re-establishing the financial bases of the aircraft business in Japan.7 For the next step in improving their modern aircraft manufacturing capabilities, the Japanese aircraft manufacturers engaged in the licensed production of the US military aircraft. The first licensed production took place when FHI started to produce the Beech Aircraft’s T-34 trainer (a single propeller plane) in 1954 (Table 5.2). The T-34 was later upgraded

Japanese Commercial Aircraft Production: Case Study 119 Table 5.2 Licensed aircraft manufacturing in post-war Japan Year

Model

Type

Licensor

Licensee

Units Produced

1954 1955

B-45 (T-34) F-86F

Single propeller Jet

FHI MHI

162 300

1955 1957 1959 1961

T-33A L-19 P2V-7 F-104J

Jet Single propeller Large piston aircraft Jet

KHI FHI KHI MHI

210 22 48 230

1969

F-4EJ

Jet

MHI

140

1981 1981

F-15J/DJ P-3C

Jet Large turbo-prop

Beech Aircraft North American Lockheed Cessna Lockheed Lockheed McDonnell Douglas McDonnell Douglas Lockheed

MHI KHI

199 105

Source: SJAC (2002b: 36)

by the T-1, which was the first jet plane indigenously produced in postwar Japan. Licensed production became the core activity for the Japanese manufacturers after they were offered licenses for the North American F-86 and the Lockheed T-33 trainer. MHI and KHI were appointed prime contractors for the F-86 and T-33 respectively in June 1955, but their production processes were largely shared with other manufacturers under the administrative guidance of MITI. The total costs (in current price) for licensed production of F-86 and T-33 together amounted to 56.6 billion yen; and they had produced 300 F-86 by February 1961, and 210 T-33 by March 1959. These license contracts opened significant opportunities for Japan both in terms of financial benefit and technological development. Licensed production was enthusiastically supported by the United States, which wanted Japan to bear more of the military burden in postKorean War Asia. Furthermore the United States offered subsidies to assist Japanese production of the T-33 trainer (70 million yen (in current price) each plane) and the F-86 fighter (150 million yen (in current price) each plane) (Society of Japanese Aerospace Companies 1985: 23). The subsidies were offered under the terms of the Mutual Defence Assistance Agreement (MDA). The MDA created a scheme to appropriate $50 million earned from selling maize to Japan for ‘strengthening the Japanese defence production and industry in general’ (Adachi 1981: 12). The United States would finance more than half the production cost of Japan’s first post-war jet fighter.

120 The Challenges of Late Industrialization

5.2.2.1

Indigenization process

The Japanese manufacturers were aggressively sought to absorb modern technologies through licensed production by increasing the rate of indigenization in the ‘phase-in procedure’ (Hall and Johnson 1970: 320). The first stage of both the F-86 and T-33 programmes began with licensees simply assembling knockdown kits supplied by the licensors. Knockdowns were replaced by shipments of component parts in the second stage when the licensees’ own assembly tools had become completely operable. As production tooling was completed, Japanese manufactured parts were used in assembly in the third stage. The US licensors generously transferred production technologies to the Japanese manufacturers especially during the early stages of the programmes.8 Japanese licensees received all product and process designs and specifications, a great deal of planning information as well as the statistical quality control technique, which was first introduced to Japan at that time. Technical assistance included not only the formal data on tooling and tool design, but also the informal data written in the notes and black books of foremen and other production line personnel. Mitsubishi modernized its production facility with F-86 tools directly supplied from North America’s factory in Columbus, Ohio. Kawasaki also received approximately 2,000 separate tooling designs from Lockheed (Hall and Johnson 1970: 316–17; Samuels 1994: 209). In this way, Adachi (1981: 12) asserts that Mitsubishi and Kawasaki’s production operation and management techniques came to surpass their pre-war capabilities.9 The rate of indigenization rose as the Japanese manufacturers assumed full manufacturing responsibilities with US material support primarily limited to ‘hardcore’ items, which were defined as those items ‘beyond the capability of the Japanese industry to produce or    economically unfeasible for production in Japan’ (Hall and Johnson 1970: 322). The indigenization rate eventually reached about 60% for F-86 and 65% for T-33 by the end of their production (Society of Japanese Aerospace Companies 1985: 13). Indigenization was the Japanese manufacturer’s core strategy for mastering the licensed technologies. According to Jirô Horikoshi, the legendary chief designer of the Mitsubishi Zero fighter, components would be indigenized under three general conditions: (1) when production, operations, and maintenance would be hindered if a domestic source were not available; (2) when components could be produced economically by Japanese facilities and technologies, and (3) when these components and technologies could ‘be frequently utilized in later aircraft, missile, and other industr[ies]’ (quoted in

Japanese Commercial Aircraft Production: Case Study 121

Samuels (1994)). Through their indigenizing efforts Japanese aircraft manufacturers built the foundation for manufacturing capabilities and facilities. Indigenizing strategy was more aggressively pursued in the subsequent two licensing projects. In September 1957, Kawasaki received approval to produce the Lockheed P2V-7 anti-submarine/search aircraft under license.10 A total of forty-eight P2V-7 were manufactured, and its domestic content had reached 95% when it was replaced by its successor, the P2-J in 1969 (Society of Japanese Aerospace Companies 1985). Another project was license production for Japan’s next-generation FX jet fighter, the successor of the F-86. The Lockheed F-104 design was selected for the FX from several candidates in 1958 for commercial, political and technical reasons.11 The prime contract went to Shin Mitsubishi Heavy Industries, which would first assemble seventeen knockdown kits and then proceed to licensed production of 160 F-104Js.12 Indigenization of the F-104 was firmly pursued from the beginning of the project, even when it was more expensive than importing. Accordingly, 60% of the original F-104 budget (excluding engines) was appropriated for indigenization. Overall, the domestic content of the final F-104 production was 70% (ibid). The Japanese aircraft manufacturers succeeded in dramatically raising their competence through the indigenization efforts of the P2V-7 and the F-104, which were respectively the first aircraft with on-board electronic computers and the first supersonic jet fighter manufactured in Japan. One estimate, for example, showed that the ratio of technology purchased abroad to total aircraft R&D spending in Japan fell from 70 to 45% between 1961 and 1962 alone.13 Overall, the licensed production of US military aircraft during the first ten post-war years played a decisive role in rebuilding and modernizing the Japanese aircraft industry.

5.3 Failure to catch up by the national project (late 1950s to 1970s) Although Japanese aircraft manufacturers benefited enormously from the licensed production explained above, they also began to realize the limitations of licensed production as a strategy for the industry’s further development. From around 1956, both MITI and the manufacturers started raising their voices, asserting that passive dependence on licensed production of military aircraft handicapped the long-term development

122 The Challenges of Late Industrialization

of the Japanese aircraft industry. Such criticisms could be summarized as follows: (Mowery 1987: 7–9; Maema 1999: 119–120): 1. Aircraft produced under license would be out of date because they had been developed long before Japan started producing them. It is sometimes not worth paying an expensive license fee for obsolete technologies, particularly in the fast advancing field of electronics. 2. However licensing more up-to-date aircraft also incurs economic and technological problems. The more up-to-date the aircraft, the more expensive the license fee would be. Further, those components based on cutting-edge technologies are usually designated ‘hard core’ items and remain ‘black-boxed’ – inaccessible to licensees. 3. Licensed production would not contribute to improving the R&D and design capabilities of Japanese engineers. Even though the technical R&D data are made available by a licensor, the licensee engineers would not acquire sufficient knowledge to sustain innovation, which is largely experience-based knowledge – only attainable through a trial-and-error process. Searching for a way to overcome the constraints of licensed production, policy makers decided to pursue the catch-up strategic route towards FLI. During the 1960s, the catch-up FLI strategy resulted in a national project of the YS-11. It mobilized all the participants in the Japanese aircraft industry in order to promote the indigenous development and production of a medium-sized commercial aircraft. The present section examines the rise and the fall of the YS-11 project, which resulted in the failure to catch up in the finished product market for commercial aircraft. The YS-11 project brought home to both policy makers and manufacturers the acute difficulty of overcoming the entry barriers to the finished product markets. Nevertheless, the precious experience of the YS-11 project had provided a solid foundation on which the Japanese aerospace industry participants later upgraded their capabilities as significant suppliers in the international collaboration projects, which will be covered in the forthcoming sections.

5.3.1

Rise of the catch-up FLI strategy

¯ Akazawa Shoichi, the MITI Aircraft and Ordnance Division director, was the original promoter of the idea to develop and build an indigenous commercial aircraft. He enthusiastically promoted his idea to influential

Japanese Commercial Aircraft Production: Case Study 123

politicians and the Ministry of Finance by arguing the following three points (Adachi 1981: 18–19; Samuels 1994: 210–11): 1. The aircraft industry is a high value-added and high precision industry. It also has a broad base of different industries, so the diffusion of the technology developed will be very great. 2. Depending solely on military demands makes the industry vulnerable to unstable military budgets. Production of a commercial aircraft would help to secure a stable scale of production in the long run. 3. Production of a commercial aircraft would help to improve the balance of payments. Since Japan was banned from exporting military aircraft, it needed to promote the commercial sector of the industry. Meanwhile, the export market was expected to develop a medium local aircraft to succeed the DC-3, of which more than 13,000 units had been produced. Domestic air travel was also expected to increase rapidly; so domestically built aircraft would curtail the commercial aircraft imports. Akazawa therefore tried to embrace the ‘catch-up’ strategy of FLI – directing the Japanese aircraft manufacturers to challenge the finished product market directly. He urged strong government support for them so as to make them independent in commercial aircraft production. Nevertheless, as discussed in section 3.1.3 the catch-up strategy entails high risk because the latecomer firms – in this case the Japanese aircraft manufacturers – must create and control their own value-chain with sufficient effectiveness to overcome the barriers to entry. Indeed, both MITI and aircraft manufactures were sceptical of Akazawa’s grand idea. When senior managers and engineers saw the Lockheed and the North American factories, they became acutely aware of the wide technological gap between American and Japanese manufactures. However, as Maema (2002) points out, Akazawa did not fully understand the significance of this technological gap because he lacked an engineering background. He also felt strong nostalgia for the wartime glory of the Imperial air force, particularly the Zero fighter (Maema 2002: 165). He therefore bluntly refused licensing offers from foreign manufactures, such as Fokker, who had already introduced the Friendship F27 into the medium-size transport aircraft market.14 Akazawa’s grand idea began to take shape through the typical ‘Japanese style of negotiation’. Akazawa first held an informal meeting in a Tokyo restaurant with senior managers from each of Japan’s heavy industrial and aircraft-related companies. Informal meetings involving

124 The Challenges of Late Industrialization

government agencies, firms, parts suppliers, users and research institutions continued throughout the year of 1956. Akazawa’s persistence gradually gained sufficient support both within MITI and from the private sector. After cabinet ministers had been lobbied persistently, the government eventually decided to appropriate 35 million yen in direct subsidies (hojokin) for design research of a medium-size commercial transport plane in fiscal year 1957 (Samuels 1994: 211; Maema 1999: 82–3).

5.3.2 The YS-11 project: formation of the local institutional setting15 The catch-up strategy of FLI started to acquire institutional substance ¯ oki when the Commercial Transport Design Research Association (Yus¯ Sekkei Kenkyu¯ Ky¯okai, hereafter Yuken) was established in 1957 by the Aircraft Industry Association under the auspices of MITI.16 Yuken was a prototype for the local institutional setting which developed later, in which the public and private sectors of the industry collaborated closely. The chairman of Yuken, Soda Taizo, was chief of MHI’s aircraft division. He was joined by managers from eighteen airframe, component, materials and precision equipment manufacturers. Senior Liberal Democrat Party politicians were appointed as ‘advisers’. By early 1958, a technology committee had been established; study teams conducted operational research to decide the fundamental design of the planned aircraft. The committee’s senior members included the ‘all-star’ team of legendary aircraft designers from wartime, who were dubbed the ‘Five Samurai’.17 They played a strong leadership role in decisions regarding fundamental design; but, as will be seen later, this would become a factor which delayed the project. Participating firms undertook joint research with Yuken in planning, propulsion, airframe, components, design, wind-tunnel testing and real-size model building. On the basis of the operational research and the accumulated data on foreign practices, Yuken set the basic specification of the planned aircraft as a medium-sized turbo-prop, capable of carrying around 60 passengers. The planned aircraft was named the YS-11 after the code numbers of its basic specifications. The YS-11 project was formally covered by the national budget after MITI drafted and the Diet passed the Aircraft Industry Promotion Law ¯ K¯ogy¯o Shink¯o H¯o) in May 1958. The Promotion Law designated (K¯okuki the YS-11 a national project and authorized funding for its design, development and manufacture. Furthermore, the government-industry consortium, which had been developed around Yuken, metamorphosed

Japanese Commercial Aircraft Production: Case Study 125

into a national policy company (kokusaku gaisha), the Nihon Airplane Manufacturing Company (Nihon Kokuki Seizo Kabushiki Kaisha, hereafter NAMCO) in June 1959. The government held half the equity, with the remainder held by six ‘manufacturing partners’18 (20%) and a larger number of nominally unrelated firms, such as electric utilities, trading companies, banks and so on. Of the NAMCO equity allotted to manufacturers, MHI held 51%, KHI 26%, and FHI 13%. NAMCO, as a national policy company, guaranteed returns to the participating manufacturers. MOF was initially against the establishment of the national policy company, which would rely on the government for the total cost of prototype manufacture – expected to be more than 3 billion yen. Instead MOF preferred a single private national champion. MITI and the aircraft manufacturers overruled MOF’s reservation on the basis of the following three arguments: 1. In terms of technology, facilities or financial resources, no single aircraft manufacturer could independently carry out prototype manufacturing and mass production of a medium-sized aircraft. 2. In order to achieve an internationally competitive cost, instead of making a new investment the existing facilities of each manufacturer would have to be coordinated and effectively used under the framework of a national policy company. 3. The manufacturers’ commitment to the project would not be possible without a guarantee of strong government support. While NAMCO was responsible for testing and sales, the six manufacturers undertook research, design and manufacturing as subcontractors: MHI, forward fuselage and final assembly; KHI, main wings; FHI, tail section; Shin-Meiwa,19 rear Fuselage; Showa, honeycomb structures; and JAMCO, ailerons and flaps. Aero-engines were purchased from Rolls Royce, and 150 aircraft were planned to be manufactured between 1963 and 1970. In the process of preparation for the YS-11 national project, therefore, the local institutional setting came to be embodied and consolidated in a way suitable for pursuing the catch-up FLI strategy. Figure 5.2 illustrates the relationships between the main actors in the Japanese aircraft industry during the years of the YS-11 project. Participating manufacturers maintained close and collaborative inter-firm relationships under the auspices of NAMCO. MITI and the aircraft manufacturers maintained formal lines of communication through joint-membership of the advisory council (shingikai) and the equity sharing of NAMCO. The

126 The Challenges of Late Industrialization

MITI Influence

Membership Equity share

Aircraft Industry Association

Influence NAMCO

Aircraft Advisory Council

Equity share Loan of employees

Coordination Membership

Membership Manufacturing partners MHI, KHI, FHI, Nippi, Shin-Meiwa, Showa

National aeronautic laboratory Technical support

Figure 5.2 Local institutional setting of the YS-11 Project

Aircraft Industry Association collected the views and acted as the voice of the private sector in the Japanese aircraft industry. Public sector players in the industry, particularly MITI, often took such voices of the private sector into consideration in policymaking. Such close public–private relationships and the collaborative inter-firm network are often known as the ‘All-Japan Consortium’. Nevertheless, what must be emphasized is that MITI exerted the dominant influencing power over the aircraft manufacturers both in the sphere of formal legislation and in administering informal ‘administrative guidance’. In other words, MITI ‘directed’ the aircraft manufacturers in the YS-11 national project.

5.3.3

Why did the YS-11 national project fail to catch up?

Despite the enthusiasm of the supporters of the national project both in MITI and the industry, the YS-11 project was suddenly terminated in 1974 after 182 aircraft had been built and sold. The outcome of the project was mixed. It was very poor in strict business terms since its loss exceeded 36 billion yen (in current price of 1974). In technological terms however, many assert that the project was a great success, advancing the Japanese aircraft industry’s production and assembly skills tremendously. What is clear, however, is that the YS-11 national project did not achieve catch-up in the commercial aircraft finished product market. In this and the following sections, we will try to argue, on the basis of our analytical framework developed in Chapter 4, that the YS-11 project failed to catch up because the Japanese aircraft manufacturers largely lacked the strategic fit for overcoming the high barriers to entry of the

Japanese Commercial Aircraft Production: Case Study 127

finished product market. Furthermore, the dominant role of the local industrial setting in the YS-11 project distorted the strategic management of participating manufacturers.

5.3.3.1

Lacking the strategic fit for catch-up

As to their domains of activities (see section 4.2.2.1), in the YS-11 project the Japanese manufacturers set their product/market portfolio on a medium-sized turboprop transport, which would operate on short distance local routes and required only short take-off and landing facilities. This strategic decision followed assessment of the market and operational research conducted by Yuken as explained earlier. It targeted the market vacated by the aging DC-3, especially in Japan and South East-Asian countries, since air travel in those countries was expected to expand rapidly with the growth of their economies. Yuken emphasized the importance of the short landing capability for serving most airports on the targeted routes. Turboprop propulsion was chosen over the newly developed pure jet engine because, in addition to their lack of experience with jet aircraft production, they considered the turboprop more economical for short distance flights. Such product/market targeting of the YS-11 project might have been reasonable at the beginning of the project. However, it was undermined by the delay in the YS-11’s market introduction due to many design changes and technological problems. For instance development progress was delayed when the NAMCO designers changed the aircraft’s fundamental design drawn by the ‘Five Samurai’ of Yuken. Yuken’s fundamental design was deemed too light and too small to achieve the expected performance targets. It was rather a ‘rose-coloured’ design developed to convince the politicians and the MOF of the costperformance of the YS-11 in order to secure the government subsidies.20 Such development delays reduced the YS-11’s market value while its direct rival product – the Fokker Friendship 27 – increased its market share;21 and the short-ranged pure jet planes – such as the BAC111 and the Fellowship 28 – started appearing on the market from 1960. When the YS-11 finally appeared on the market in 1965, many critics called it an obsolete turboprop model (Maema 2000). When it came to the operational sphere (see section 4.2.2.2), the YS11 project attempted to cover all activities throughout the value chain of a commercial aircraft because it intended to be as independent as possible. There was a division of labour between NAMCO and the participating manufacturers: the Yuken/NAMCO consortiums undertook the

128 The Challenges of Late Industrialization

design stage of the product-related activities and all stages of marketrelated activities, while the participating manufacturers were responsible for actual manufacturing (Figure 5.2). However, this broad operational sphere was far beyond the Japanese manufacturers’ cumulative levels of competence. They faced a large competence gap and a steep learning curve in order to achieve catch-up in the finished product market. As for productrelated competences, the Japanese manufacturers could not control the key technologies because they were largely ‘black-boxed’ in the licensed production of the US F-86 fighter, the T-33 trainer and the succeeding F-104 fighter and P2V-7 antisubmarine/search aircraft. Their skills were especially weak for cockpit and electrical systems, which had advanced globally much faster than structural technology. In fact, the YS-11 cockpit was a copy of the DC-7, but with Japanese components substituted to some degree. Despite the national project emphasis on indigenous development and production, licensed products accounted for 14% of the YS-11 while imported components accounted for fully 42% (Samuels 1994: 385–6). Moreover, the YS-11 project was the first commercial aircraft production venture for Japanese manufacturers who only had experience of military procurement. The knowledge spin-off from military aircraft production was far less than the policy makers, MITI in particular, had originally expected. In the 1960s and 70s, Japan indigenously produced four military aircraft – the PS-1 marine patrol/ rescue flying boat, the C-1 transport, the T-2 trainer and the F-1 fighter. Two US military aircraft – the F-104 fighter and F-4 fighter22 (Table 5.2 and Table 5.3) were also produced under licensing. There are two main bottlenecks restricting technological spin-off between military and commercial production. One is a general difference in the concepts of military and commercial aircraft. While military aircraft production emphasizes high offensive performance above all, commercial aircraft production has to achieve not only a high level of safety and reliability, but must also provide for passenger comfort and ease of operational maintenance. Another is that the most crucial and cutting-edge technologies remained ‘black-boxed’ in the licensed production, as mentioned above. The military production significantly advanced the manufacturers’ competences in system integration and component manufacturing. However they were often irrelevant or insufficient for the development and production of a modern commercial airplane. Japanese manufacturers were especially weak in process technologies and management techniques for the mass production stage because the total production

Japanese Commercial Aircraft Production: Case Study 129 Table 5.3 Indigenous aircraft production in post-war Japan Starting year

Model

Type

Development & manufacture

Volume

KHI KHI FHI FHI FHI NAMCO MHI KHI FHI ShinMaywa Develop: NAMCO Manufacture: KHI MHI ShinMaywa MHI FHI FHI MHI Develop: JADC Manufacture: CTDC

4 2 27 66 66 182 757 83 299 23 31

(Joint development with Boeing) 1980 T-4 Jet plane 1987 T-5 Turbo prop plane 1992 B777 Jet plane

KHI FHI JADC

175 36 275

(Joint development with Boeing) 1995 XF-2 Jet plane

MHI

1953 1953 1954 1958 1960 1964 1965 1965 1966 1968 1971

KAL KAT L<-1 LM-2 T-1 YS-11 MU-2 P-2J FA-200 PS-1 C-1

Piston plane Piston plane Piston plane Piston plane Jet plane Turbo prop plane Turbo prop plane Turbo prop plane Piston plane Turbo prop plane Jet plane

1973 1974 1975 1975 1978 1978 1979

T-2 US-1 F-1 FA-300 T-3 MY-300 XY/767

Jet plane Turbo prop plane Jet plane Piston plane Piston plane Jet plane Jet plane

95 11 77 47 50 101 794

4

Source: SJAC (2002b: 55)

run of military aircraft in Japan was very small: for example, only 31 units of C-1, 95 of T-2 and 11 of F-1 were produced. Furthermore, Japan had declared that they would refrain from exporting military aircraft in the ‘Three Basic Principles of Arms Export’.23 In short, the lack of experience of commercial aircraft production caused delays in component production and assembly and thus the market introduction of the YS-11. The project also lacked realistic and efficient project planning and management. For example, the initial budget only covered the cost of prototype production. No funds had been provided for the mass production stage; its costs were supposed to be covered by loans from private financial institutions, which was in turn planned to be repaid

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smoothly by aircraft sale proceeds. However, Ohsawa Nobukazu, the executive manager of All-Nippon Air at the time, thought that such a funding plan was fundamentally flawed. He pointed out that customers rarely paid for aircraft with cash up-front, but demanded payment by long-term installment (quoted in Yamamura 1995: 95). A further problem of the project management was that the NAMCO consortium gave rise to an organizational structure of slow decisionmaking and high production cost. The task of coordinating six manufacturing firms and dozens of component suppliers, from research through production was daunting.24 It often resulted in delays in discovering and solving technological problems. Moreover, there was little sense of cost management since the consortium worked on cost-plus reimbursement. In relation to the market-related competence, the marketing, sales and after-sales networks for the YS-11 had to be set up from scratch. It was because the Japanese aircraft manufacturers had dealt solely with military procurement, for which post-manufacture activities are far less significant than the case for commercial aircraft. This lack of postmanufacturing experience crucially handicapped the YS-11 with gaining competitive advantage in the finished product market. The Japanese aircraft industry had to invest a great deal of time and other resources not only in learning about the furious sales environment in the commercial market – the so-called ‘sporty game’ (Newhouse 1982), but also in establishing service facilities wherever the customers might be located. No customer could be expected to purchase such an expensive and complex industrial product as an aircraft, consisting of more than 40 million parts, without prompt and effective product support. This was especially important for a newcomer such as the YS-11, which had neither a reputation nor an established safety record. More fundamentally, the Japanese aircraft engineers had little idea about the nature or level of safety and comfort demanded by commercial customers. For example, it resulted in the over-strengthening of the structures that took too much time and cost. The structural strength of commercial aircraft usually calls for a strength test between two and four times greater than the design strength. However the actual strength test of the YS-11 logged more than six times greater than the design strength (Yamamura 1995: 83). The manufacturer’s ignorance of commercial aircraft production requirements became even more apparent when the first operators of the YS-11 reported more than 30 types of product defect in ten major systems, such as flight control, hydraulics and air conditioning systems (Maema 2000: 173).

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Putting it simply, the national project had produced ‘an airplane which was not attractive to customers’.25 This was partly due to the MITI monopoly of the YS-11 production project and the rivalry between MITI and the Ministry of Transportation (MOT), which had jurisdiction over the airline companies. MITI simply lacked the necessary expertise for aircraft production and further lacked knowledge of commercial aircraft operations. What was even more reprehensible was that it did not seek for advice from MOT or the airline companies, who had in-depth knowledge and experience of appropriate safety and comfort requirements for commercial aircraft.

5.3.3.2

The prescriptive direction of the local institutional setting

Promoting a catch-up FLI strategy, the policy network led by MITI and Yuken/NAMCO, predominately directed the product/market targets and operational aspects of the YS-11 project. Although the product/market target might be seen to be reasonably appropriate, as discussed earlier, the operational sphere crucially lacked the internal competence to provide adequate support. Indeed, the Japanese aircraft manufacturers were fully aware that their own competences were insufficient to attain the necessary level of dynamic strategic fit to enable them to catch up in the fiercely competitive finished product market. For instance, when ¯ o¯ was sent from MHI to NAMCO to become chief engineer Teruo Toj of the YS-11, he privately pilloried the enthusiasm of Akazawa and the ‘Five Samurai’ for the YS-11 project as ‘an outrageously unrealistic dream lacking the objective concern of the present state and prospects for Japan’ (Maema 1999: 233–4). It was rather the policy network itself that distorted the manufacturers’ realistic assessment of the enormous risks and significant opportunity costs associated with the indigenous production and sales of a commercial aircraft. Indeed, the aircraft manufacturers had no reason to oppose MITI’s initiatives as long as they benefited from government subsidies aiding production expansion and the guaranteed return of a national project. In turn, the nature of the policy network, which prescriptively directed the catch-up FLI strategy, had been largely shaped by the personal sentiments of the older generation within both the government and industry, reflecting national pride and nostalgia for the legend of the Imperial aircraft industry. It was therefore a slogan rather than a strategy – lacking any professional assessment of internal competences. Meanwhile, the YS-11 project created a dense industrial network. The policy network promoted close collaborative inter-firm relationships

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between the participating manufacturers aiming to coordinate and consolidate the individual manufacturers’ competences. This network – known as the ‘All-Japan Consortium’ – had both merits and demerits for the development of the Japanese aircraft industry. On the one hand, the collaborative inter-firm relationships provided the basis for division of labour in the learning process between the individual manufacturers. Each manufacturer could focus its learning efforts on particular areas of product and of technology. They then coordinated and consolidated their individual competences through the NAMCO consortium. Such competence coordination also facilitated knowledge diffusion and interactive learning throughout the industrial network, which in turn raised the total competence level of the industry. Without such dense inter-firm collaboration, it is hard to imagine that Japan would have been able to indigenously develop and produce a modern mediumsized aircraft within ten years of its post-war rebirth after the seven-year embargo. Furthermore, NAMCO consortium developed inter-firm trust and created a sense of ‘community with a shared goal’; indeed that was the very reason that its industrial network has been called the All Japan Consortium. NAMCO consisted of its own staff and staff dispatched from the participating manufacturers. In theory, the temporary staff was not supposed to represent the position of their original companies, but be strictly neutral when it came to the YS-11 project. Meanwhile, they maintained close relationships with their own company colleagues so also understood their company’s individual demands. They thus acted as ‘middlemen’ facilitating the growth of collaboration and trust both horizontally within the industrial network (that is, among the participating manufacturers) and vertically (that is, so far as the YS11 project was concerned).26 As will become clear later this industrial network based on trust and collaboration became an important organizational basis on which the Japanese aircraft manufacturers were able to upgrade their status to become significant suppliers in Boeing’s global value chain. However the All Japan Consortium had the inherent limitations. It was a closed knowledge system arising from its objective to be as independent as possible as a national project. Thanks to the collaborative inter-firm relationships knowledge diffusion within the industrial network was significant. However, there was little importation of new technological or managerial knowledge into the network. Main sources of new technological and process knowledge were limited to publications, reverse engineering and know-how derived from military aircraft production.

Japanese Commercial Aircraft Production: Case Study 133

Manufacturers’ in-house R&D and technological support from research organizations, such as the National Aeronautic Laboratory – a statesponsored research institution – was very limited. Hence, the introverted nature of the industrial network was a major bottleneck for indigenous development and production of the YS-11. In sum, the national project of the YS-11 failed because the Japanese aircraft manufacturers could not achieve the level of dynamic strategic fit necessary for catch-up FLI strategy. Throughout the project, the manufacturers had reacted passively or been forced to adjust to the distorted incentives imposed by the prescriptive policy network. It was in fact impressive to observe the extent to which they were able to raised their overall competence level, and to succeed in building their first medium-scale commercial aircraft only 13 years after the end of the ‘seven-year blank’. However, it was not enough to attain the level of dynamic strategic fit to overcome the entry barriers posed by the fierce competition in the finished product market. Japan’s attempt to catch up by the national YS-11 project resulted in a large financial debt and great loss of confidence which would haunt the Japanese aircraft industry for many years.

5.3.4 Individual manufacturers’ endeavours in the business aircraft market In addition to the ‘All-Japan’ YS-11 national project, individual manufacturers attempted to catch up in the business aircraft market. MHI independently initiated plans to develop the MU2, an 11-seater small propeller aircraft. Through the MU-2 project, MHI aimed to foster development competences, advancing its international competitiveness and reducing its dependency on military procurement (Mitsubishi Heavy Industries 1983). It thus aimed to become an independent aircraft system integrator. The MU-2 obtained type certification (TC) from the US Federal Aviation Administration in 1956 opening the way for exports. Over the next 20 years, MHI sold a total of 762 units of the MU-2, of which nearly 75% went to the US. MHI further developed an upgraded model named the MU-300, but it took two years longer than originally planned to obtain the FAA’s type certification. Although the performance of both the MU-2 and MU-300 were highly evaluated, they failed, as had the YS-11 project. They were unable to overcome the entry barriers in the finished product market mainly because of the appreciation of the yen, the high start-up cost of the marketing network, changes in FAA regulations and slow demand. In the case of the MU-300, MHI sold its sales right to Beech Aircraft. The total

134 The Challenges of Late Industrialization

debt of the MU-2 and the MU-300 projects together was said to amount to over 10 billion yen (in current price) (Maema 2002: 207). Meanwhile, FHI also independently developed the FA-200, a 4-seater single propeller plane, and produced 297 units by 1978, exporting 170 units in that year. It further developed an upgraded FA-700 model jointly with Rockwell International. Nevertheless, these attempts by FHI to catch up in the small aircraft market also ended up in large debt, said to amount to around 1 billion yen (in current price) (Maema 2002: 212).

5.4 Upgrading to ‘significant’ supplier status in the Boeing’s GVC (1970s to mid 1990s) NAMCO was disbanded on termination of the YS-11 production in 1972. However, NAMCO had already initiated another national project from 1966: the C-1 military transport plane. Meanwhile, policy makers also started to plan another indigenous commercial project as a direct successor to the YS-11. They set up the ‘YX Development Centre’ in 1968 and carried out operational research and basic design of the YS-33 and later YX new medium-sized commercial aircraft. However the YX plan never materialized. Japan’s ambition for another indigenous commercial aircraft development became impractical as the global commercial aircraft industry began to undergo radical structural changes from the late 1960s, as discussed in section 3.2. Global business transformation together with the rise of the international collaboration project (ICP) in new aircraft development opened a window of opportunity for pursuing an upgrading FLI strategy. This section examines how the aircraft manufacturers succeeded in taking advantage of this new opportunity. The first part of this section describes the policy debate in the early 1970s, which resulted in strategic change in FLI strategy from catch-up to upgrading. It refers to the emerging global shift in the commercial aircraft industry and reviews how realistically and flexibly (or inflexibly) the Japanese policy makers and aircraft manufacturers responded to it. The second and third parts of the section show how the manufacturers upgraded their competences as suppliers in Boeing’s ICPs for the B767 and the B777 projects. It also relates to the adjustment and development of the local institutional setting to provide an effective organizational framework for the ICP. The last part of the section analyses how and why the Japanese aircraft manufacturers could achieve strategic fit and initiate effective learning for upgrading during these years.

Japanese Commercial Aircraft Production: Case Study 135

5.4.1 The shift of FLI strategy under the global business transformation The failure to catch up during the 1960s forced Japan to fundamentally reconsider its FLI strategy in commercial aircraft production. As it became clear that the YS-11 project would incur a large amount of debt, a fierce debate took place between the government and the manufacturers concerning future aircraft industrial policy in general and subsequent national projects in particular. Supporters of indigenous aircraft production, including Akazawa – the influential MITI bureaucrat, began preparations for a new YS-33 national project which became the YX from 1966. They argued that it was necessary to continue indigenous commercial aircraft production for developing an independent aircraft industry in Japan. They emphasized the significance of the aircraft industry for Japan’s industrial development by pointing out its advanced technology, high value-added and large technological spin-off effects. They optimistically expected to cover the YS-11 debt through the profit of subsequent projects. On the other hand, the sceptics, who included the Ministry of Finance and some aircraft manufacturers, questioned the feasibility of profitable indigenous commercial aircraft production and, more fundamentally, the realistic prospects for successful catch-up FLI strategy. The manufacturers were very angry at their 10% share of the YS-11 project debt. Symbolically, the president of MHI directly criticized MITI for its insistence on the technological significance of the aircraft industry; saying; ‘A proper commercial assessment should take precedence over technological issues in commercial aircraft production. We will only participate [in the YS-33 national project] if the government guarantees to cover 100% of the project cost’ (Maema 2002: 223). One reason for the manufacturers’ strong opposition to subsequent commercial aircraft projects was because they expected large military demand during the 1970s. However, as they discovered that actual military demand would be much less than expected, they became more supportive of MITI in planning a new direction for commercial aircraft production. The turning point in the aircraft industrial policy debate came in 1970 when the Minister in charge of MITI sought the formal advice from the ¯ K¯ogy¯o Shingikai)27 concerning Aircraft Industry Advisory Council (K¯okuki the future direction the Japanese aircraft industry should take in the coming decade. Having fully understood the extreme difficulty of catchup, the Council began to review the FLI strategy by redefining ‘success’ in aircraft industry development. They came to put greater emphasis on

136 The Challenges of Late Industrialization

the significance of the aircraft industry in terms of its technologies – such as the high technological intensity, the high value-added, and its extensive linkages to other ‘knowledge-based industries’ – rather than in terms of its economic performance – such as profitability, market share or trade balance. They redefined the aircraft industry as a quintessential strategic activity, a resource for raising the technological level of the entire economy (Samuels 1994: 245). The primary criteria for the success of aircraft industry development therefore shifted from catch-up FLI strategy towards upgrading FLI strategy. The former was ‘to rapidly become an independent competitor in the international market’, while the latter was ‘to gradually nurture technological level and international competitiveness in the long run’ (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 58). Consequently, the Council abandoned totally indigenous production of the YX and started searching for a way to introduce international collaboration in the YX national project (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 59). This strategic change was based on a clear understanding of the Japanese aircraft industry’s capacity. The indigenous YX project was estimated to cost around 200 billion yen, while the total sales of the Japanese aircraft industry at that time was only about 100 billion yen (in current price).

5.4.1.1

Invitations to the international collaboration projects

Meanwhile, the global shifts in the commercial aircraft industry, which was discussed in section 3.2, had begun to take place in the late 1960s. Facing the rapid growth in air travel, airline companies demanded larger, faster and higher-performance aircraft. Following the rise in oil prices and stricter environmental regulation, they also began to demand an aircraft with low direct operation costs (DOC). This in turn relentlessly raised the development and production costs of new aircraft. On the other hand, the market price of a commercial aircraft could not be increased due to severe competition in the finished product market. The net profit for each new aircraft therefore decreased, while the break-even point rose dramatically. As a result any project to produce a new aircraft became riskier than ever. This steadily increasing risk in aircraft production became intolerable for even the major system integrators. Consequently, they began to search for partners and suppliers with whom to share the risk in the guise of ‘international collaboration projects (ICP)’. Having observed Japan’s strategic change as explained above, many system integrators – including Boeing, Douglas and Lockheed from the US and the British

Japanese Commercial Aircraft Production: Case Study 137

Aircraft Company and Fokker from Europe – approached Japan to discuss possible ICP partnership. Boeing was distinctively aggressive in approaching Japan amongst the all system integrators. The Japanese policy makers, on the other hand, considered the ICP a realistic framework in which to pursue their upgrading FLI strategy. By collaborating with the major system integrators, they expected that the Japanese manufacturers could learn new technological and management capabilities. In the interim report of 1970, the Council made an epochmaking announcement: saying, ‘in addition to an indigenous aircraft development project, the government should also subsidize an international collaboration project [in which the Japanese manufactures participate]’ (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 171). In other words, the Japanese policy makers admitted the ICP to be a Japanese national project as long as all major Japanese aircraft manufacturers would participate. Nevertheless, it is important to note that they also emphasized Japan’s ‘autonomy’ in project planning and management as a necessary condition for a national project funded by Japanese taxpayers’ money. Japan then carefully reviewed all the ICP invitations and chose Boeing as the primary negotiating partner for the first government subsidized ICP in 1971. They chose Boeing partly because the Japanese manufacturers had been providing components for the B747 and subsequent the B737 and the B757 programmes since the late 1960s (see Table A2). They considered Boeing a sincere and trustworthy business partner. More significantly, Boeing initially proposed an equal partnership recognizing Japan’s autonomy in ICP management and providing greater opportunities for the Japanese manufacturers to upgrade than any of the other system integrators.

5.4.2 The Boeing ICP: transformation of the local institutional setting To implement the strategic change from catch-up towards upgrading, the Japanese aircraft industry had to undergo a major transformation. In particular, the local institutional setting which had taken shape during the YS-11 project, needed many adjustments if it was to be effective in the organizational framework of the ICP. There were two major driving forces for institutional transformation during the YX project. One was the lesson to be learned from the YS-11’s large debt, which was in turn mainly caused by high production cost. There was little sense of cost management under the national company, NAMCO, which had guaranteed cost-plus reimbursements to the participating aircraft

138 The Challenges of Late Industrialization

manufacturers in the government-sponsored consortium. To avoid such moral hazard common in a public-funded project, the policy makers asserted that the YX project must be run by private initiative. The nature of government subsidy also changed from simple outright subsidy to success-conditional loans, to be repaid out of revenue derived from the project. Another driver of institutional transformation was the plain fact that Boeing held the dominant power in the ICP to which the Japanese manufacturers joined as a dependent and subordinate actor. The asymmetric power relationship became apparent when Boeing gradually reduced the Japanese work share within the ICP, as contract negotiations advanced. In 1974, Boeing admitted Italy to the ICP for what was then called the 7X7 project, with a 20% work share while they retained their controlling majority of 51%. Japan’s work share thus decreased drastically from an initial 50% to 29%. This gave rise to serious doubts about the fundamental coherence between the ‘national project’ designation and the ICP. As mentioned earlier Japan’s autonomy in project planning and management was a necessary condition for the ICP to be designated a Japanese national project. Japan’s minor and dependent nature in Boeing’s ICP highlighted the ideological clash between the Japanese national project concept and Boeing’s management of ICP. The former primarily emphasized the need for ‘public’ benefit for Japanese taxpayers, while the latter’s sole concern was project profitability. In linking the YX project to the Boeing’s 7X7 the asymmetric power balance dictated that it was Japan, not Boeing, who would have to adapt the nature of a national project by reinterpreting the stipulation for Japanese autonomy.

5.4.2.1 The YX/B767 project: the problem of national autonomy and realistic compromise Following the Council’s decision to make the YX project to be run as a private initiative, the Civil Transport Development Corporation (CTDC) was established as a private foundation totally financed by contribution from aircraft manufacturers. The government subsidy rate for the YX project was fixed as 75% in the development phase and 50% in the mass production phase. CTDC had two central roles in the YX project. It was to take over the role of NAMCO in coordinating the domestic production consortium – the All Japan Consortium. At the same time, it was also to represent the Japanese consortium as the counterpart of Boeing in the contracting and management of the YX/7X7 ICP. To put

Japanese Commercial Aircraft Production: Case Study 139

it simply, CTDC acted as middleman between the Japanese consortium and Boeing. The first, and probably the most difficult, task for the CTDC was to engage in long contractual negotiations with Boeing, which lasted almost seven years. They negotiated over the nature of Japanese involvement in the YX/7X7 project, such as the work share, the equity share, production roles and the participation in decision-making. Toward Boeing, CTDC demanded to keep Japan’s presence as large as possible, but was continually frustrated by their limited bargaining power. It was disappointed to discover that Boeing considered Japan to be only one of its minor partners, and that there was no room for negotiation over Boeing’s sole authority in the ICP management. Towards the domestic policy makers, CTDC therefore stressed the necessity to abandon the condition of Japanese ‘autonomy’, which was the necessary condition for the government subsidy for the YX/7X7 project. Japan initially had four key points for autonomy: (1) Japan to have the right to submit alternative plans for important development and production issues; (2) Japan to have the final assembly line and to have the right to market in the Asian areas. (3) Japan to have a voice in decision making in proportion to its investment; and (4) Japan to obtain industrial property rights (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 90). None of these conditions were acceptable to Boeing. Hence the only way for Japan to keep the YX/7X7 alive was to compromise on the issue of autonomy and accept their minor and dependent position in the Boeing ICP. Otherwise, Japan would lose the opportunity to introduce the ICP into its aircraft development policy, and would close an important route for the upgrading FLI strategy. Here Japan demonstrated realistic flexibility by compromising the required level of its autonomy in the IPC. They abandoned all autonomy key points in accepting Boeing’s final proposal28 in 1977 becoming programme participants producing components and subassemblies for Boeing directly on a single-source basis. Boeing calculated the Japan’s work share as 15% of the airframe.29 Meanwhile, Boeing would control all aspects of design, production (including work share allocation) and marketing. Moreover, Japan was also required to agree not to compete in the same product line. The final assembly line was located in Boeing’s Seattle plant. The arrangement also envisaged risk-sharing. Japan would assume the costs of tooling and investment in new plant capacity and the currency risk. The payment arrangement was a fixed-price purchase for the first 500 ship sets, which incorporated learning curve cost reductions over time. But, the first 500 ship sets were not guaranteed, which

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meant that the Japan assumed the total risk for its work share (National Research Council 1994: 105; Samuels 1994: 247). Accepting those conditions was not an easy decision for Japan. However, the Japanese policy makers claimed that it was necessary to make a realistic compromise since it could be the last chance for collaboration with Boeing (The Editorial Committee of ‘The History of YX/767 Programme’, 1985: 96). They placed great importance on entering Boeing’s global value chain (GVC), creating the opportunity for the Japanese manufacturers to work together with Boeing’s engineers and to participate in all activities throughout the value chain. In other words, they did not insist on rigid criteria of autonomy as long as the YX/B7X7 offered the chance to learn from Boeing, the largest commercial aircraft maker in the world. In September 1978, Boeing and CTDC, representing the Japanese consortium, signed the Master Programme Contract, and the YX/7X7 project was finally launched. Japan’s 15% work share was allocated to the three major domestic aircraft manufacturers as subcontractors of CTDC: MHI took the aft fuselage; KHI the forward and centre body and the wing ribs: and FHI the composite wing-to-body faring (Figure 5.3).

Service door

Rear fuselage

Centre fuselage Forward fuselage

Wing fuselage faring, main landing gear door

Service door

Wing inspar ribs

Japan Figure 5.3 Japanese workshare in the B767 production Note: See Table A2 for the details of work allocation among the Japanese manufactuers Source: Adapted from JADC (2003: VIII–27)

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The basic design process started in the middle of 1978, and a total of 136 Japanese engineers were dispatched to Seattle. After participating in basic design discussions in Seattle, they returned to Japan and carried out detailed component design covering the 15% work share of the Japanese consortium. The Japanese manufacturers completed the firstbatch production of their components in 1980 and sent them to Seattle for assembly. The development phase of the ICP was completed when it acquired FAA’s type certification in 1982. The YX/7X7 was formally named the B767, when its development entered the mass-production phase in 1982, the subsidies from the Japanese government were terminated, and a new corporation, the Commercial Airplane Company (CAC), was formed to replace the CTDC in coordinating mass-production by the Japanese consortia. The CAC was a private company, jointly financed by MHI (43%), KHI (43%) and FHI (13%). The B767 is a wide-body twinjet that can carry 260 passengers in a mixed-class configuration. In some versions, the range of the B767 exceeds 6,000 miles. B767 was highly successful and, as of the end of 2002, over 890 units had already been delivered to airline companies (Japan Aircraft Development Company 2003: II-6). The market success of the B767 contributed to the sales of the participating Japanese manufacturers in the ICP. Moreover, in addition to the ICP framework, Japanese equipment vendors successfully bid on ‘ordinary’ subcontracts for hydraulic systems, actuators, materials fabrication, entertainment systems and other components (see Table A2). Throughout the B767 project, Japanese manufacturers gained production experience of a cutting-edge modern airliner at that time. They also benefited from a considerable transfer of component design technology, even though this constituted ‘old’ technology from Boeing’s standpoint. They did not, however, gain access to the upstream design and downstream marketing activities, where the sources of Boeing’s competitive advantages reside. Boeing had already made the major design decisions by the time the B767 deal was signed with the Japan (National Research Council 1994: 105; Samuels 1994: 248; Maema 2002: 239–40). Boeing, on the other hand, could spread the considerable development risk and benefit from de facto Japanese government subsidies. The total development cost of the B767 was 224 billion yen (in constant price of 1978), of which the Japanese consortium bore 15% – 33.6 billion yen (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 110; Maema 2002: 240). The Japanese government subsidies, which were success-conditional loans, amounted to a total of 146 billion yen (in constant price of 1978) between 1978 and 1982.30 Boeing also acquired

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components more cheaply than they would have done from traditional suppliers. In general, the B767 ICP created a win-win situation for the Boeing–Japan collaboration. Both parties were therefore eager to continue and expand their collaboration.

5.4.2.2 The B777 project: deepening international collaboration with Boeing When the peak of the B767 development phase was over, Japan started to plan the YXX project in 1980 – a new development project for a 100–150 seat commercial aircraft. Japan was eager to pursue the YXX project, in which they could hold the initiative and engage in upstream design and downstream marketing activities. In 1982, the CTDC was transformed into the Japan Aircraft Development Company (JADC), to carry out the YXX project in real earnest. JADC abandoned full indigenous development at an early stage and looked for an ICP partner. Following the success of the YX/B767 project, JADC decided to collaborate again with Boeing and signed a Letter of Intent in 1984. The YXX project changed into the 7J7, a narrow bodied civil transport, when Boeing and JADC signed a formal Memorandum of Understanding in 1986. The 7J7 would be a great step up for Japan as it guaranteed a 25% share of equity and access to every stage of Boeing’s value-chain. Japan and Boeing originally agreed to aim for market introduction of the 7J7 in 1990. However, the 7J7 project was suspended in 1993 when Boeing announced to proceed with development of the B737, which would be much cheaper than the 7J7 (Society of Japanese Aerospace Companies 2002b: 106). It was again a harsh moment for Japan to accept the hard fact that it was subject to Boeing’s dominant power in decision-making. However, as we will see later, the first four years of the 7J7 from 1986 to 1989 were very important for nurturing a close and trusting relationship between Boeing and the Japanese consortium. During those years, Boeing treated Japan as an equity partner; and many data gathered by Boeing over many years of trial and error were released exclusively to Japan.31 In the meantime, Japan further proceeded to transform the institutional setting in order to be able to engage more effectively in ICPs. In 1986, the Aircraft Industry Promotion Law of 1958 was revised to formalize the FLI strategic changes discussed earlier – from ‘catch-up’ through indigenous development towards ‘upgrading’ through ICPs. Article One was changed from ‘promotion of domestic development of aircraft and aero-engines and the subsequent reduction of the trade deficit’ to ‘promotion of joint international development of aircraft and

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aero-engines and the subsequent facilitation of international business exchange’.32 This revision clearly declared that international collaboration would henceforth become Japan’s number one aircraft industrial policy priority (Samuels 1994: 253). To cope with the ever-increasing development cost of modern aircraft and aero-engines, the revised Promotion Law also established the International Aircraft Development Fund (IADF), to carry out a new scheme of financial assistance focusing on international collaboration. In the new scheme, the government does not provide direct subsidies to the manufacturers, but provides a grant to the IADF instead. Meanwhile, the aircraft manufacturers would not repay success-conditional loans directly to the government but to the IADF instead. In other words, the IADF pools the loan repayments together with the government grants for future use as success-conditional loans. The IADF could then secure a larger self-sustaining capital available for financial assistance in international collaboration. Furthermore, the IADF discounts the risk money by channelling low-interest loans from the Japan Development Bank (JDB) to aircraft manufacturers involved in the ICP (International Aircraft Development Fund (IADF) 2000: 5). As Samuels (1994) points out, the IADF is also politically convenient for defending Japan from foreign accusations of violating the GATT agreement of 1980, which prohibits direct public subsidies, or ‘targeting’ of an industry (Samuels 1994: 254). Japan has argued that IADF loans are not ‘direct’ public subsidies and do not violate the spirit of GATT by pointing out that the IADF is independent from the government, and by insisting that the loans it makes must be repaid and are guaranteed by collateral from the manufacturers.33 Although the institutional setting had been adapted for international collaboration, Japan took sometime to designate the next ICP for a ‘national project’ while the YXX/7J7 failed to take shape. In 1990, eight years from the end of development phase of the B767, the Japanese consortium reached an agreement with Boeing to take part in the new ICP of the B777 – a 350-seat airliner, which would fill the wide size gap between the B747 and B767. The structure of the deal was very similar to the B767, although Japan’s presence in the ICP was increased and upgraded. Work share of the Japanese consortium rose to 21%,34 essentially including all fuselage parts except for the nose section. Most significantly, Boeing, for the first time, outsourced crucial wing parts – a wing box and a pressure bulkhead. Nevertheless, Boeing’s dominant power was as obvious as ever. Japan’s increased work share was not a negotiable issue – it was unilaterally offered by Boeing, and neither

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the wing box nor the pressure bulkhead, in Boeing’s judgement, constitutes ‘advanced technology’ (National Research Council 1994: 113). In addition, more than ten Japanese vendors successfully bid on ‘ordinary’ subcontracts (see Table A2). Moreover, Japan’s status in the ICP was upgraded from ‘programme participant’ for the B767 to ‘programme partner’ for the B777 (see Table 3.7). Although both were non-equity roles, the former arrangement was for a fixed number of ship sets, while the latter was for the life of the programme. Japan had also been involved at an earlier stage in the B777 development than for the B767, for which Boeing had already finished the basic design by the time the Japanese engineers arrived in Seattle. In the case of B777, however, Japanese engineers were involved from the basic design stage, with several hundred being sent to Seattle during the most intensive design phase. Japan’s greater involvement in basic design was largely due to the Boeing’s adaptation of the ‘design/build’ concurrent engineering process, which will be discussed in more detail later. Although, as with the B767, Japan’s main engineering contribution was limited to their own work package, the Japanese manufacturers were no longer ‘simply bending metal to spec’ (Samuels 1994: 255). Japan was also entitled to participate in marketing, but in practice that turned out to be insignificant.35 The inter-firm communications between Boeing and the Japanese manufacturers were more extensive and proceeded more smoothly than at the time of the B767, partly because engineers from both sides had established trust and close relationships, at both company and personal levels through their collaborative experience in the B767 and the B7J7 projects.36 Two hundred Japanese engineers arrived in Seattle in mid1991 to learn, and in mid-1992 ninety Boeing engineers arrived in Japan to teach design skills (Samuels 1994: 255). The structure of the institutional setting around the B777 project can be illustrated as Figure 5.5. The JADC, representing the Japanese consortium, signed the Master Programme Contract with Boeing. In addition, the three main Japanese manufactures (MHI, KHI, and FHI) signed the Grantee Agreement, in which they warranted the execution of the Master Programme Contract. As in the case of the B767, JADC subcontracted the work package or the Japanese consortium to the five aircraft manufacturers, adding Nippi and Shin-Meiwa as ‘special subcontractors’ of KHI and FHI respectively.37 MHI took the aft fuselage, tail cone, and passenger and bulk cargo doors (42.2% of Japan’s work share); KHI took the forward and central fuselage, keep-beam and cargo doors (28.19%); FHI took wingbox, wingbox fairing, and main landing gear

Japanese Commercial Aircraft Production: Case Study 145

Carge door Centre fuselage Cargo door Forward fuselage

Bulk cargo door Tail fuselage

Rear fuselage

Bulkhead Wing fuselage fairing

Entry door Keel beam

Centre wing Main landing gear door

Wing inspar ribs

Japan Figure 5.4 Japanese workshare in the B777 production Note: See Table A2 for the details of work allocation among the Japanese manufacturers Source: Adapted from JADC (2003: VIII–27)

doors (19.15%); Nippi subcontracted the wing in-spar ribs (5.66%); and Shin-Meiwa subcontracted a part of the wing-box fairing and a part of the main landing gear door (4.8%) (The Editorial Department of ‘K¯oku¯ Gijyutsu’ 1993) (Figure 5.4). As in the case of CTDC in the B767 project JADC played the role of middleman: coordinating domestic production on the one hand, and acting as representative partner in negotiations with Boeing, on the other. As in the case of the B767, once the development phase of the B777 had been completed, the Commercial Aircraft Company (CAC) took over the JADC in 1998 to coordinate the mass-production phase in Japan. The Japanese consortium spent 104.5 billion yen as its share of the B777 development cost (in current price). The cost was covered by success-conditional loans from IADF (3.3. billion yen), the loan from JDB (57.8 billion yen) – interest payments were compensated by IADF – and private capital from the participating manufacturers (43.4 billion yen) (Japan Aircraft Development Company 2000: 1). The local institutional setting is described in Figure 5.5. B777 acquired FAA type certification in April 1995. It is a wide-body twinjet seating 328 in a mixed-class configuration with a range of 5,000 miles for the initial version. B777 has become another sales success

146 The Challenges of Late Industrialization

Boeing

Master programme contract

Japanese government Grant Success-conditioned loan IADF

JADC/CTC Guarantee agreement

Investments

Coordination

Employees

MHI

KHI

Lo

an

Compensation for interest

FHI JDB

Special subcontract Nippi

SMIC

Aircraft manufacturers Figure 5.5 Local institutional setting in the B777 project Sources: Field interviews; International Aircraft Development Fund (2000: 5)

following the B767 – as of the end of 2002 orders and deliveries numbered 619 and 424 units respectively (Japan Aircraft Development Company 2003: II-4, II-6). Since the B777 production surpassed the break-even point estimated at about 270 planes,38 the JADC had paid back 1.8 billion yen to IADF and 29.3 billion yen to JDB (in current price) by the end of 1999.

5.4.3 Why did the Japanese aircraft manufacturers succeed in upgrading? Since Japan altered its FLI strategy in the 1970s, the aircraft manufacturers have successfully upgraded their position as airframe suppliers within Boeing’s GVC as set out in Figure 3.3, which summarizes the hierarchy of suppliers in a GVC. Having started as ‘piece-part subcontractors’ for the B747SP in the 1960s, the Japanese aircraft manufactures upgraded their status in Boeing’s GVC to the status of ‘programme participant / risk-sharing partner’ for the B767 project in the 1970s and the 1980s, and further upgraded it to the ‘programme partner / risk-sharing partner’ for the B777 project in the 1990s (see Table A2). In short, the Japanese aircraft manufacturers’ sourcing activities for Boeing evolved from ‘building parts to specification’ to actual design and engineering

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interaction from the earliest stages of product development (National Research Council 1994: 37). Participation in Boeing B767 and B777 international collaboration projects have greatly contributed to the expansion of the Japanese aircraft industry, particularly its commercial and export sectors. As Figure 3.9 shows, the total aerospace production value (in current price) increased from around 270 billion yen in 1980 to over one trillion yen in 2001. During the same period, aerospace exports jumped from around 18 billion yen to almost 360 billion yen, and the military share decreased from over 80% to less than 60%. In addition, as shown in Figure 3.10, the company-level performance advanced impressively during those years. The value-added per employee (in current price) in the aerospace division of Japan’s eight major aircraft manufacturers jumped from 6 million yen in 1980 to over 13 million yen in 2000; and the capital intensity from 3.5 million to 18.7 million during the same period. Meanwhile, the aircraft divisions increased their presence in their mother companies’ management – their share of total sales increased from 8% in 1980 to 19% in 2000, and their operating margin from 14% to 37% (Society of Japanese Aerospace Companies, various years). The Japanese aircraft manufacturers and the industry as a whole have achieved the above impressive growth in the commercial sector without building any complete commercial plane. Friedman and Samuels (1993) called such growth in the Japanese aircraft industry ‘succeeding without really flying’ (Friedman and Samuels 1993). Indeed, the Japanese aircraft manufacturers achieved firm-based late industrialization by successfully carrying out the upgrading strategy. In the following, we will then examine the determinants for their successful upgrading in the Boeing GVC on the basis of our analytical framework put forward in Chapter 4.

5.4.3.1

Changes in Boeing’s sourcing strategies

In the first place, Japanese aircraft manufactures were able to upgrade because a ‘window of opportunity’ opened and widened as a result of changes in Boeing’s sourcing strategies. As briefly mentioned above, Boeing started outsourcing to the Japanese aircraft manufacturers in the B747SP programme in the late 1960s. MHI, KHI and FHI supplied Boeing as piece-part subcontractors for the B747, MHI and FHI on the B757, and KHI on the B737. Boeing’s primary (and probably only) strategic goal for sourcing was ‘offsets’; that is, orders placed beyond what would be strictly necessary in commercial terms to gain political bargaining power for domestic orders – in this case, by Japanese airlines

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(see Section 4.2.1.2). Even though the Japanese government never officially demanded offsets, it was rather clear that Boeing tried to get closer to the policy network, particularly MITI, around the Japanese aircraft industry through the sourcing relationships in order to gain favourable access to the Japanese market.39 Boeing–Japanese sourcing relationships during the early years were largely confined to ‘cost reduction sourcing’, in which Boeing kept the ‘exit’ option by using the Japanese manufacturers as second source suppliers with short-term contracts (see section 4.2.1.1). In the 1970s and 1980s, as Boeing adopted a framework of international collaboration to build the B767 for the first time, it was willing to expand the Japanese aircraft manufacturers’ participation in its GVC in exchange for risk sharing. Boeing had four main strategic goals for making the Japanese aircraft manufacturers risk-sharing partners in the B767 programme (National Research Council 1994: 38): (1) Facing increasing development costs for its new mid-sized aircraft project, Boeing expected to spread a significant part of the project-financing load by involving the Japanese suppliers who would invest in facilities and tooling and who might attract further subsidies from the Japanese government. (2) Facing intensifying international competition in the finished product market, particularly the new challenge from Airbus Industries, the European consortium, Boeing also expected that collaboration with Japan would give it favourable access to the Japanese market. (3) Boeing also expected the Japanese manufacturers to reduce production costs by challenging Boeing’s traditional suppliers in both price and quality. (4) Boeing also hoped to pre-empt any Airbus–Japan alliance. Although the Japanese aircraft manufacturers upgraded their supplier status to become programme participants and then single source suppliers in the B767 programme, the Boeing–Japanese sourcing relationship was still too immature for ‘value-creating sourcing’ (see section 4.2.1). Boeing appreciated the Japanese basic competences in meeting the required QCD, but it was not interested in more integrated alignment or intensive information sharing, which might bring about transaction value through joint learning. The sourcing relationship in the B767 was rather ‘bargaining oriented’. Samuels (1994) calls it ‘a relationship between badgers and foxes’, in which ‘these shy animals (the former Japanese and the latter Americans) sought to outmanoeuver each other within a framework of international collaboration and partnership’ (Samuels 1994: 248). The Japanese were eager to absorb maximum technological and management knowledge, particularly in sales and marketing, from Boeing. Boeing, for its part, kept

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the knowledge transfer to a minimum by excluding the Japanese from upstream design and downstream marketing activities as well as by strictly restricting engineering data exchange to a ‘need-to-know’ basis (National Research Council 1994: 105). Meanwhile, Boeing tried to take maximum advantage of Japanese QCD competences, governmentsubsidized investments and enhanced market access. The turning point in the Boeing–Japanese sourcing relationship came when Boeing carried out a thorough revision of its corporate vision and strategies regarding the production system for the B777 programme around 1990. By this time, the global business transformation had become dramatic, as we discussed in section 3.2. Boeing’s B777 had to win a fierce price war against the McDonnell-Douglas MD11 and the Airbus A330, to secure enough launching orders from now deregulated and highly price-sensitive customers. In these circumstances, Boeing saw an urgent need to adopt a competitive, customer-oriented production system if it were to survive. Boeing’s traditional stance was engineeroriented, in which it ignored competitors or costs as factors in the process of designing the most technically optimal plane – whatever could be done to improve the design would be done in order to achieve that end, they were not looking to beat the opposition by competing on price (Sabbagh 1995: 79). Those days had gone, and Boeing were desperately seeking a new way to build a plane that would, first and foremost, be cheap to operate and attractive to customers. Meanwhile, towards the end of the 1980s, Japanese manufacturing companies gained international competitiveness one after another, especially in the electronic and automotive industries. It was the time when Americans were highly impressed by Japan’s high productivity, which Ezra Vogel popularized in ‘Japan as Number One’ (Vogel 1979). More serious research was also conducted to identify the source of Japan’s competitiveness; for example, the International Motor Vehicle Programme (IMVP) at the Massachusetts Institute of Technology. This focused on the innovative production system – so-called ‘lean’ production40 – that was originally developed by Toyota and has been diffused widely throughout the Japanese manufacturing sector. Consequently, many American companies in a variety of manufacturing industries eagerly tried to adopt the lean production system as ‘best practice’. As seen in section 3.2.2.2, Boeing, in the commercial aircraft industry, was not an exception. Boeing adopted a slogan – ‘Learn the Japanese Way’ – in the late 1980s, and sent many senior managers and engineers to Japan to visit major manufacturing companies, such as Toyota, Honda, Matsushita,

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MHI and KHI among others.41 On the basis of the lean production principles that it acquired during these visits, Boeing drastically transformed its production methods and structures for developing the B777. Boeing’s traditional production method was so-called ‘sequential’ engineering, in which various groups undertook different steps in the production process – such as design, system-installation and load-analysis, and these were largely divided by organizational ‘walls’. There was little interaction between the different groups, but they usually passed on their finished work to the next team in a manner of ‘throwing it over the wall’ (Sabbagh 1995: 54) without expecting any feedback. This was changed into a so-called ‘concurrent’ engineering system, in which all steps in the production process are coordinated through intensive interaction in a continuous flow. Another lean production principle that Boeing adapted was to recombine labour into cross-functional teams dedicated to the overall production process. It took shape in Boeing’s most significant organizational innovation in the B777 programme: ‘design build teams’ (DBTs). The plane was divided up into large areas of responsibility such as wings, empennage (the tail assembly) fuselage and so on. Each of these units was then broken down into subcomponents, each the responsibility of a DBT (Sabbagh 1995: 67). DBTs consisted of not only the Boeing’s staff from various sections, but also of the representatives of its first-tier suppliers and customer airlines. It was a radical innovation for Boeing to allow outsiders into the heart of the B777 design and manufacturing process, previously considered inviolate company secrets, identified as ‘Boeing Proprietary’ (Sabbagh 1995: 64). The following account by Alan Mulally, a senior leader in the B777 programme, neatly explained the development of the underlying philosophy of the DBT: We can’t make a better airplane [than Airbus and McDonnellDouglas] unless we can figure how to get everybody’s knowledge [of manufacturing and airplane operation] included in this [B777] design.    So we thought, why don’t we get everybody together? Why don’t we figure out an environment – a structure – that will allow this knowledge to flow into the designer? And that led to the design-build team concept, where airline customer services and manufacturers around the world would join with engineering and we’d sign a pact together that we would design a product that balanced all these objectives and we’d listen to each other and we’d include that knowledge. (Quoted in Sabbagh (1995: 65), emphasis added)

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Engineers of MHI, KHI and FHI were therefore allowed to join various DBTs, in which they participated from the very early stage of the B777 design process. In addition, the intra- and inter-firm communication was greatly intensified due to introduction of the inter-linked computer systems: CATIA – Computer graphics Aided Three-dimensional Interactive Application – and EPIC – Electronic Pre-assembly in CATIA – which allow the different components to be designed and integrated into one vast computer simulation of the whole plane. CATIA and EPIC were used to make the design process as ‘paperless’ as possible, and in particular to remove the need for mock-ups. They also streamlined the design process by putting the design data of all parts, of which there are more than 250,000 in the B777, under the control of one unified computer system.42 Boeing distributed 2,200 computer terminals among the B777 design team, all of them connected to the world’s largest grouping of IBM mainframe computers. In addition, other key participants in the process, from airframe manufacturers in Japan to engine-makers in America and the UK, had immediate access to data and were made aware of updates and changes as soon as they were confirmed (Sabbagh 1995: 56). Hence, the Japanese manufacturers, for the first time, had real-time access to the Boeing system of process and material control (albeit with certain restrictions, that will be discussed in more detail below). According to Mulally again, the innovative organizational structure of DBTs, combined with new information technologies of CATIA and EPIC, would enable Boeing to do three things: First, we [Boeing] would get it more right [designing] the first time, before people started to make it. Second, when we got it into test it would be closer to the final product. And third, it would allow us to test it more efficiently, so that the plane would be even more service-ready to deliver to the airlines. (Quoted in Sabbagh 1995: 65) The intensive and collaborative interaction among engineering, manufacturing and operations, that also transcended the legal boundaries of the firms (that is, Boeing, suppliers and customers), grew into a distinct competitive advantage for Boeing. Boeing has later come to promote it with the catch phrase – ‘Working Together’ – and symbolized it in the company’s vision; that is ‘People working together as a global enterprise for aerospace leadership’ (Boeing 2003). From the Japanese manufacturers’ point of view, therefore, they could deepen their sourcing relationships with Boeing through intensive and

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collaborative interaction in Boeing’s GVC. This is because Boeing shifted its sourcing strategy, in relation to the Japanese manufacturers, towards one of ‘value-creation’ sourcing (see section 4.2.1). Boeing primarily strove to maximize transaction value by working together with the Japanese manufacturers in a ‘problem-solving oriented’ manner. Boeing had come to exercise the ‘voice’ option in the long-term sourcing relationship, which provides the Japanese manufacturers with a dynamic learning platform. In sum, Boeing’s strategic change has opened a ‘window of opportunity’ for Japanese manufacturers to become ‘significant’ suppliers43 in Boeing’s GVC.

5.4.3.2

Achieving dynamic strategic fit for upgrading

Japanese aircraft manufacturers achieved upgrading in Boeing’s GVC because they seized the aforementioned ‘window of opportunity’ to become a significant supplier in the GVC. More specifically, they attained dynamic strategic fit of the dependent firm (see section 4.2.2) by taking advantage of enlarging and deepening GVCs – particularly that of Boeing.

External fit. Regarding the ‘external fit’ of a dependent firm the Japanese aircraft manufacturers adjusted their domain of activities to take advantage of the general trends in global business transformation. As discussed earlier, the finished product market for commercial aircraft has consolidated dramatically while the global sourcing in the intermediate goods market in the aircraft industry has enlarged and deepened. Having given up the attempt to overcome the ever-higher barriers to entry in the finished product market, the Japanese aircraft manufacturers, as a result, could avoid the ever-fiercer oligopolistic competition. Instead, by taking part in Boeing’s globalizing value chain, they could still gain access to the world market incurring only manageable risk. Furthermore, they could grow as ‘significant’ suppliers by focusing on the increasing medium value-added sourcing activities – such as component design, manufacturing and assembly. Therefore, by shifting their strategy as dependent firms from ‘catch-up’ towards ‘upgrading’, the Japanese aircraft manufacturers came to be better able to take advantage of Boeing’s changing sourcing strategies. In retrospect it may be said that the Japanese aircraft manufacturers attained the external fit of a dependent firm by making the right choice in entering the Boeing’s global value chain. Being a dependent firm, as discussed in our analytical framework, the fate of the Japanese aircraft manufacturers depends on their lead firm’s (or firms’) performance in

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the finished product market. Like the case of the Chinese aircraft manufacturers with McDonnell-Douglas, which ended up being forced out of the finished product market,44 a dependent firm relying on a failing lead firms’ GVC has no choice but to fail with it. On the other hand, Boeing has successfully gained competitive advantage as the largest and most powerful commercial aircraft maker in the world; and the Japanese aircraft manufacturers being a member of the enlarging and deepening Boeing GVC, have also benefited from the increasing sourcing activities in the long run.

Internal fit. On the other hand, the Japanese aircraft manufacturers also attained a better ‘internal fit’ in pursuing an upgrading FLI strategy. First of all, at the static level, the Japanese manufacturers adjusted their sphere of operations to enable them to leverage better the competences at hand. They had long nurtured their manufacturing competences through the licensed and indigenous production of military aircraft and the YS-11. As suppliers for Boeing, they focused on component and subsystem design and production. As a result, they were relieved of the need to master post-production activities – such as obtaining certification, sales and after-sale service by abandoning the possibility of catch-up to become a system integrator in the finished product market. They were weak in those after-production activities due to their insufficient experience of total system integration of a commercial aircraft. Hence, the Japanese aircraft manufacturers came to exert much stronger ‘competence backing’ over their operational sphere than they had at the time of the indigenous YS-11 production in which they tried to cover all activities throughout a value chain. At the same time, the competence backing of the Japanese manufacturers was objectively scrutinized by Boeing during the contractual negotiations of the B767 international collaboration project (ICP). Boeing conducted a detailed capability study tour of major Japanese manufacturers’ factories in May 1975 and again in February 1978 (Society of Japanese Aerospace Companies 1999: 54–5). Boeing carefully examined the level of Japanese manufacturers’ capabilities and resources, in order to ensure that they possessed sufficient ‘competence backing’ for successfully carrying out their work-package in the B767 ICP. In the first capability study, Boeing was generally satisfied with the level of Japan’s competence – commenting on the ‘excellent foundation’ for producing components for the B767 (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 228). However, Boeing pointed out that the Japanese manufacturers had problems with 1)

154 The Challenges of Late Industrialization

expansion of production scale, 2) configuration control according to the customers’ requests, and 3) management systems. More specifically, Boeing thought that the Japanese engineers – with Boeing support – would be able to perform the required level of technological requirements. Though they commented that Japanese manufacturers needed to increase the number of capable engineers and to update much of their equipment. Boeing’s 1978 capability study was much more exhaustive than the first. In advance of the second capability study tour, Boeing asked the Japanese aircraft manufacturers to submit detailed ‘Management Plans’ and ‘Manufacturing Plans’. In response, the CTDC conducted a scrupulous survey of the status of resources (particularly, manpower and equipment) that the Japanese aircraft manufacturers currently possessed. On the basis of Boeing’s technical data the CTDC Survey calculated the scale of resources required at the peak of the B767 project, and identified the deficiencies in current resource status, then further explained what Japan would do to cover those deficiencies. For example, as shown in Table 5.4, CTDC calculated that quality control would require manpower of 1,129 at the peak of the B767 project, but the Japanese manufacturers together had only 920 manpower when the survey was conducted. The survey suggested the necessary action to be undertaken to address the deficient manpower problem, such as covering it through overtime work, transferring from other divisions, sub-contracting production and new recruitment. Boeing’s capability studies realistically and objectively brought home to the Japanese aircraft manufacturers their actual current level of competence – what they could do and could not do. As a result, they were able to attain a firmer competence grounding than at the time of the YS-11 project. They also got a clear understanding of the competence gap that they would have to fill in order to upgrade within Boeing’s GVC. By entering Boeing’s GVC, therefore, the Japanese manufacturers attained a static internal fit for the upgrading FLI strategy.

Learning to upgrade. Nevertheless, the most important question still remains: How have the Japanese manufacturers been able to achieve the learning dimensions required to upgrade in Boeing’s GVC? Using our analytical framework (section 4.2.2.2) to answer the question – the Japanese manufacturers could learn efficiently because (1) they were exposed to a large scale and scope of external knowledge; (2) they had absorptive capacity to assimilate and utilize efficiently the new knowledge; and (3) they could sufficiently finance the learning process.

Japanese Commercial Aircraft Production: Case Study 155 Table 5.4 Excerpt from the B767 Operations Requirements and Resources Plan – CTDC Manpower and Equipment Survey Direct labour skill category

Current manpower (A)

Required manpower at peak (B)

Difference (B)-(A)

Tool Engineering

122

335

213

Tool & Production Planning

384

451

67

Tool Fabrication

219

2,554

2,435

Parts Fabrication & Assembly

4,663

5,659

994

920

1,129

209

Required at peak (B)

Difference (B)-(A) (SET)

Quality Control EQUIPMENT

Current quantity (A)

Necessary action availability for deficient area These will be covered by overtime work, transfer from other divisions, outside production, and recruitment

Necessary action availability for deficient area

5 Axis NC Mills

3

8.7

3.7(4)

Will be procured

Skin Mills

7

4.7

3.7(4)

3 sets will be procured and 1 set will be modified from 1 to 2 heads

Roll Forming

0

1.8

1.8(2)

Section roll and 2 contour rolls will be procured

Process Tanks

1

2.6

1.6(2)

2 sets will be procured and some will be covered with overtime work

Source: The Editorial Committee of ‘The History of YX/767 Program’ (1985: 241)

First of all, having become a ‘significant’ supplier – that is, a sub-system supplier and a risk-sharing partner – in the international collaboration projects, the Japanese manufactures came to enjoy an intensive information sharing with Boeing. As seen in the preceding section, such interfirm information sharing intensified as a result of the shift in Boeing’s sourcing strategy – in relation to the Japanese – towards value-creating sourcing. In particular, the Japanese manufacturers gained access to Boeing’s design and manufacturing process at an early stage in the ‘design built teams (DBTs)’, as well as in real-time through the new electronic data interchange (EDI) system, namely CATIA and EPIC.

156 The Challenges of Late Industrialization

Moreover, having become sub-system suppliers/risk-sharing partners, the Japanese manufacturers reached a position in GVC where the vertical intra-firm information sharing usually intensifies. In order to design and manufacture their sub-system coherently with other sub-systems, the Japanese manufacturers were, to a certain degree, entitled to share with Boeing not only the ‘component knowledge’ of their work package, but also the ‘architectural knowledge’ of the whole system structure (section 4.2.2.2). Particularly, during the four years (1986–1989) when the Japanese and Boeing tried to work out an equity partnership for the immaterialized B7J7, Boeing widely opened its proprietary product and process technologies solely to Japan. Some Japanese engineers and managers, who participated in the B777, pointed out that those four years spent with Boeing as an equity partner were a crucial period for Japan to learn deeply Boeing’s way of developing new aircraft.45 They also asserted that those four years were an important preparation for the following great technological transition in the development process – that is, the introduction of concurrent engineering supported by CATIA and EPIC. Secondly, the Japanese aircraft manufacturers demonstrated a high level of absorptive capacity to assimilate and utilize the inflow of new knowledge, which was brought about by intensive information sharing with Boeing. They also showed a high level of absorptive capacity in experience-based endogenous learning, such as learning-by-doing and learning-by-using. They could effectively derive lessons to be learnt from their own experience and implement them in their future activities. The Japanese manufacturers attained their high level of absorptive capacity as sub-system suppliers through their long prior experience with component production.46 They have long accumulated the component manufacturing skills ever since the licenced production of US military aircraft such as the F-86 fighter and the T-33 trainer in the 1950s. They had also developed component design skill through the indigenous development of the YS11 as well as various military aircraft such as the T-1 trainer and the C-1 transport plane in the 1960s, and the T-2, T-3 trainers and the F-1 fighter in the 1970s47 (see Table 5.3). These long experiences in component development and manufacturing have equipped the Japanese manufacturers with the capacity to absorb effectively new knowledge through intensive information sharing with Boeing as well as learning from their own experience. Indeed, it was proved to Boeing that the Japanese manufacturers had a high level of component production skills in the indigenous production

Japanese Commercial Aircraft Production: Case Study 157

of the YS-11 as well as by the high performance as a piece-part subcontractor in the B747SP production during the 1960s. Boeing’s confidence in Japan’s product-related competences was further reinforced through the B767 project. Indeed, it seems to be the very reason why Boeing, in the capability studies mentioned above, recognized the Japanese manufacturers’ ‘excellent foundation’ as sub-system suppliers for the B767. In other words, on the basis of their good record of component production, Boeing believed that the Japanese manufacturers had sufficient absorptive capacity to become sub-system suppliers for advanced aircraft such as the B767 and the B777.48 Furthermore, through the long experience as Boeing’s subcontractors, the Japanese manufacturers have attained relation-specific competence, through which they were effectively able to assimilate and take advantage of the knowledge inflow from Boeing. The Japanese manufacturers were agile in understanding Boeing’s specific needs and accommodating them.49 Thirdly, Japanese aircraft manufacturers could mobilize sufficient financial resources to become the significant suppliers in Boeing’s international collaboration projects. It was a prerequisite for them to become sub-system suppliers and to enjoy the learning opportunities offered through their position in the Boeing GVC. In the context of the BoeingJapan ICPs, the Japanese aircraft manufacturers together had to share the development cost according to their work share. In the case of the B777 project, as Table 5.5 shows, they together had to bear 104 billion yen, which was about 21% of the total development cost of about 500 billion yen. The individual burden of MHI, KHI and FHI was 44.4 billion, 30.3 billion and 16.9 billion yen respectively (in current price).

Table 5.5 Japan’s development costs (in current price) of the B777 project Company

MHI KHI FHI Nippi Shin-Meiwa TOTAL

Development cost (¥ billion) 444 303 169 60 69 104.5

Government grant∗ (¥ billion: as of July 2000) 83 56 33 11 13 19.6

Note: ∗ Government grant consists of subsidies through IADF and compensation for interest payments on the loans from the Japan Development Bank Source: JADC (2000: 2)

158 The Challenges of Late Industrialization

The manufacturers financed these large development costs mainly from three sources. First was intra-firm financial support. MHI, KHI and FHI are large multi-product companies. As Table 5.6 shows, aerospace sales account for 18% of MHI’s total sales, 26% for KHI and only 7% for FHI. The aircraft divisions of such companies contributed to Japanese aircraft production supported by the mother companies’ strong financial bases.50 The other two financial sources were loans from the Japan Development Bank and government grants through the IADF, which reached 57.8 billion yen and 43.4 billion yen respectively (in current price) in the B777 project as noted earlier. Without those three financial resources it would have been very difficult for the Japanese aircraft manufacturers to become sub-system/the risk-sharing partners of Boeing and to accomplish dependent firm learning. Table 5.6 Selected financial results of the major Japanese aircraft manufacturers in 1990 (billion yen, in current price)

Total Sales

MHI

KHI

FHI

2,327

892

756

Aerospace & 18% Aerospace Sales special purpose share by vehicle operational Shipbuilding & 13% Shipbuilding segments steel structure Power systems 28% Vehicle

26% Aerospace

9% Automotive 81% 7% Industrial machinery

4% 8%

Machinery

27% Machinery

23% Transport machinery

General machinery

14% Industrial machinery & steel structure

18%

Consumer products

7%

18%

Operational income

138

42

−58

Total assets

3,279

908

673

Source: Nihon Keizai Shinbunsha (ed.) (1991) Kaisha Nenkan (The Year Book of the Japanese Companies), Keizai Shinbunsha, Tokyo

Japanese Commercial Aircraft Production: Case Study 159

5.4.3.3

The catalytic role of the local institutional setting

Japan thus shifted its FLI strategy from catch-up to upgrading after the 1970s and, as seen earlier, the local institutional setting also changed to suit the upgrading FLI strategy. Facing the massive business failure of the YS-11 project, the policy network lost both its confidence and its legitimacy to play an autocratic role in industrial policymaking.51 It stopped imposing prescriptive direction on the aircraft manufacturers. Consequently the aircraft manufacturers gained greater initiative in policymaking, especially in the context of the Boeing ICPs, in exchange for taking a larger share of risk in a national project. They could no longer enjoy a guaranteed return from national projects as the government subsidies were greatly reduced. Nevertheless, the local institutional setting played an important role in promoting the upgrading FLI strategy. Its role became catalytic rather than prescriptive – helping the aircraft manufacturers to become risksharing partners in the Boeing ICPs.52 More specifically, the local institutional setting supported the manufacturers to attain the dynamic strategy fit required to upgrade towards a significant supplier within the Boeing GVC. As to the external strategic fit, the policy network provided the Japanese manufacturers with important information about the potential ICP lead firms. For instance, when Japan was offered invitations for ICPs for the first time at the beginning of the 1970s, the policy network sent a team of aircraft specialists, known as the ‘Kimura Mission’,53 to investigate potential ICP lead firms in various countries – including BAC of the United Kingdom, Fokker of the Netherlands and Boeing, Douglas and Lockheed of the United States. The Mission interviewed the executives of those lead firms and of their governments in order to scrutinize amongst other things (i) the detailed contents of their ICP proposals, (ii) the extent to which Japan would be able to retain its autonomy in the ICPs and (iii) a general expectation for Japan’s gains and losses (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 40). The Mission’s report became the basis of discussions at the Aircraft Council culminating in its decision to choose Boeing as the ICP partner. Looking back one may say that this decision was the critical first step for the manufacturers to upgrade within the largest and arguably the strongest aircraft GVC in the world. The policy network helped Japanese manufacturers to establish an efficient information-sharing channel with Boeing throughout the contract negotiations. For example, in the case of the B767 project, the CTDC organized a ‘Higher Level Meeting’ with Boeing’s top executives to

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discuss the sensitive matters of the contract, such as the organizational framework of the ICP, Japan’s work share and a method of pricing. The heads of MHI’s, KHI’s and FHI’s aircraft divisions composed CTDC’s representative team at the meeting. Thirty Higher Level Meetings had taken place by the end of the Programme Contract of the B767 in September 1978 (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 178). They contributed significantly to the establishment of a trusting inter-firm relationship between the manufactures and Boeing. In general, the policy network created a foundation on which the Japanese manufacturers could nurture relation-specific competences in relation to Boeing.54 Needless to say the financial support of the Japanese government was critical for the aircraft manufacturers to receive the ICP invitations in the first place. As seen earlier, one of Boeing’s initial motivations for inviting Japan to its ICP was to spread a significant part of the project-financing load by involving Japanese suppliers, who might attract subsidies from the government. Thus, without the government’s financial support, it seems very doubtful that the aircraft manufacturers would have secured sufficient financial resources to become risk-sharing partners in the ICPs. The financial support was thus critical in enabling the manufacturers to gain effective learning opportunities and to have sufficient financial base to turn those opportunities into real learning for upgrading. To some extent they were also important in enabling Japan to retain some bargaining power during the contract negotiations with Boeing. In regards to internal strategic fit, on the other hand, along with the change of the FLI strategy and the transformation of the local institutional setting, the Japanese aircraft manufacturers have focused the scope of their activities on component design and manufacture. As seen earlier, they could demonstrate a strong competence backing for those activities. In particular, the government’s financial support provided them with incentives to take part in the ICPs and to seek to be successful ‘significant’ suppliers. It in turn facilitated public–private coordination in shifting the FLI strategy towards that of upgrading. A domestic industrial network succeeded the organizational context of the consortium that had taken shape during the YS-11 project. Close inter-firm relationships had developed within the industrial network through various collaborative projects of both military and commercial. It enabled the manufacturers to coordinate and consolidate effectively their individual competences (that is, capabilities plus resources) centering on the CTDC/JADC. That effective competence coordination/consolidation was in turn critical for the Japanese consortium as a

Japanese Commercial Aircraft Production: Case Study 161

whole in enabling it to become a risk-sharing partner, that is, a significant supplier, in Boeing’s ‘lean’ GVC, as seen in section 3.2.2 as well as section 4.2.2. Partly because it wanted to reduce the overhead cost of supplier management, Boeing required its ICP partners to undertake a large bundle of component production – for example, the whole fuselage structure excepting the nose section in the case of the Japanese consortium in the B777 project. Boeing also required ICP partners to purchase the updated EDI and CAD systems – namely, CATIA and EPIC. No Japanese aircraft manufacturer had sufficient capability to carry out such a large bundle of component production alone, or the financial resources to invest in the expensive EDI system. Thanks to effective competence coordination/consolidation in the domestic industrial network, therefore, the Japanese aircraft manufacturers could take advantage of the ‘window of opportunity’ for upgrading despite their small individual scale.55 In addition, as the consortium of CTDC/JADC they could exert larger bargaining power over Boeing in the contract negotiations than had each Japanese manufacturer negotiated individually. Finally, as the manufacturers took part in Boeing’s GVC, the domestic industrial network became an ‘open’ knowledge system. One significant problem with the YS-11 project had been that there was not much knowledge inflow into the domestic industrial network from outside because it sought to be independent as possible. In contrast, the Japanese manufacturers could now enjoy not only efficient knowledge diffusion within the domestic industrial network, but also a large knowledge inflow from Boeing in the 767 and 777 ICPs. Boeing transferred product and process technologies to the manufacturers in the form of data exchange and engineer training in the use of advanced computer design techniques. However, as will be discussed in detail later, such data exchange was not conducted freely, but on a ‘need-to-know’ basis (National Research Council 1994: 105, 113). In other words, Boeing still strictly controlled the knowledge inflow to Japan except during the four-year period (1986– 1989) when Boeing and the Japanese consortium tried to work out an equity partnership for the ill-fated B7J7. Having reacted effectively to the global business transformation, the local institutional setting around the Japanese aircraft industry promoted linking the domestic industrial network to Boeing’s extending and deepening GVC. It helped the manufacturers to attain a dynamic strategic fit for upgrading as ‘significant’ suppliers within the Boeing’s ICPs.

162 The Challenges of Late Industrialization

5.5 Diversifying into different GVCs (late 1990s to present) Having upgraded as significant suppliers within Boeing’s GVC, the Japanese aircraft manufacturers incrementally expanded the scale and scope of their activities. They learned new technologies and expertise, gained relatively low-risk access to the finished product market and secured a significant stream of long-term business. According to various statistics recording the growth of the post-war Japanese aircraft industry that we saw in Chapter 3 (Figure 3.9, Figure 3.10), it seems safe to suggest that Japan succeeded to a significant degree in its upgrading FLI strategy in a period of global business transformation. However it remains an incontrovertible fact that the Japanese aircraft manufacturers are still dependent firms in the global commercial aircraft industry at the beginning of the 21st century. Furthermore, by becoming closely aligned with a particular lead firm, namely Boeing, the inferior status of the manufacturers seems to have established them in an asymmetric inter-firm power position within the aircraft GVC. In other words, from the Boeing point of view, the Japanese manufactures have become Boeing’s most important ICP partner and competent sub-system suppliers. Meanwhile, they are the compliant dependent firms that do not pose a potential threat to Boeing’s dominant position within its GVC, nor to its competitive advantage in the finished product market of the global commercial aircraft industry. Therefore, the contour of Japan’s upgrading process highlights not only the possibilities of, but also the limits of the upgrading FLI strategy. We have thus far concentrated on demonstrating the possibilities of the upgrading FLI strategy by illustrating the growth of the Japanese aircraft manufacturers in the Boeing GVC. We will now turn to shed light on the other side of the coin of the upgrading process – that is, the inherent limits of the upgrading FLI strategy by outlining how Boeing has controlled the growth of the Japanese aircraft manufacturers. We will further examine how the manufacturers have been trying to stretch those limits by diversifying into different market segments, specifically the regional jet market, since the late 1990s.

5.5.1 The limits of upgrading within the Boeing’s global value chain The Japanese manufacturers still remain dependent firms in the commercial aircraft value-chain mainly because they lack the high-rank dual-faceted competences essential to carry out the strategic functions

Japanese Commercial Aircraft Production: Case Study 163 FUNCTIONS

Market research

Design

Manufacturing

Marketing

Service

After-sales service

Leasing

Sales

Testing/certification

Total system integration

Module system integration

Sub-system assembly

Component manufacturing

Detailed design

Project planning

Product conceptualization

Basic design

Market risk evaluation

Customer needs appreciation

ACTIVITIES

Japan’s competences Figure 5.6 The area of Japan’s competences in the commercial aircraft GVCs Sources: SJAC (1999); Field interviews

and core technologies (see section 3.1.2). Figure 5.6 illustrates the current competence mapping of the aircraft manufacturers. It clearly shows that Japanese competitiveness is confined to the product-related competences (see also Figure 3.4). For instance in the B767 ICP, the Japanese manufactures undertook only detailed component design, component manufacturing and subsystem assembly. As seen earlier, in the B777 ICP, they took part in the earlier phases of the value-chain, such as product conceptualization and basic design as a member of the Boeing-sponsored ‘design built teams’ (DBTs). However Japan’s involvement in market-related functions (that is, market research, marketing and after-sales service) was still negligible.56 In terms of its production share, although Japan’s share increased from 15% of the total airframe value in the B767 to 21% in the B777, it was still largely concentrated on the fuselage structure (see Figure 5.3 and Figure 5.4). The critical components, such as cockpit and a main wing, were strictly ‘black-boxed’ to the Japanese. One Japanese aircraft engineer succinctly described the current state of Japan’s aircraft competences.57 He explained the competitive advantage as follows: We have a competitive advantage as component suppliers possessing design capabilities. We are not restricted to small components but

164 The Challenges of Late Industrialization

can also carry out large-scale investment in plant and equipment. We undertake detailed design as well as contributing to some extent at the conceptualization stage of [large-scale] components. We design components in such a way as to bring about cost reductions at the mass-production stage. So, we are not the type of supplier that simply manufactures according to Boeing’s design drawings. Our competitive advantage is our ability to make suggestions [to Boeing] at the conceptualization stage both making the components cheaper and improving quality. He went on to point out the weak area of Japanese aircraft competences as follows: We do not have the competences for product conceptualization. In order to conceptualize a new commercial plane, you must be able to go further than design capabilities to envisage what kind of plane airlines are demanding; what are the right size and range for a plane able to accommodate those demands; how many planes you have to sell in order to break-even. We lack these conceptualization competences. They call for market research capability and the marketing capability [to collect information about customers’ demands] and the capability to incorporate [the information] in the product concept. Paraphrasing the above statements by applying our analytical framework, the Japanese aircraft manufacturers currently have competitive advantages in the intermediate goods market as ‘design-approval (DA)’ sub-system suppliers that are able to perform the value analysis (VA). However, they largely lack the market-related competences that are essential to gain and sustain a competitive advantage as a system integrator in the finished product market (see section 3.1.2.2 and section 4.1.1). Japanese aircraft manufacturers are upper-status dependent firms in Boeing’s GVC. Nevertheless, they do not possess sufficient high-rank dual-faceted competence to seize dominant power as the lead firm in a GVC.

5.5.2 The ‘controlled’ growth of the Japanese aircraft manufacturers The Japanese aircraft manufacturers’ weakness in market-related competences was originally a result of the earlier failure of indigenous projects; however within the GVC due to Boeing’s tight control over their growth by restricting the scope of their activities and learning

Japanese Commercial Aircraft Production: Case Study 165

(see section 4.1.2.3). Ever since the beginning of the ICP partnership, Boeing has stringently prevented the Japanese from learning the core technologies and strategic functions – especially the later stages in the value chain, such as total system integration, testing and type certification, sales and after-sales service. Boeing’s control became most clearly apparent in the so-called Stamper Letter, which Boeing’s president at the time, Malcolm Stamper, handed to the Japanese partners in October 1976 during contractual negotiation for the B767 IPC. Before the Stamper Letter, aiming to keep its ‘autonomy’ within the ICP framework, the Japanese demanded amongst other things: (1) the setting up a joint venture company, (2) responsibility for marketing in Japan and other Asian areas, (3) setting up a final assembly line in Japan (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 146). However, Boeing had no intention of surrendering its full hold over the project, and unilaterally announced in the Letter that it was going to freeze the negotiation process in order to carry out an overall re-evaluation of the proposed ICP. Boeing came back to the negotiation table in February 1977 and told the Japanese that it would not accept any of the three Japanese demands. Boeing clearly affirmed that it would maintain full control over the ICP and left the Japanese with a ‘take-it or leave it’ proposal where they had no option but to become a subordinate actor in the ICP. By exerting power to tell their inferior counterpart what to do and what not to do, Boeing forced the Japanese to settle for dependent firm status if they wanted to join the Boeing’s ICP.

5.5.2.1

Control over the learning dimensions

One important goal of Boeing’s authoritarian behaviour was to prevent the Japanese from becoming a potential threat to its own competitive advantages both as a lead firm in the GVC and as a system integrator in the finished product market. According to one of the top Japanese negotiators, Stamper used to outwardly assert, ‘Boeing will never give any opportunity for Japan to grow into our potential competitor’ (The Editorial Committee of ‘The History of YX/767 Programme’ 1985: 203). In order to do so, Boeing restricted the Japanese domain of activities and learning to the product-related functions; and it locked out Japan from learning the strategically significant market-related functions. As seen earlier, the Japanese reluctantly accepted dependent firm status and became a risk-sharing/ the programme participant in the B767 ICP in order to realize its FLI strategic change towards upgrading. The Stamper Letter turned out to be the climax of the power game in the history of the Boeing–Japan ICP partnership. Subsequently, both

166 The Challenges of Late Industrialization

sides have been trying to avoid overt antagonism and maintain collaborative partnership. This could imply that Boeing was very successful in exerting structural control over the growth of the Japanese aircraft manufacturers – securing Japan’s compliant dependence on Boeing through repeated trust based interaction (see section 4.1.2.2). The following comment by one executive manager of Japanese aircraft manufacturers seems to symbolize the extent to which Boeing influenced the Japanese thoughts and desires even when no obvious power attempt had been made:58 We don’t need to play a power game with Boeing. We are happy with our friendly partnership with Boeing based on the long and trusted relationship. I think that the Japanese and Boeing are both successful because we complement each other.59 There is no doubt that the Boeing–Japan partnership has been successful due to its complementary relationship. However, what is also unequivocally clear is that the partnership has been based on an asymmetric power relation, in which the Japanese manufacturers have been content to grow into competent sub-system suppliers for Boeing. In addition, Boeing has carefully controlled knowledge transfer to the Japanese in the ICP. In both the B767 and B777, the Japanese engineering effort is restricted to their own work package. Structural testing – and software and models needed to verify results – are only shared if they are necessary for the Japanese to design the parts they will build (National Research Council 1994: 113). At the same time inter-firm communications in the ICPs, which Boeing later lauded as ‘Working Together’, were actually strictly limited to a ‘need-to-know’ basis, as the report of the National Research Council – which is a private think-tank advising the US federal government – vividly describes as following: Through a system of passwords, the access of Japanese engineers onsite and working at the computer system in Japan that Boeing set up for the 777 project is limited. The CATIA design software itself is ‘locked up,’ as is work on parts of the airplane unrelated to the Japanese work share. Attempts to get around the system would set off alarms.    On site, the visiting Japanese engineers were given access only to certain buildings, and sensitive manufacturing sites were accessible only with a Boeing escort.    How did Boeing control the people-to-people flow of technology? First, within Boeing, analysis and testing of the design are done by a separate group of engineers

Japanese Commercial Aircraft Production: Case Study 167

from those who work on design with the Japanese heavies.    Boeing provided a briefing to engineering and manufacturing personnel who would come in contact with the overseas partners, conveying the basic message that they should provide only what would be needed for the partners’ work share. (National Research Council 1994: 113–14). In sum, Boeing has controlled the growth of the Japanese aircraft manufacturers – mostly beneath the surface – by restricting the domain of activity and learning as well as by limiting the technology/knowledge transfer to a need-to-know basis. In so doing, Boeing has limited the growth of the manufacturers to competitive sub-system suppliers, retaining their dependent firm status that would not pose a potential threat to Boeing.

5.5.2.2

Control over double-crossing diversification

Towards the late 1990s, the Japanese aircraft manufacturers became clearly aware that they had started to hit the inherent ‘glass ceiling’ in upgrading within Boeing’s GVC. In addition, their growth as dependent firms has been also reduced by depletion in new commercial aircraft development projects. Indeed, Boeing has not launched any new development project since the B777 in 1990 except for derivative projects of existing models. So aiming to extend the limits of the upgrading FLI strategy, the Japanese aircraft manufacturers started looking for an opportunity to enter into partnerships with other system integrators. Meanwhile, having carefully examined the underlying factors for the success of the B767 and B777 ICPs, Airbus Industries – Boeing’s archrival as a system integrator in the large-scale aircraft market – came to appreciate the extent to which the partnership with the Japanese aircraft manufacturers had provided Boeing with a significant competitive edge. Indeed, as seen earlier, Boeing benefited from the great contribution of the Japanese partners in establishing an efficient ‘lean’ value chain. It is also clear that Boeing retains dominant access to the Japanese domestic market – Boeing planes accounted for more than 80% of Japan’s commercial fleet, the world’s second largest air travel market (Financial Times, 25 June 2002). Airbus claimed an 18% share of the Japanese market in 2002 and is hoping to increase its share to 50% over twenty years (Financial Times, 25 June 2002). Airbus considers Boeing’s close production ties with the Japanese aircraft manufacturers to be the main reason for its dominance in sales to the Japanese airline operators, as John Leahy (executive vice

168 The Challenges of Late Industrialization

president of customer affairs at Airbus) asserts, ‘In order to receive orders [from the Japanese airlines], we need to have a production partnership with the Japanese manufacturers in the first place’ (Nihon Keizai Shinbun, 21 April 2003).60 Consequently, Airbus eagerly invited the Japanese aircraft manufacturers to become programme partners in its new ICP for the A380 that is currently under development.61 Indeed, it was a great opportunity for the Japanese manufacturers to diversify their ICP partnership and to extend the limits of the FLI strategy by leveraging their strong product-related competences. However, Boeing was also quick to make a preventive move against the Airbus’ effort to break into its most important turf (Business Week, 2 April 2001). For instance, having seen Airbus’ aggressive approach to the Japanese aircraft manufacturers, Phil Condit (Boeing’s chief executive at the time) publicly gave the Japanese a piece of Boeing’s mind – particularly pointing to MHI, its closest Japanese partner – by saying: Our close partnership depends on their [the Japanese] strategy of international partnership    we cannot help but get nervous if the Japanese engage in the collaborative development [of the A380] with Airbus that is our direct competitor in the large plane market. If MHI deepen its relationship with Airbus, we both will have to make a decision on whether to continue our complete partnership [in the ICPs] or to revert to a subcontractor relationship. MHI itself has to make a decision about its position. (Nikkei Business 1999: 40) Hence, Boeing tried to control the diversification strategy of the Japanese manufacturers by pressuring them to refrain from ‘double-crossing’ diversification (see section 4.1.2.2). In other words, by exerting their structural power based on the long-term trusted relationship, Boeing tried to make the Japanese give up any idea of becoming competitive suppliers to its archrival, Airbus. Japanese manufacturers then decided to give their partnership with Boeing priority over the diversification into the Airbus’ ICP. Although 13 Japanese manufacturers will supply the parts to the A380 – for five of them it is the first time to do business with Airbus (Nihon Keizai Shinbun, 30 April 2003), none will participate in the project at the partner level.62 Instead, they are only subcontractors or suppliers that do not engage in collaborative development with Airbus (Table A2). It is as far as the Japanese could go without destroying their trusted partnership with Boeing. The following comment of one Japanese aircraft

Japanese Commercial Aircraft Production: Case Study 169

manufacture executive vividly illustrates the dilemma that the Japanese face: It would be great if we could expand our business with Airbus. But it is too risky [for the Japanese manufacturers] to deepen our relationship with Airbus very much. It is because we do not really know how beneficial the business with Airbus will be on the one hand and on the other hand, it will spoil our long friendship with Boeing.63

5.5.3

Diversifying into the regional jet market

Nevertheless the Japanese aircraft manufacturers could still attempt to diversify into the market segments for smaller-scale planes. In particular, the regional jet (20–99 seat) market has rapidly expanded during the 1990s: the total number of orders jumped more than ten times from 62 planes in 1990 to 742 planes in 2000 (Japan Aircraft Development Company 2003: II-18).64 Such rapid market expansion has been brought about by the introduction of a fun-jet aircraft that transformed the economics of the medium-distance, low-density routes operated by regional airlines, which hitherto had mostly operated noisy, slow turbo-props (The Economist, 15 March 2001). According to the JADC market forecast, the total demand for regional jets will account for 5,616 planes between 2002–22 (Japan Aircraft Development Company 2003: III-3). The major system integrators, such as Bombardier of Canada and Embraer of Brazil, have competed with others in launching new models by employing the ICP framework. Indeed, the ICP framework was inevitable for system integrators to survive in the severe market conditions with limited resources at hand. The same driving forces for the ICP of a large airplane (see section 3.2.2) seem to be more acute in the case of a regional jet project, whose cost pressure tends to be more acute than for a larger aircraft project. It follows that although the customers require the regional jet to be much cheaper than a larger aircraft, the commensurate cost reduction in regional jet production is very difficult to achieve since its total number of components and technological complexity is not very different from those of a larger aircraft.65 Consequently, the regional jet system integrators have actively sought the risk-sharing partners. It again provided great opportunities for the Japanese aircraft manufacturers to diversify their ICP partnerships and to extend the limits of the FLI strategy by leveraging their strong product-related competences. More importantly, such participation in regional jet ICPs would not disturb Boeing because

170 The Challenges of Late Industrialization

the Japanese partnership with others in that market segment would not ‘double-cross’ their own competitiveness in the large-scale aircraft market (Nikkei Business, 20 September 1999: 40). The Japanese did not waste much time in seizing those diversification opportunities. Each of the three heavies – that is, MHI, KHI and FHI – has become a risk-sharing partner of major system integrators: MHI with Bombardier from 1992; KHI with Embraer from 1999; and FHI with Raytheon from 1995. Figure 5.7 presents an overall view of current Japanese aircraft manufacturers’ participation in ICPs. It is to be noted that the nature of these risk-sharing partnerships in the regional jet market has two different aspects from that of their partnership with Boeing. Firstly, the MHI, the KHI and the FHI work packages were more significant both in terms of components and of functions than with Boeing. Particularly noteworthy is that MHI and KHI have both produced the main wing, one of the most critical aircraft components, for Bombardier’s Global Express and for the Embraer 190/195, respectively. (For details of Japan’s work packages, see Table A2.) In addition,

Bombardier

CRJ700 – Global express Dash8-400 – Continental

Embraer

Embraer 170/190

Mitsubishi heavy industries A380 A340 etc.

Boeing B737 B747

Kawasaki heavy industries A380 A340 etc.

B777 B767 B787

Fuji heavy industries

A380

Airbus

B717

ShinMaywa industry Co.

Japan aircraft manufacturing

Hawker Horizon Business Jet Raytheon

ICP participation through the national consortium ICP participation on individual company base Subcontractor/supplier

Figure 5.7 Japanese manufacturers’ participation in the various GVCs (as of December 2005) Note: See also Table A2 Source: Based on the NIkkei Business, 20 September 1999

Japanese Commercial Aircraft Production: Case Study 171

Japanese manufactures have borne the design responsibility for their produced components. They have also carried out the installation of the systems related to their produced components as well as the product support (Society of Japanese Aerospace Companies 1999: 87). Secondly, each of the three heavies has entered into the contract with the system integrators on an individual basis. This seems to suggest that the individual Japanese manufacturers have begun to take greater initiative in relation to the local institutional setting (see section 4.2.3.2). Up to the beginning of the 1990s, as seen earlier, the Japanese manufacturers had largely depended on the domestic consortium around the JADC under the auspice of MITI in order to take part in the ICP partnership with Boeing. Nevertheless, having accumulated the productrelated competences and having developed a reputation as competent sub-system suppliers, they have learned to stand on their own feet.66 Meanwhile, some executives at the aircraft manufacturers and trade associations in Japan pointed out that the inter-firm and interorganizational relationships have loosened both in the domestic industrial network and the policy network with the result that individual manufacturers are now less dependent on the JADC consortium.67

5.6

Concluding remarks

In this chapter, we have described the post-war development of Japanese commercial aircraft production. In particular, on the basis of our analytical framework put forward in the preceding chapter, we made an indepth analysis of the FLI of the Japanese aircraft manufacturers. Ever since the end of the seven-year prohibition on all aircraft activities in 1952, the Japanese have sought to overcome their latecomer status in the commercial aircraft market; and they in turn aimed to achieve FLI. Having rebuilt and updated the fundamental infrastructure and technological foundation through licensed production of US military aircraft, the Japanese began to pursue the catch-up FLI strategies, in particular the national project to build the YS-11 during the 1960s relying only on domestic resources. However, the YS-11 project failed to catch up in the finished product market partly because the Japanese aircraft manufacturers were unable to attain the dynamic strategic fit to overcome the barriers to entry to the finished product market. Another factor contributing to the failure of the catch-up strategy was Japan’s local institutional setting, in which the strategic decisions were largely moulded by the prescriptive slogans – that is, with no careful and realistic assessment of the current levels of internal competences.

172 The Challenges of Late Industrialization

On the other hand, after the Japanese implemented a strategic change in FLI during the 1970s and 1980s, their achievement in the upgrading FLI was impressive. An outline of their upgrading process is conceptualized in Figure 5.8. The Japanese first became piece-part subcontractors for the Boeing B747SP during the 1960s. Having become risk-sharing partners in the B767 ICP (15% work share) in the 1980s, and, subsequently, of the B777 ICP (21% work share) during the 1990s, the Japanese aircraft manufacturers incrementally upgraded their status to dependent firm while enlarging the scale and scope of their sourcing activities. We tried to show that Japan successfully exploited the window of opportunity for the upgrading FLI, which was opened by the global business transformation in the commercial aircraft industry as seen in Chapter 3. More specifically, Japan has successfully attained the dynamic strategic fit – with catalytic support from the local institutional setting – to become ‘significant’ suppliers in the globalizing (that is, enlarging, deepening and intensifying) intermediate goods market (Figure 5.8).

Dependent firms

Generic terms

Piece-part subcontractor

Terms in the ICPs

SUBCONTRACTOR

Sub-system suppliers or module system maker PARTICIPANT

PARTNERS

RISK SHARING Large

FULL PARTNER REVENUE SHARING 2005 ~ B787 (35%)

1992 ~ Regional Jets Scale & scope of sourcing activities

1990 ~ B777 (21%) 1977 ~ B767 (15%) Late 1960s ~ B747SP Small UPGRADING

Figure 5.8 Japan’s upgrading process through international collaboration projects Source: Field interviews; see also Table 3.1 and Table 3.7

Japanese Commercial Aircraft Production: Case Study 173

We also shed light on the limits of the upgrading of the Japanese aircraft manufacturers within the Boeing’s GVC. Those limits are due to Boeing’s strict control over the scope of Japan’s sourcing activities – that is, the former tells the latter what to do and what not to do. Boeing’s structural control has also been exerted over Japan’s diversification strategy. Under Boeing’s pressure, the Japanese had to refrain from diversifying into the rival Airbus GVC. Instead, the Japanese have tried to extend the limits of the upgrading FLI strategy by diversifying into the regional jet market. Furthermore, Boeing announced on 26 April 2004 the go-ahead for its first new aircraft programme, B787, in more than a decade (Financial Times, 26 April 2004). On 16 December 2003, it announced a plan to bring a new 200–250 seat aircraft, B787, into service by 2008. Boeing also confirmed its plan to outsource a large share of the B787 basic structure to foreign partners, keeping just 35% of the work for itself. Of particular concern here is that the Japanese manufacturers – namely MHI, KHI and FHI – will be revenue sharing partners and will undertake a 35% work share – that is, their highest status and their largest share ever in a Boeing’s ICP. Especially, MHI will make the main wing that, as seen earlier, is one of the most critical component parts of an aircraft after the cockpit. In addition, Japanese engineers have been allowed to take part in the product conceptualization of the B787. As of late December 2003, about 90 Japanese engineers have already joined the Boeing’s engineering team in Seattle (Financial Times, 21 November 2003; Financial Times, 17 December 2003; Nihon keizai shinbun 18 December 2003; Nihon keizai shinbun 5 February 2004). Hence, if this proposed B787 project is to be actually launched, Japanese manufacturers will have a great opportunity to upgrade to a higher level within the Boeing GVC.

6 Conclusion

The purpose of this study has been to understand the dynamics of firm-based late industrialization (FLI) in the context of recent global business transformation. More specifically, it has examined the nature of the obstacles and opportunities for latecomer firm growth prevailing in modern global industry. It has also analysed how the latecomer firm could (or could not) overcome the obstacles and seize the opportunities in pursuit of firm-based late industrialization. Furthermore, the fundamental motivation of this study was to develop a comprehensive fund of knowledge about FLI, which may ultimately assist developing countries in designing government policy and corporate strategies for FLI. To this end, six research questions were asked: 1. How may latecomers pursue firm-based late industrialization (FLI)? 2. What are the trends and driving forces of the recent global business transformation? 3. How have these globalization trends changed the context of FLI? 4. What are the underlying factors of the FLI process? 5. How can we describe the FLI of the post-war Japanese commercial aircraft production? 6. What are the lessons to be gleaned by current latecomers from the Japanese post-war FLI experience? The literature review in Chapter 2 showed that the traditional literature relating to late industrialization has largely failed to take into full account the impact of the recent global business transformation. Meanwhile, due to its futurological, hypothetical, deterministic or abstract nature, the globalization literature does not offer a focused or in-depth analysis of the extent to which the recent global business transformation 174

Conclusion 175

might have changed the context of FLI. Therefore, Chapter 2 tried to highlight the shortcomings of the existing literature in failing to answer comprehensively the research questions addressed in this study. Having focused on the recent global business transformation in the commercial aircraft industry, we explored how the context of FLI has changed in the epoch of globalization in Chapter 3. As the first step in the analysis, we stylized two strategic routes by which latecomers might pursue FLI – namely ‘catch-up’ and ‘upgrading’ FLI strategies. The former would directly aspire to gain competitive advantage as a system integrator in the finished product market, while the latter would aim at gradually upgrading its supplier status in the intermediate goods market. To highlight the difference between these two FLI strategies, we emphasized the power asymmetry between a system integrator and a supplier by adapting the global value chain (GVC) perspective. The GVC perspective focuses on the superior power of a system integrator (that is, a lead firm) in integrating and coordinating the globally dispersed suppliers’ (that is, dependent firms’) activities along the value chains of a given commodity or product. Although the GVC perspective offers an effective conceptual framework within which to focus on such power asymmetry, it lacks the analytical edge to contemplate its functions and sources. We thus derived the theoretical underpinning for the system integrators’ superiority as well as for the suppliers’ dependency in GVCs by synthesizing the power-dependence model of inter-organizational relationships and the resource-based view of the firm. Based on this elaborated version of the GVC perspective, we described the mechanism of FLI, in general, as a process in which a latecomer firm might become a less dependent actor in a GVC by acquiring ‘dual-faceted’ competences that would generate rent and bargaining power simultaneously. Furthermore, we also redefined the ‘catch-up’ and ‘upgrading’ strategies as alternative strategic routes towards FLI in relation to GVCs.1 A latecomer firm employing catch-up FLI strategy would attempt to become a lead firm in a GVC either by seizing the superior power from an incumbent lead firm in an already existing GVC or by establishing its own GVC from scratch. Its success depends on whether the latecomer firm would be able to acquire the dual-faceted competences that would enable it to overcome the entry barrier to the finished product market. The latecomer firm deploying an upgrading FLI strategy, on the other hand, would remain a dependent actor in an already existing GVC and would aim at incrementally upgrading its supplier status in the intermediate goods market.2 Its success would depend on the nature of the

176 The Challenges of Late Industrialization

intermediate goods market – more specifically, the availability of high value-added sourcing activities for suppliers. We then turned to the effect of the global business transformation on the commercial aircraft market in order to examine how global trends had affected the prospects for success of the catch-up and upgrading strategies respectively in their pursuit of FLI. Two major trends of global business transformation can be identified in the commercial aircraft industry. One is the extreme consolidation of the finished product market. Another is the expansion, deepening and intensification of the intermediate goods market. Ever since the very early stages of its history, the aircraft industry has witnessed a constant process of market consolidation. The small workshops, which were originally established by adventurous entrepreneurs, turned into the massive global giants during the past century. This consolidation process accelerated during the 1990s and finally resulted in the finished product market of the aircraft industry being more concentrated than in any other industry. There are five major driving forces behind such market consolidation by large firms: 1. The cost of developing new aircraft is higher than for any other industrial product due to the large production scale and high technological complexity. 2. To keep pace with rapid technological progress, the system integrators must undertake high intra-firm R&D investments. Those first two factors together call for strong economies of scale. 3. Post-manufacturing activities – such as marketing, sales and aftersales service – have economies of scope. 4. To withstand the long gestation period of investment together with the volatile demand situation system integrators must have a strong financial base. 5. Business consolidation at domestic and regional levels has been strongly supported by the governments of major aerospace countries, who have well understood that the battle for the aircraft market is fought at the global level. As the result of vigorous consolidation throughout the 1990s, which reached its peak when Boeing acquired McDonnell-Douglas in 1997, the industry has become a duopoly in the two major market segments: Boeing and Airbus Industrie in the large jet aircraft market; and Bombardier and Embraer in the regional jet market. In particular, the oligopolistic competition in the regional jet market has become so

Conclusion 177

severe that even some established forerunners, such as Fokker, British Aerospace and Fairchild Dornier, have been forced to abandon the commercial finished product market. Such extreme market consolidation has brought about fierce oligopolistic competition on a global scale. It has in turn raised ever higher barriers to entry against latecomers attempting catch up in the finished product market. In purely logical terms, a latecomer might eventually be able to overcome the barriers to entry if its government kept providing effective and large-scale financial and technical support over a long period. However, the scale of necessary resources required and the risk of failure inherent in such massive government support continue to inflate remorselessly. On the other hand, the intermediate goods market of the commercial aircraft industry has expanded, deepened and intensified. This has resulted from the fact that the system integrators have outsourced ever larger components and ever higher value-added functions to selected suppliers worldwide. System integrators have been willing to delegate medium value-added activities – such as component design and development – to capable suppliers, in exchange for their sharing the ever rising financial and technical risks inevitable in new aircraft production. In addition, facing ever-fierce oligopolistic competition calling for an enormous commitment of financial and technical resource for survival, the system integrators have been obliged to focus their resources on their core competences while outsourcing non-strategic activities. In particular, such significant suppliers have come to participate in socalled international collaboration projects (ICPs), which have become a popular organizational structure for the development and manufacture of new aircraft. It has become common for system integrators to select some project partners, with whom they create significant levels of interfirm cooperation in research, design, production and marketing. They also expect a significant contribution from all partners with development funds or risk capital. All major airframe system integrators have pursued international collaboration projects since the 1980s. In addition, the number of these ‘significant’ suppliers has also risen outside the framework of international collaboration. They mainly include the sub-system suppliers, who not only carry out manufacturing but also detailed design of the components they are supplying. Therefore, the expanding scale and scope of the intermediate goods market, together with the increasing number of significant suppliers, suggests that the opportunities for latecomer firms to upgrade to significant suppliers status within the commercial aircraft GVCs have

178 The Challenges of Late Industrialization

increased. In other words, the recent global business transformation has opened a ‘window of opportunity’ for the upgrading FLI strategy. However, what should be emphasized at this point is that such a window of opportunity has been opened only for those latecomers who have sufficient level of competence to qualify as significant suppliers. In other words, in order to be selected as significant suppliers by lead firms, latecomer firms must already possess a significant level of financial resources and production capacity in addition to a high level of technological, marketing and managerial capability. Indeed, the Japanese aircraft manufacturers during the 1970s, when ICPs began to be widely used, were a peculiar case in history of the upgrading FLI. They already possessed far larger capital resources and a far higher level of competences than other latecomer firms in NIES (newly industrialized economies) and developing countries. In short, the recent globalization trends within the commercial aircraft industry have shifted the context of FLI towards one in which an upgrading strategy is likely to have a greater prospect of success than ever while a catch up strategy is confronted with ever higher entry barriers. This phenomenon has been highlighted by the Japanese failure to catch up and its qualification for success in upgrading. Even the Japanese aircraft manufacturers, with their abundant capital resources and advanced technological capabilities, were unable to overcome the ever-higher barriers to entry of the finished product market. However these attributes were invaluable in enabling them to take advantage of the emerging opportunity for upgrading FLI as the global business transformation took place. Given such contextual changes of FLI, the shortcomings of the traditional literature have became even more exposed as it has largely limited its analysis to the catch-up process of late industrialization without taking globalization effects into account. Therefore, there remains an urgent need for explorative and in-depth analysis of the upgrading FLI process taking full account of the global business transformation. Having aimed at contributing to an understanding of the process of upgrading FLI, Chapter 4 developed an analytical framework, and Chapter 5 presented an in-depth case study of the post-war Japanese aircraft industry. These two chapters were complementary. On the one hand, the analytical framework provided the organizational structure to illustrate the case study by identifying the underlying factors affecting the upgrading of the FLI process. The case study, on the other hand, created the basis on which the analytical framework identified these underlying factors.

Conclusion 179

The underlying factors identified in Chapter 4 were as follows:  1  2  3  4

Lead firms’ control over latecomer firms’ growth; Lead firms’ sourcing strategies; Latecomer firms’ dynamic strategic fit; and Local institutional setting, in which latecomer firms are embedded.

It has been argued that latecomer firms might achieve the upgrading of FLI  2 when lead firms expand and deepen the ‘value creation’ sourcing (VCS) rather than the ‘cost reduction’ sourcing (CRS);  3 when latecomer firms demonstrated a tight strategic fit to the nature of global sourcing as well as effective learning capability; and  4 when the local institutional setting promoted their strategic fit and learning. In addition to these three factors, we have especially emphasized that  1 lead firms attempt to control the progress and direction of latecomer firm growth so as to closely align it with their sourcing strategy – that is, ensuring that their suppliers have sufficient competence to respond quickly and flexibly to their needs, but preventing them from becoming sufficiently competent to encroach on their own competitive advantages. The case study in Chapter 5 showed that each of those factors had singly and jointly affected the failure to catch up while enabling the success in upgrading within post-war Japanese commercial aircraft production. Japan failed to catch up by the YS-11 national project (late 1950–70s). Its failure in catch-up was partly attributable to a lack of internal strategic fit for overcoming the high entry barriers in the finished product market (Ref.  3 above). Having focused on nurturing an independent indigenous commercial aircraft industry, the YS-11 project provided for the Japanese manufacturers to cover all activities throughout the value chain. However, they had no experience of the development, production, marketing and after-sales service necessary for a modern commercial aircraft. Partly due to their ‘closed’ knowledge system, they were unable to overcome their steep learning curve sufficiently to fill the large competence gap and this prevented them from gaining competitive advantage as a system integrator in the finished product market. Moreover, the manufacturers’ assessment of the risk associated with the indigenous commercial aircraft project had been distorted by governmental prescriptive directions and over commitment of subsidies; and the business associations also interfered to complicate matters (Ref.  4 above).

180 The Challenges of Late Industrialization

Japan’s success in upgrading FLI in the Boeing GVC (1970s–mid 1990) could be also well described by focusing on the underlying factors listed above. First of all, the window of opportunity for upgrading FLI was opened by the changes in Boeing’s sourcing strategies from short-term ‘cost reduction’ sourcing to long-term ‘value-creation’ sourcing (Ref.  2 above). The Japanese manufacturers gained a dynamic learning platform by deepening their sourcing relationship with Boeing through intensive and collaborative interaction within the Boeing GVC. Nevertheless, as we emphasized repeatedly, as a prerequisite for utilizing such a window of opportunity, the Japanese manufacturers had been equipped with sufficient capital resources and technological capabilities. Secondly, the Japanese were able to seize the opportunities to upgrade to significant supplier status in Boeing’s GVC because they attained external strategic fit in the globalizing intermediate goods market (Ref  3 above). Having focused on medium value-added sourcing activities – such as sub-system design and assembly, the Japanese had come to be deeply involved in Boeing’s value-creation sourcing. Japanese manufacturers were also able to attain internal strategic fit by positioning their sphere of operations so that they could optimize their product-related competences. They had long nurtured those competences through the licensing and indigenous production of military aircraft and in the course of the YS-11 project. In addition, they were able to achieve the learning competences required for their upgrading FLI strategy because: (1) they benefited from the large knowledge inflow resulting from intensive interaction with Boeing; (2) they had the absorptive capacity to assimilate and utilize that knowledge efficiently; and (3) they were able to finance the learning process sufficiently. Thirdly, the local institutional setting in Japan played an important catalytic role in promoting the sourcing relationships between the Japanese manufacturers and Boeing (Ref  4 above). The policy network helped the manufacturers to establish an efficient information-sharing channel with Boeing throughout the contract negotiations, such as the ‘Higher Level Meeting’ in the B767 project. The government’s financial support was critical for the Japanese manufacturers to be in a position to receive invitations for international collaboration projects in the first place. Furthermore, the industrial network led by the national consortium, the CTDC/JADC, enabled the manufacturers to coordinate and consolidate their individual competences effectively. This was crucial in facilitating their becoming significant suppliers to Boeing by taking on a large bundle of component production. It also enabled the Japanese to exert stronger bargaining power over Boeing in the contract negotiations than would have been the case had they negotiated individually.

Conclusion 181

However, Boeing did not give the Japanese manufacturers a free hand in upgrading FLI within its GVC. Rather, Boeing carefully controlled the growth of its suppliers by determining ‘what to do’ and ‘what not to do’, and more fundamentally ‘what to learn’ and ‘what not to learn’ through the sourcing activities (Ref.  1 above). In so doing, Boeing prevented the Japanese from acquiring the core technologies and knowledge of strategic functions – especially market-related competences. As a result, Japanese manufacturers ran into the inherent limitation of the upgrading FLI process by finding themselves restricted to product-related activities. This is the main reason why the Japanese manufacturers today still remain at dependent supplier status in commercial aircraft GVCs. To put it differently, Boeing successfully led the direction of the Japanese FLI towards the ‘window of opportunity’ of upgrading FLI for the sake of its own strategic goal of building an effective ‘lean’ global value chain. In so doing, Boeing could also exercise control over the progress of the Japanese FLI. Hence, Boeing has contrived to make the Japanese manufacturers dependent ‘partners’ in their ICPs while preventing them from growing into independent and competitive lead firms. We finally turn to the last research question of this study – what are the lessons to be learnt by current latecomers from the Japanese postwar FLI? As discussed in Chapter 3, some of the current latecomers – particularly the Asian NIES and China – have been eager to develop their indigenous aircraft industries. Those countries have aggressively nurtured the aircraft industry as a ‘strategic industry’ both for national security and for advancing to a higher level of industrialization through mastering the industry’s sensitive and advanced technology. Due to space limitations, I will discuss only two possible implications of this study for current latecomers. Firstly, the attributes which permitted the Japanese success in upgrading suggest that it would be extremely difficult, if not impossible, for current latecomers to achieve FLI in the globalizing commercial aircraft industry. When the industry began to undergo global business transformation in the 1970s, the Japanese aircraft manufacturers already possessed a significant level of competence – specifically, capital resources and technological capabilities. This high level of competence was one of the critical prerequisites for the Japanese manufacturers to be selected by the Boeing as significant suppliers in its ICPs. However, the current latecomers’ level of competence is much lower than was that of the Japanese manufacturers during the 1970s. Given the recent globalization trend of ever-fierce oligopolistic competition between the ever-larger suppliers (see section 3.2.2.3), the

182 The Challenges of Late Industrialization

less competent firms of NIES countries and China, not to mention the even smaller firms of developing countries, would face extremely high barriers to entry for upgrading FLI. Indeed, this is a pessimistic implication of the study for the current latecomers. However, policy makers and business leaders in the current latecomers should bear in mind this hard reality in pursuit of FLI in the large aircraft industry. Secondly, the Japanese failure to develop a competitive system integrator suggests that the current latecomers would not be able to establish an independent indigenous commercial aircraft industry by solely pursuing upgrading FLI. This is mainly because there is a stark division of labour between a system integrator and a supplier in the GVCs of the commercial aircraft industry. As long as a latecomer firm solely pursues upgrading FLI, it would not be able to advance beyond dependent status as a supplier in GVCs. In turn, this is because the lead firm controls the direction and progress of latecomer firm growth in order to restrict the latecomer firms to dependent status within the GVCs. It may further imply that, in order to establish an independent indigenous aircraft industry, both Japan and current latecomers should search for a different FLI strategy from catch-up or upgrading. For instance, latecomer firms might be able to externally acquire marketrelated competences though merger or acquisition of established but poorly performing system integrators if they could afford it – perhaps with their government’s financial support. Such external acquisition of marketrelated competence might complement the endogenous learning of product-related competence through an upgrading FLI process. This study provides new insights into the enduring discussions concerning late industrialization and globalization. It shows that to comprehend the complexity of the process of firm-based late industrialization in this period of globalization, it is necessary to understand the upgrading process of latecomer firms in global value chains. The study thus delineates the possibilities and limitations of the upgrading FLI strategy through developing the analytical framework and conducting an in-depth case study. Nevertheless, further research is needed to test the validity and organization of our analytical framework, particularly through comparative case studies covering different industries, firms and countries. This study is but a modest start in promoting comprehensive understanding of the challenges facing late industrialization in the epoch of globalization.

Appendix Table A1 The list of the interviewees of the fieldwork Organization

Position

Government Agencies A. Director, International Research and Development Cooperation Div. Deputy Director, Defence Products and Space Industry Div. B. Maintenance Examiner, Aviation Dep., Technology Div. Deputy Director, Tourism Dep., Int’l Affairs Office Trade Associations C. Senior Managing Director (Former) Project Head, V2500 Project Dep. Project Head, ‘X’ Int’l Collaboration Project Dep. General Manager, ‘Y’ Int’l Collaboration Project Dep. D. Senior Managing Director General Manager, Administration General Dep. E.

General Manager, Public Relations Div. General Manager, Business Development Div. General Manager, International Affairs Div.

Japanese Aircraft Manufacturers F. General Manager, R&D Dept. Manager, International Joint Programme, Commercial Programmes General Manager, Commercial Programmes, Aerospace Div. G. Senior Manager, International Sales Dep., Aerospace Div. Manager, International Sales Dep., Aerospace Div. H. Director, Factory Manager

183

Date

12/12/00 11/12/00 7/11/00 5/12/00 22/12/00 07/11/00 23/10/00 26/3/00 02/11/00 23/10/00 5/10/00 5/10/00 11/10/00 19/10/00 7/8/00 19/10/00 8/12/00 10/01/00 26/3/00 15/11/00 28/6/01 14/11/00 14/11/00 10/11/00 28/12/00

184 Table A1 (Continued) Organization I.

Position Senior Manager, Business Development, Commercial Aircraft & Space Systems Dept., Aerospace Sales Div ‘Z’ Program Manager, Contract Administration Department, Aerospace Div. Senior Manager, Information & Communication System Dept., Planning & Control Office, Aerospace Group Vice President, USA Office, Aerospace Marketing and Business Department Associate Director of Board & Deputy General Manger of Gas Turbine Div. Senior Manager, Gas Turbine Div., Gas Turbine & Machinery Group, Aero Engine Engineering Dep.

J.

Manager, Civil Products Group, Civil Aircraft & Aeroengine Dep. Senior Manager, Civil Products Group, Civil Aircraft & Aeroengine Dep. Acting Manager, Civil Aircraft & Aeroengine Dep. Acting Manager, Civil Aircraft & Aeroengine Dep. Deputy Chief Engineer, Engine & Control Equipment Dep. Deputy Chief Engineer, Engine & Control Equipment Dep.

K.

L.

Executive Officer, President, Aircraft & Oil Hydraulic Equipment Company Advisor, Aircraft Equipment Company General Manager, Purchasing Dept., Aero-engine & Space Operations General Manager, Marketing & Business Development Dep., Civil Aero-Engine Div., Aero-Engine & Space Operations Marketing & Sales Group, Marketing & Business Development Dep., Civil Aero-Engine Div.

Foreign System Integrators M. Director, Airplane Programmes – Japan Manager, Business Development, Commercial Airplanes Group N. Senior Airline Analyst, Commercial Aviation O. Vice President Marketing & Sales P. Regional Director – Japan, Northern Pacific Operation Q. Regional Director, Japan

Date 18/10/00 27/6/01 28/12/00 28/12/00

01/11/00 30/10/00 15/11/00 27/6/01 30/11/00 16/11/00 16/11/00 8/12/00 20/6/01 16/11/00 8/12/00 20/6/01 8/12/00 8/12/00 6/10/00 6/10/00 23/10/00 19/12/00 25/6/01 02/11/00

18/12/00 18/12/00 26/3/00 26/3/00 7/12/00 11/12/00

185 Airline Companies R. Senior Director, Route and Fleet, Corporate Planning Office S. Assistant Manager, Purchasing & Facilities Assistant Manager, Purchasing & Facilities Manager, Engineering & Maintenance – Quality Assurance

05/12/00 22/12/00 22/12/00 22/12/00

Private Research Organizations T. President U. President

05/12/00 10/01/01

Table A2 Japanese manufacturers’ participation to international collaboration projects Model (No. of seats)

Japanese manufacturer

Component parts

Type of involvement

B707 (165) Production ended

Matsushita Electronic Co.

Passenger entertainment system

Subcontractor

B727 (94–145) Production ended

JAMCO

Galleys

Subcontractor

Matsushita Electronic Co.

Passenger entertainment system Passenger seats

Boeing (USA)

Tenryu Industries Co. B737 (110–140)

Kayaba Industry Co. Kawasaki Heavy Industries Kawasaki Heavy Industries Koito Industr‚ Koito Manufacturing Co. Kobe Steel Shimadzu Corp.

JAMCO Sumitomo Precision Products Co.

Thrust reverser control valve Wing rib (B737–300∼ 800) Winglet (B737–300/400/500) Passenger seats Lighting systems Titanium casting parts fuel back-flow prevention valve, APU deboost Galleys Landing gear

Subcontractor or supplier

186 Table A2 (Continued) Model (No. of seats)

Japanese manufacturer

Component parts

Teijin Seiki Co.

Main gear actuator, brake system control valves Passenger seats Horizontal gyrometer

Tenryu Industries Co. Tokyo Aircraft Instrument Co. Japan Aviation Electronics Industry Fuji Heavy Industries Matsushita Electric Corp. Mitsubishi Heavy Industries Mitsubishi Heavy Industries Yokohama Rubber

B747 (490)

Kawasaki Heavy Industries Koito Industry‚ Shimadzu Corp.

JAMCO ShinMaywa Industry Co. Teijin Seiki Co.

Tenryu Industries Co. Japan Aircraft Manufacturing Fuji Heavy Industries Matsushita Electric Corp. Mitsubishi Heavy Industries

Type of involvement

Accelerometer Elevator Passenger entertainment system Nose steering system Inboard flap Potable water tank, lavatory module Outer flap Passenger seats Trailing-edge angle gearbox, spoiler operational appliance, APU door system equipment Galleys, lavatory modules Horizontal & vertical tail wing trailing-edge Aileron actuator part, flap actuator part, nose gear steering sytem Passenger seats Structural components Aileron, spoiler Passenger entertainment system Inboard flap, main landing gear door

Subcontractor or supplier

187

B757 (180)

Mitsubishi Electric Corp. Minebea Yokohama Rubber

Control valves

Kayaba Industry Co.

Nose gear steering system Passenger seats Lighting systems

Koito Industries Koito Manufacturing Co. Kobe Steel Shimadzu Corp.

JAMCO Shinko Electric Co. ShinMaywa Industry Co. Sumitomo Precision Products Co. Teijin Seiki Co. Tokyo Aircraft Instrument Co. Japan Aviation Electronics Industry Japan Aircraft Manufacturing Fuji Heavy Industries Furukawa Aluminum Matsushita Electric Corp. Mitsubishi Heavy Industries Mitsubishi Electric Corp. Yokohama Rubber

B767 (210–250)

Mitsubishi Heavy Industries Kawasaki Heavy Industries Fuji Heavy Industries

Bearings Potable water tank, Honeycomb materials

Titanium casting parts Cargo door hinge, APU door system equipment, main landing gear system Galleys Cargo door motor Cabin pressure bulkhead, horizontal tail wing trailing-edge Nose gear

Subcontractor or supplier

Subcontractor or supplier

Aileron Auxiliary altimeter Accelerometer Elevator Outer flap Aluminum casting Cabin speaker system Stringer, main landing gear door Control valves Lavatory module, potable water tank Rear fuselage, entry & service door Forward & centre fuselage, cargo doors Wing/fuselage fairing, main landing gear door

Programme partner

188 Table A2 (Continued) Model (No. of seats)

Japanese manufacturer

Component parts

Japan Aircraft Manufacturing ShinMaywa Industry Co.

Wing inspar ribs

Kayaba Industry Co.

Landing gear actuator hydraulic parts Passenger seats Lighting systems

Koito Industry‚ Koito Manufacturing Co. Kobe Steel

Shimadzu Corp. JAMCO Shinko Electric Co. Sumitomo Precision Products Co. Sony Corp. Daido Steel Teijin Seiki Co. Tenryu Industries Co. Tokyo Aircraft Instrument Co. Toshiba Machine Japan Aviation Electronics Industry Furukawa Aluminum Matsushita Electric Corp. Mitsubishi Heavy Industries Mitsubishi Electric Corp. Minebea Yokohama Rubber

Type of involvement

Fuselage structure, horizontal tail wing trailing-edge

Titanium casting parts, aluminum window frame Trailing-edge angle gearbox Galleys, lavatory modules Electric motor Nose gear Video system Steel Flight control system Passenger seats Auxiliary altimeter CRT display Accelerometer Aluminum casting Passenger entertainment system Main landing gear door Control valves, CRT display Bearings, small motors Composite material, potable water tank

Subcontractor or supplier

189

B777 (350)

Mitsubishi Heavy Industries Kawasaki Heavy Industries

Fuji Heavy Industries

Japan Aircraft Manufacturing ShinMaywa Industry Co. Kayaba Industry Co. Shimadzu Corp.

JAMCO Sumitomo Precision Products Co. Sony Corp.

Programme partner

Landing gear, accumulator Main landing gear door, PDU cargo door hinge, other Lavatory Landing gear parts

Subcontractor or supplier

Yokohama Rubber

Passenger audio system Flight control system CFRP Forward landing gear door Tyres LCD system Main landing gear door, forward landing gear steering, forward landing gear door, entry & service door Potable water tank

JAMCO Shinmaywa Industry Co.

Galleys horizontal stabilizer, engine pylon

Teijin Seiki Co. Toray Industries Japan Aircraft Manufacturing Bridgestone Hoshiden Mitsubishi Heavy Industries

B717–200 (106 seats)

Rear fuselage, tail fuselage, entry & service door Forward, centre fuselage, cargo door, lower centre-fuselage structure, rear body panel Centre wing, wing/fuselage fairing, main landing gear door Wing inspar ribs, stam beam Wing/fuselage fairing

Subcontractor or supplier

Airbus (UK, France, Germany, Spain) A300/A310 (260/210)

JAMCO Sumitomo Precision Products Co.

Galleys Landing gears

Subcontractor or supplier

190 Table A2 (Continued) Model (No. of seats)

Japanese manufacturer

Component parts

Toray Industries Matsushita Electric Corp.

Interior materials Passenger entertainment system, interior materials

A319 (124)

Mitsubishi Heavy Industries

Shroud box

Subcontractor or supplier

A320 (150)

Bridgestone Mitsubishi Heavy Industries

Landing gear tyres Shroud box

Subcontractor or supplier

A321 (186)

Kawasaki Heavy Industries

Aft-skin fuselage panel

Subcontractor or supplier

A330/A340 (253–335)

Kobe Steel Sumitomo Precision Products Co. Mitsubishi Heavy Industries Minebea

Window frames Landing gear

Subcontractor or supplier

JAMCO

Floor cross beams for 2nd fl., structure materials for vertical tail wing PAN carbon fibre PAN carbon fibre Pure titanium sheet

A380 (555)

Toray Industries Toho Tenax Sumitomo Precision Products Co. Mitsubishi Heavy Industries Fuji Heavy Industries Japan Aircraft Manufacturing

Type of involvement

Rear cargo door Bearings Subcontractor or supplier

Forward cargo door, rear cargo door Vertical tail wing trailing-edges, fairings Horizontal tail wing edge

ATR (France, Italy) ATR42/72 (45/70)

Sumitomo Precision Products Co.

Forward landing gear

Subcontractor or supplier

191

Bombardier (Canada) Global Express (8)

Mitsubishi Heavy Industries

Wings, centre-fuselage sections

RSP

Dash 8-Q400 (70)

Mitsubishi Heavy Industries

Centre & rear fuselage, horizontal and vertical tail wings

RSP

CR J700/900 (70/86)

Sumitomo Precision Products Co.

Forward and main landing gear systems Tail fuselage

RSP

Mitsubishi Heavy Industries Continental (8)

Global5000 (8)

Mitsubishi Heavy Industries Sumitomo Precision Products Co.

Wings

RSP supplier

Mitsubishi Heavy Industries

Wings, centre-fuselage

RSP

Wing components, pylon, centre-wing Air conditioning

RSP

Wings, centre-wings Air conditioning

RSP

Main landing gear

Embraer (Brazil) Embraer 170/175 (70)

Kawasaki Heavy Industries Sumitomo Precision Products Co.

Embraer 190/195 (90)

Kawasaki Heavy Industries Sumitomo Precision Products Co.

Gulfstream (USA) GulfstreamIV (14)

GulfstreamV (15)

ShinMaywa Industry Co. Sumitomo Precision Products Co.

Radome parts

Kawasaki Heavy Industries ShinMaywa Industry Co. Sumitomo Precision Products Co.

APU parts

Subcontractor or supplier

Landing gear systems

Flaps Landing gear systems

Subcontractor or supplier

192 Table A2 (Continued) Model (No. of seats)

Japanese manufacturer

Component parts

Type of involvement

Wing structure system

RSP

Raytheon (USA) Hawker Horizon (8)

Fuji Heavy Industries

Note: RSP – Risk sharing partner Source: JADC (2003: 24–26); National Research Council (1994: 109)

Notes

1

Introduction

1 Although rapidly expanding short-term capital flows have some indirect impact upon economic growth by affecting exchange rates and interest rates, they mainly redistribute success and failure around the system, and add little to the structural capacity to generate aggregate growth (Hirst and Thompson 1996: 51). 2 The aircraft industry, whether commercial or military, consists of three main sub-sectors: airframe, aero-engine and equipment/material sectors. Due to space limitations, this study mainly focuses on the airframe sub-sector. 3 This programme launch has been triggered by Boeing having received its first firm orders for the B787 with Japan’s All Nippon Airways purchasing 50 aircraft, which was worth around $6 billion at list prices, although it will have received a big discount as the vital launch customer (Financial Times, 26 April 2004). 4 Nevertheless, the comparison between the commercial aircraft industry and the carbonated soft drink industry presents an interesting paradox in relation to their respective industry characteristics and market structures. Contrary to the commercial aircraft industry, the carbonated soft drink industry produces a large number of small and very simple products for a very large number of customers. However, very similar to the commercial aircraft industry, the global market of the carbonated soft drink industry is extremely concentrated. In practice, both market structures are largely a duopoly – Boeing and Airbus for a large-sized commercial aircraft, and Coca-Cola and Pepsico for cola. I am indebted to Professor Peter Nolan of University of Cambridge for this point.

2 Late Industrialization and Globalization: Literature Review 1 The ‘old’ or ‘classic’ international division of labour is most clearly delineated in the so-called Prebisch–Singer Theorem, which originally lays out the ‘centreperiphery’ view of the world economy in 1949 (Prebisch 1949/1962; Singer 1949/1975). The Theorem asserts that the world economy is divided into the ‘centre’, where the high value-added industrial goods are produced, and the ‘periphery’, where the low value-added agricultural commodities are. Hence, the ‘old’ and ‘new’ international division of labour analyses differ in their focuses on where the division of labour exists: the former focuses on the different types of commodity while the latter on the different types of activities within a production system. 2 It should also be noted that both Gerschenkron and Abramovitz, at the same time, assert that the latecomers cannot take advantage of the backlog of

193

194 Notes

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4 5

6

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technology without their own efforts. Instead, the latecomers may only catch up if they have resources and capabilities to materialize the inward technological transfer and bring it into production, as will be seen in the following section. Several authors have stressed that the founding fathers of the notion of national innovation systems did not share the same semantic contents when defining it (McKelvey 1991; Niosi and Bellon 1996). Furthermore, the unit of analysis has diversified from the sub-national, continental, and sectoral innovation systems (Edquist 1997; Freeman 2002; Malerba 2002). For the detailed literature review on government intervention, see Chang (1994: 7–32). International economy refers to the one in which the principal entities are national entities, and where trade and investment produce growing interconnections between these still national economies (Hirst and Thompson 1996: 8). For instance, Petrella (1996) asserts that ‘de-linking’ of the world economy has occurred, coinciding with the emergence of globalization. He explains delinking as ‘the new division of the world between the increasingly integrated “global” world and the increasingly excluded fragments outside of the Triad’ (Petrella 1996: 81). The development economy literature has suggested that FDI is unambiguously beneficial for economic development (Lall 1993). For a re-evaluation on the benefits of FDI in the globalization literature, see Dunning (1997b: chapter 8). The theory of convergence in turn draws heavily on neoclassical theory of competition and trade, which predicts that over time the costs of production would equalize across the world (Boyer 1996). I am indebted to Professor Peter Nolan at the University of Cambridge for this idea about the government’s duty.

3 Changing Context of Firm-based Late Industrialization in the Global Business Transformation 1 In this study, a finished product market refers to a market for a completed aircraft, whose customer is an airline operator, such as United Airline or Japan Airline. 2 In this study, an intermediate goods market refers to a market for all intermediate goods and services transacted throughout a supply chain. A customer of an intermediate goods market can be system integrators or various tiers of suppliers that comprise a supply chain. 3 The GVC perspective has its root in a notion of the ‘commodity chains’ that was originally developed by Hopkins and Wallerstein (1986; 1994). The conceptual evolution of ‘global value chain’ can be traced as following. Hopkins and Wallerstein originally presented the notion of ‘commodity chain’ to discuss a variety of international chains for agricultural (and timber) products, from the beginning of the early modern era. It in turn comes from the Wallerstein’s (1974) world system theory, combined with Braudelian history. Having adapting the basic framework of ‘commodity chain’, Gereffi et al. (1994) developed a global commodity chain analysis. Gereffi et al. (1994) ignore the historical/cyclical context of ‘commodity chain’ and are concerned specifically with industrial commodity chains (Raikes, Jensen et al. 2000: 393).

Notes 195

4

5

6

7

8

9

Furthermore, at the workshop in Bellagio in September 2000 (hosted by the Institute of Development Studies, University of Sussex), Gereffi and other researchers working in this area agreed to replace the term ‘global commodity chain’ with ‘global value chain’ partly because the term ‘commodity’ does not fully appreciate a significance of the service activities in the chains (Humphrey and Schmitz 2001). In contrast, the students of development economics usually focus exclusively on the production activities for their analyses on industrial development and trade of developing countries. It is mainly because they assume that the firms in developing countries can become an exporter with no extra effort as long as they are able to produce goods at or below the world market prices. Nevertheless, such assumption is unacceptable because entering the export market requires to overcome the entry barriers of the after-production activities, such as shipping, delivery, wholesaling, retailing, after-sales services, whose standards are set high by developed countries (Lall 1991; Hobday 1995: 34). Ruigrok and van Tulder (1995: 65) call such dominant firms ‘core firm of networks of supply and distribution’ rather than a ‘lead’ firm. It is considered here that the characteristics and the roles of a lead firm in a GVC and a core firm in a production network are sufficiently similar to be regarded as synonymous. The Coca-Cola system consists of the Coca-Cola Company itself that employs about 1,700 people within the EU, and its licensed bottlers that employs around 25,000 people (Nolan 1999: 74). There are various terminologies for categorizing suppliers in different industries. For example, DS suppliers and DA suppliers are often called ‘own equipment manufacturers’ (OEM) and ‘own design manufacturers’ (ODM) respectively in the electronic and automotive industries (Lee and Chen 2000). However, these terms have changed their meaning along with the evolution of production systems in their industries (Sturgeon 2001). I here refer to Asanuma’s terminologies, developed based on the automotive industry, because they clearly indicate who undertakes the drawing function and avoids confusing the definitions of OEM and ODM. This category of various types of suppliers is consistent with the indicators of supply dependencies developed by Ruigrok and Tulder (1995: 63–83). Ruigrok and Tulder construct a dependency scale, which positions various types of suppliers according to the degree of their dependency on lead firms within a value-chain. One extreme is the least dependent type of supplier, being a monopsonistic supplier of critical components. The other extreme is the most dependent type of supplier, being one of a large number of producers of noncritical small parts. The former and the latter types of supplier may coincide with a module system maker and a piece-part subcontractor respectively in Figure 3.4. Regarding the recent frequent usages of the word ‘interdependence’ in the literature on international relationships, Ruigrok and van Tulder (1995) rightly point out the vacuity of the word in the context of asymmetrical power relations, saying: Obviously, one can call two actors interdependent whenever one wishes, but it is misleading and inappropriate to refer to a relationship between two actors as ‘interdependence’ if one actor has more influence over the other than vice versa. (Ruigrok and van Tulder 1995: 73)

196 Notes 10 Even the famous lean-production process developed by Toyota has been standardized and licensed. Indeed, there is an institute in Japan, which provides instruction regarding the Toyota production system. Boeing was one of the most eager students at the institution in the early 1990s. 11 Barriers to entry can be also exogenously and artificially created by policy measures. 12 It is to be noted that ‘acquisition of new competence’ – that is, learning – is the bedrock for achieving the FLI. The issue of learning by a latecomer firm, specifically by a dependent firm, will be elaborated in the next chapter. 13 Some GVC literatures call the former way of upgrading as ‘functional upgrading’ and the latter as ‘product upgrading’ (for example, Kaplinsky and Morris 2000: 38; Gereffi and Kaplinsky 2001: 5). In addition, they identify two more ways for upgrading: ‘process upgrading’ through transforming input into output more efficiently, and ‘chain upgrading’ through diversifying into a new global value chain. Although those two ways contribute to increasing the value-added of the dependent firm, I regard them as productivity increases rather than upgrading of the dependent firm’s status in GVCs, which is brought about by the changes of the nature of their supplier activity. 14 It is to be noted that these two market segments often overlap at the aircraft size between 90–110 seats. Both the makers of a large aircraft (that is, the Boeing and the Airbus) and those of a regional jet (that is, the Embraer and the Bombardier) have showed their intention to develop this overlapping market segment. 15 For a detailed illustration of the consolidation process in the 1990s, see Nolan (2001a: 141–73). 16 Commercial aircraft are often recycled, for example into a cargo plane. If we take into account of such recycled periods, the total product life cycle of an aircraft could be longer than 50 years. 17 Becoming launch customers, the airline companies usually obtain large discounts in exchange for taking the risk of buying the unproven new aircraft. 18 In general, three kinds of risk inherent in the development/production of a new industrial product can be identified:

• The process risk arises from uncertainty whether a firm would be able to transform inputs into outputs with sufficient efficiency to recoup its investment. • The technical risk arises from uncertainty whether a firm would be able to solve technical problems in production with sufficient efficiency to recoup its investment. • The marketing risk arises from uncertainty whether a firm would be able to sell enough to recoup its investment. 19 One consequence of the firms’ lack of international partners was a lack of new aircraft, as McDonnell Douglas introduced only one new aircraft (the MD-11), which was a derivative of a 25-year-old design in the 1990s. This in turn directly contributed to the failure of McDonnell Douglas to expand its product line sufficiently to remain a viable competitor and was therefore an important factor in the firm’s demise (Mowery 1999: 97).

Notes 197 20 As will be seen later, the Boeing’s CAD (computer aided design) system, namely CATIA, is now connected by optical cables to the computers of all the ICP partners over the world. 21 Interview, Vice President of USA Office, Aerospace Marketing and Business Development, Company I, 1 November 2000. 22 However, SJAC reports that some suppliers commented in the interview: ‘long-term contracts do not mean much in reality. A long-term contract is valid only as long as the suppliers are able to satisfy the prime contractor’s demands for cost reduction’ (Society of Japanese Aerospace Companies 2000c: 36). 23 For instance, the Smiths Group, which produces integrated electronic and actuation systems and precision components for commercial and military aircraft, engaged in 30 M&A transactions between 1995 and 2000, including the merger with TI Dowty Group in 2000. During this period, the Smiths’ both turnover and total assets almost quadrupled to £3.2 million and £2.9 million (in current price) respectively. 24 For the literature, which regards the post-war contour of Japanese aircraft industry as a failure, refer to note 48 of Friedman and Samuels (1993: 267). To list a few, such literature includes Abegglen (1991) and Long Term Credit Bank of Japan (1986). 25 Aerospace production in Japan is mainly carried out by a division of the multi-product heavy industry companies: Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Fuji Heavy Industries (FHI) and IshikawaHarima Heavy Industries (IHI). There are also two smaller manufactures, Shin-Meiwa Industries and the Japan Aircraft Manufacturing Corporation (JAMCO), which have a close relationship with FHI and KHI respectively. 26 For the summary and development of the Brazilian aircraft industries, see Goldstein (2001) and Ghemawat et al. (2000); for China, see Nolan (2001: chapter 6) and Jane’s Information Group (Jane’s Information Group 1997; DeVore 2000); for Taiwan, see ATIP (Asian Technology Information Programme 1998), for Korea, see Texier (2000: chapter 6), for the ASEAN countries, see SJAC (Society of Japanese Aerospace Companies 2000a) and Eriksson (1995). 27 As of 2000, the Chinese aerospace industry comprises, in total, some 250 manufacturing enterprises and other organizations, including over 30 research, education and training establishments, which together employ about 540,000 people (DeVore 2000: 29).

4 Upgrading in Global Value Chains: Analytical Framework 1 According to Ruigrok and van Tulder (1995: 63–64), a ‘network’ has the following characteristics: (1) it is relatively stable: the actors do not meet accidentally; and the interaction is aimed (2) at the exchange of goods, capital, technology, information, skills and/or people; and (3) at the allocation of value for instance on how the interaction should occur. 2 For a good survey on the literature of the theories of international production, see Cantwell (2000).

198 Notes 3 For a good review of the literature on organizational learning, see Bell, Whitwell et al. (2002), Easterby-Smith, Crossan et al. (2000), and Huber (1991). 4 Strange (1988) originally uses the term ‘structural power’ in a context of international political economy, in which the state is the basic unit of analysis: Structural power, in short, confers the power to decide how things shall be done, the power to shape frameworks within which states relate to each other, relate to people, or relate to corporate enterprises. (Strange 1988: 25)

5

6

7

8

9

10

In this study, I apply the term in the context of a global value chain, in which a firm is a basic unit of analysis. The term skill used by Asanuma is here expressed by the term competence. This is because in the literature on resource-based views of the firm, skill refers to capabilities residing at the individual base while competence connotes both resources and capabilities at the organizational base. The latter is the case here (Nelson and Winter 1982; Dosi, Richard et al. 2000). Humphrey and Schmitz (2000; 2001), along the stream of the global value chain analysis, define the ‘chain governance’ solely in terms of this directional mode of control over QCD. It is quite insightful here to consider Dore’s account of how the personal sense of obligation grows through recurring interactions (Dore 1987: 170). He divides such obligatory sense into three categories depending on the power relationship. In an unequal relationship, he calls it ‘benevolence’ when it is shown by a superior to an inferior, while in the reverse direction he calls it ‘loyalty’. Meanwhile, he calls it ‘goodwill’ when it is shown within an equal power relationship. Thus, if we bring the asymmetric power relations into Sako’s ‘goodwill trust’, it should be restated as simultaneous expectations for benevolence and loyalty in the vertical sourcing relations. In the research stream on the global value chain, such a command structure is generally called ‘governance’, which is defined as non-market coordination of economic activity (Kaplinsky and Morris 2000; Gereffi, Humphrey et al. 2001; Humphrey and Schmitz 2001). Furthermore, it identifies three forms of governance: (i) inter-firm networks, (ii) quasi-hierarchical relationships between powerful lead firms and independent but subordinate firms in the chain, and (iii) vertical integration within enterprises. Those forms of governance respectively correspond to what Ruigrok and van Tulder (1995: 72–5) call (i) coalition, (ii) structural control, and (iii) direct control in their dependency scale. Hence, the ‘informal command structure’ discussed here can be regarded as the same notion that GVC research terms a ‘quasihierarchical relationship’. The learning mechanism of a dependent firm will be further discussed later in section 4.2.2.2. The mechanism of firm learning has been mostly scrutinized by the so-called ‘learning school’ of strategic management research. Refer to Cohen and Sproull (1996) for a useful collection of the important literature on the issue. The notion of absorptive capacity will be further discussed later in section 4.2.2.2.

Notes 199 11 Another metaphor can be helpful to understand the lead firms’ control over their suppliers. Imagine the relationship between a bear charmer and a show bear. A bear charmer (that is, a lead firm) wants his show bear (that is, a supplier) to be capable and strong enough to master the various performances entertainingly and vigorously. At the same time, a bear charmer must keep his bear under control all the time and prevent the bear from attacking him. To do so, the bear charmer may have to put the bear in a strong cage. Such a cage can be regarded as a metaphor for the lead firms’ restriction on domains of supply activities and in turn over the learning dimensions of dependent firms. (I owe the inspiration for this metaphor to a conversation with Professor Peter Nolan, Judge Institute of Management, University of Cambridge.) 12 Contemplating the dynamic aspect of a firm’s competences, Teece et al. (1997) have advanced the concept of ‘dynamic capabilities’: ‘We define dynamic capabilities as the firm’s ability to integrate, build, and reconfigure internal and external competences in order to address a rapidly changing environment’ (516). If we consider that the upgrading activities move a dependent firm into a changing environment, the concept of dynamic capabilities seems to underline the elements of learning discussed here. However, the criticisms, which have often been posited against it (Williamson 1999; Barney 2001; Prierm and Butler 2001a; Prierm and Butler 2001b), are also relevant here. As it has been called conceptually vague and tautological, the concept of dynamic capabilities fails to provide clear insight into how a firm can create the ability to integrate, build and reconfigure its competences. Nevertheless, it retains its significance for the issue of organizational learning by shedding light on path dependencies, as we discussed earlier. 13 The concepts of ‘component knowledge’ and ‘architectural knowledge’ in product development were originally put forward by Henderson and Clark (1990). They defined the former as ‘knowledge about each of the core design concepts and the way in which they are implemented in a particular component’, and the latter as ‘knowledge about the ways in which the components are integrated and linked together into a coherent whole’ (Henderson and Clark 1990: 11). Like Brusoni, et al. (2001), some advocates of the ‘knowledge-based theory of the firm’ – which was pioneered by, for example (Demsetz 1991; Kogut and Zander 1992) – have adopted those concepts, and presented an antithesis to the transaction cost economics position in the research on the boundary of the firm. For a detailed account, refer to the special issue of Organizational Science (1990, Volume 7, Issue 5) on the theory of the firm. 14 From the perspective of network approach the firm is seen as a part of a web of inter-organizational relationships, which link the firm and other organizations together in a network structure (Håkansson 1990). Instead of primarily accruing the firm’s performances to the firm’s internal functions, the network approach focuses on how the firm manages as part of a larger whole (that is, industrial network), and how the structure and history of the industrial network affect the behaviour and the activity of the embedded firm. Examples of such network approaches have seen the firm as a nexus of treaties (Aoki, Gustafsson et al. 1990), as an actor searching for complementary network partners (Håkansson 1990), as part of an industrial district (Marshall 1891;

200 Notes

15

16

17

18

Piore and Sabel 1984; Best 1990), and as part of a cluster of firms cooperating and competing at the same time (Porter 1990; 1998). For a critical review of the literature regarding network approaches, see Ruigrok and van Tulder (1995: 25–6). Challenging the neoclassical economics for its central concept of institutionally unaffected Homo economicus (Veblen 1898), institutionalist approaches adopt the ‘sociological’ meaning of institutions as entities that pattern economic actions (Granovetter 1985). In particular, ‘new institutional economics’ puts the transaction costs and roles of property rights at the centre of its analysis. For example, Oliver Williamson analyses the relationships between transaction costs and organizational forms both at the levels of the firm and the market (Williamson 1975; Williamson 1985); and Douglass North asserts that institutions develop as a means to reduce transaction costs (North 1990). According to Richardson (1972: 889), activities are complementary when they represent different phases of a process of production and require in some way or another to be coordinated. In this study, we use the term, policy network instead of the more general term, institution. According to the institutional literature (Hodgson 1988; North 1990), an institution consists of formal rules, characterized by codified rules (for example, national and international regulations and laws, multinational treaties on trade or weapons, business contracts and so on), and of the informal constraints, which are simply habits or social norms (for example, common laws, customs, traditions, work norms, norms of cooperation, conventions, practices and so on). For the purpose of this study, by using the term policy network, we simply focus on the formal functions of the institution in order to limit the scope of our analysis. Needless to say, the informal functions of the institution are also an important factor that influences the behaviour of embedded firms; and they should be scrutinized on other occasion. North (1995) refers this institutional framework as ‘polities’: ‘It is polities that shape economic performance because they define and enforce the economic rules of the game. Therefore the heart of development policy must be the creation of polities that will create and enforce efficient property rights’ (North 1995: 25).

5 The Post-war Development of the Japanese Commercial Aircraft Production: Case Study 1 All manufacturers (excepting Mitsubishi and Nakajima) could supply airframes and engines only to the Army or the Navy, not both. For instance, Kawasaki was an exclusive supplier to the Army and Kawanishi to the Navy (Samuels 1994: 114). 2 Selected from reports in Maema (1992: 182–3). The translation was adapted from Samuels (1994: 128–9). 3 According to Asai (1953: 109), some 40% of facilities were maintained and 80% of aircraft engineers stayed on at the successors to Nakajima and MHI during the ‘7-year blank’.

Notes 201 4 SCAP was the acronym of the allied occupying forces. 5 The Diet is the Japanese parliament. 6 One Japanese aircraft engineer, who had been involved in the development of various types of wartime aircraft and engaged in the maintenance of US aircraft in the 1950s, confessed, ‘The tooling, inventory and quality control management of US) were much superior to the ones of wartime Japan. I am now studying them from the very beginning and about mastering them after 2 years of hard work.’ (Maema 1999: 26). 7 Japanese factories soon began repairing and overhauling all US Navy aircraft in the Far East earning 40–50 million dollars (in current price) annually (exchange rate at the time US$ = 360 yen) (Samuels 1994: 202). 8 It is reported that for the T-33 programme, Lockheed sent 59 advisors to Japan. Because few of them stayed the full three years, the total number of man-months spent by Lockheed was considerably less than 2,124. North American’s technical assistance programme was much smaller than that of Lockheed. No more than 29 employees were in Japan at any one time. Less than 400 man-months of effort were expended on F-86 technical assistance (Hall and Johnson 1970: 318). 9 For detailed descriptions of the post-war development of MHI and KHI aircraft production and management technologies, refer to their company histories: Mitsubishi Heavy Industries (1983) and Kawasaki Heavy Industries (1987) respectively. 10 The P2V-7 contract called for Lockeed’s technical assistance including 1,462 man-months of overseas technical assistance; it also provided for 775 manmonths of technical assistance in the United States, and an allowance of up to 78 man-months for short-term and emergency specialists (Hall and Johnson 1970: 318). 11 The selection of FX licensing was highly politicized and has been called the ‘First FX War’. It involved the Japan Self-Defence Force, the defence industry and the government. Regarding technical performance criteria in particular, the F-104 was favoured over the rival candidate, Grumman F-11, because it was twice as fast (Mach 2) and equipped with more sophisticated avionics, so the F-104 had greater potential for learning through indigenization (Samuels 1994: 215–17). 12 Mitsubishi paid Lockheed a licensing fee of $31,500 (in current price) per plane for the first 160 aircraft. Hall and Johnson claimed this was a dramatically under-priced license. Moreover, they report that the United States agreed to contribute $75 million, more than a quarter of the total cost (Hall and Johnson 1970: 325). The Lockheed-MHI license agreement specified a technical assistance programme of approximately 1,400 man-months in Japan paid for by the US government. A major subcontractor, KHI, also received Lockheed technical assistance (Hall and Johnson 1970: 325–6). 13 This estimate was put forward by the Defence Production Committee and the Machinery Industries Association (quoted in Samuels 1994: 207). 14 Akazasa later admitted his nostalgia saying ‘I had a strong belief that the Japanese aircraft technology, which beat Grumman and Lockheed during the Second World War, could never be inferior to that of Fokker’ (Samuels 1994: 80).

202 Notes 15 The account in this section is based largely on Samuels (1994) and Maema (1999). 16 The total Yuken budget for fiscal year 1957 was 80 million yen (in current price), to which the aircraft manufactures together contributed 45 million yen on top of the government subsidy of 35 million yen. 17 ‘Five Samurai’ were Jiro Horikoshi (the chief designer of the Mitsubishi Zero fighter), Shizuo Kikuhara (Kawanishi Shidenkai fighter), Minoru Ohta (Type97 fighter), Takeo Doi (Kawasaki Hien figher), and Hidemasa Kimura (A26 – the unofficial world record holder for long-distance flight). 18 These ‘manufacturing partners’ coincide with the companies introduced in Note 9 above except IHI, which specialized in aero-engines. 19 Shin-Meiwa was originally the Kawanishi Aircraft Manufacturing Company. Its anglicized name was subsequently changed to ShinMeiwa. 20 Furthermore, younger generation designers at NAMCO claimed that the ‘Five Samurai’, who only had experience of pre-war military aircraft, did not seem to fully understand the complexity of modern commercial aircraft production (Maema 1999: 295). 21 A critical blow was that All Nippon Airways (ANA) cancelled the purchase of the YS-11 because of development delays and instead put 25 Fokker Friendship 27s in operation by April 1965. It severely damaged the product image and market prospects of the YS-11. 22 Due to space limitations I refrain from a detailed account of Japan’s military production, as it has already been well covered by others. For a detailed discussion refer to Maema (2002: chapter 2), Samuels (1994: 214–44) and Chinworth (1992). 23 Interview with Deputy Director, Government Agency A. 24 For example, in 1958 a meeting to coordinate the major areas of planning, propulsion, airframe and components involved 55 formal project managers (Samuels 1994: 212). 25 Interview with Manager, Civil Aircraft & Aeroengine Dept., Company J. 26 Interview with Managing Director, Industrial Association D. 27 The members of the Aircraft Industry Advisory Council consisted of highrank bureaucrats from MITI, MOF and MOT as well as representatives of the major aircraft manufacturers and airline companies. 28 Specifically Boeing offered Japan the choice between a ‘joint programme relationship’ and a ‘programme participant relationship’. The former involved revenue-sharing rather than a fixed-price payment. It also demanded that Japan pay a ‘special equivalent fee’ for Boeing’s technological supremacy and market share, from which Japan would benefit as Boeing’s revenue-sharing partner. In response Japan chose to become a programme participant because it did not want to pay the special equivalent fee (The Editorial Committee of ‘The History of YX/767 Program’ 1985: 156–7). 29 This calculation does not include airframe systems. National Research Council (1994: 105) calculates the Japanese work share actually at only about 6 to 7% of the total airplane value. 30 The government loan has already been completely repaid. (Interview with Senior Manger, Business Development, Commercial Aircraft Dept., Company I.)

Notes 203 31 Interview with Senior Manager, Information and Communication System Dept., Company I. 32 This translation is taken from Samuels (1994: 253). 33 In reality, however, it is MITI, together with the aircraft manufacturers that designate a ‘national project immediately qualifying for up to three-quarters of its development costs through IADF funding’. In this regard, the US government reported that the IADF ‘is designed to insulate MITI politically’ (US Congress, Office of Technology Assessment; quoted in Samuels (1994: 254)). 34 According to Boeing’s calculation, the work share of the Japanese consortium constitutes only 8 to 9% of the value of the airplane (National Research Council 1994: 113). 35 Interview with Manager, International Joint Programme, Company F. 36 Maema (2002: 241); Interview with Senior Manager, Commercial Aircraft Dept., Company I. 37 Nippi and Shin-Meiwa were ‘special’ (second-tier) subcontractors because they were also entitled to IADF financial assistance. Meanwhile, they were subcontractors because their products were delivered to Boeing as KHI or FHI products. This arrangement followed MITI’s administrative guidance, which aimed at wider technological diffusion in the industry. (Interview with Manager, International Joint Programme, Commercial Aircraft Dept, Company F.) 38 Interview with Manager of the International Joint Programme, Commercial Aircraft Dept, Company F. 39 Interview with Vice President of USA Office, Aerospace and Marketing and Business Dept, Company I. Other managers of airframe companies, whom I interviewed, pointed out that the Japanese government never officially demanded offset arrangements for reasons of pride, not wishing to be seen as a developing country. Offset arrangements were generally regarded as a popular tool for developing countries’ industrial policy. (Interview with managers of the Company G and the Company I.) 40 For the principles of lean production, refer to Womack and Jones (1994: 93) as well as section 3.2.2.2 of this book. 41 Interview with Vice President of USA Office, Aerospace Marketing and Business Dept., Company I; Interview with Manager, Contract Administration Dept., Aerospace Div., Airframe Company I. According to the latter interview, in the late 1990s, Boeing also dispatched its executive managers to the technical school set up by former Toyota employees. A total of around 300 Boeing executives studied Toyota’s production system there. 42 It is reported that CATIA contributed to reducing design modifications and design abnormalities in B777 production by 30% and 70% respectively, compared to the B767 production. (Masataka Kadoma, Senior Managing Director, Japan Aircraft Development Corporation, quoted in Aoyama 1998: 7.) 43 As defined in section 3.2.2, a ‘significant’ supplier is a supplier that undertakes not only manufacturing, but also designing and sometimes even marketing and co-financing the development/production project of a new aircraft. 44 See Nolan (2001a: 206–11) for a detailed account of the international collaboration between the Chinese aircraft industry and McDonnell Douglass.

204 Notes 45 Interview with Senior Manager, Information & Communication System Dept., Company I; Interview with Executive Officer, Company K. 46 In turn, this is because, as explained in section 4.2.2.2, absorptive capacity is largely a function of the level of prior related knowledge (Cohen and Levinthal 1990). 47 Interview with Senior Managing Director, Trade Association D. 48 Many interviewees in my field study pointed out Boeing’s confidence in the Japanese manufacturers’ product-related competences and emphasized how critical this was in enabling them to upgrade their position to become subsystem suppliers in the Boeing GVC. 49 Interview with Director, International R&D Cooperation Div., Government Agency A. 50 Interview with Manager, Civil Aircraft & Aeroengine Dep., Company J. 51 Interview with Director, International Research and Development Cooperation Div., Government Agency A. 52 Interview with Deputy Director, Defence Products and Space Industry Div., Government Agency A. 53 The Kimura Mission was led by Hidemasa Kimura, who was one of the Five Samurai who conceptualized the YS-11, and consisted of representatives of MITI, NAMCO and aircraft manufacturers. 54 Interview with Factory Manager, Company H, also former manager of Trade Association D. 55 Interview with Senior Manager, Information & Communication System Dept., Company I. 56 Indeed, a few Japanese representatives actually participated in market-related activities for the B777. However, it was not sufficiently significant to bring about real knowledge transfer to the Japanese aircraft manufacturers: Interview with Vice President of USA Office, Aerospace Marketing and Business Dep., Company I. 57 Interview with Manager, Civil Aircraft and Aeroengine Dept., Company J. 58 This illustrates the most ‘subtle’ way of controlling a supplier. (See Lukes 1974 as well as section 4.1.2.2 of this book.) 59 Interview with Senior Manager, Commercial Aircraft & Space Dept., Company I. 60 However, all managers of the Japanese airlines whom I interviewed said that they would not be persuaded to purchase the A380 simply because of contracts that Airbus might award the Japanese aircraft manufacturers. (Interviews with Company R and Company S.) 61 The A380 ‘superjumbo’ is a complete double-deck commercial airplane that will hold 555 to 800 seats. It was launched in December 2000 and will enter service in 2006. Its total development cost is estimated to be $10.7 billion. As of January 2004, Airbus claimed to have gained 34 firm orders for the A380 (Financial Times, 19 December 2000; Financial Times, 15 January 2004). With the A380, Airbus is trying to break the monopoly of Boeing’s B747 in the jumbo airplane (over 400 seats) market segment. In particular, Airbus is hoping to sell up to 180 A380s in the Japanese market, which it believes will have the largest requirement of any country for aircraft with more than 400 seats (Financial Times, 25 June 2002).

Notes 205 62 In particular, Airbus claimed that the contracts with three Japanese heavies – that is, MHI, KHI, and FHI – could be worth up to $850 million over the next 20 years based on forecast sales of 600 aircraft, seen by most analysts as very optimistic (Financial Times, 25 June 2002). 63 Interview with General Manager of the Commercial Programme, Aerospace Div., Company F, 28 June 2001. 64 Needless to say, after the terrorist attack in the US on 11 September 2001, the order for new planes has remorselessly dropped to only 94 planes in 2002 (Japan Aircraft Development Company 2003: 18). However, our analysis here concerns the late 1990s, which was the period when the new regional jet ICPs were launched one after another in the regional jet sector. 65 Interview, General Manager of the Commercial Programme, Aerospace Div., Company F, 28 June 2001. 66 Interview with Senior Managing Director, Trade Association D, 5 October 2000; Interview with Vice President, USA Office, Aerospace Marketing and Business Dept., Company I. 67 Interview with Senior Manager, International Sales Dept., Company G; Interview, Trade Association E, General Manager, Business Development Dept.

6

Conclusion

1 As mentioned in section 3.1.3, these two FLI strategies do not have to be mutually exclusive. It is possible, at least in a logical sense, for a latecomer firm to pursue both strategies simultaneously. 2 As we defined in notes 1 and 2 of Chapter 3, the finished product market, in this study, refers to the one for a completed aircraft while the intermediate goods market refers to the one for all intermediate goods and services transacted throughout a supply chain.

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Index

absorptive capacity, 88, 100–1, 156 Abramovitz, M., 15, 18 Airbus Industrie, 50, 57, 65, 67–8, 167–8 Akazawa, S., 112–14 alliance capitalism, 24–5, see also Dunning, J. Amsden, A., 21, 34 architectural knowledge, 100, 156 Asanuma, B., 42–3, 82 asymmetric power relation between a system integrator and a supplier, 35–6 its sources in global value chains, 38, 45–50 the case of the commercial aircraft industry, 47–8, 49, 49–50 Baldwin, C. Y., 43 bargaining power, 51–2, 160 Boeing, 8, 50, 57, 67, 71, 137–69 design build teams (DBTs), 150 ‘Learn the Japanese Way’, 149–50 sourcing strategies of, 147–8, 151–2 ‘Working Together’, 151 Bombardier, 8, 50, 170 Brazilian commercial aircraft industry, 75–7, 197n British Aerospace, 57 capability of the firm, 46–7 experience/organization-based, 48 catch-up proposition, 15 catch-up strategy, 34–5, 52–5, 175 CATIA (Computer graphics Aided Three-dimensional Interactive Application), see electronic data interchange chain hierarchy, 42–5 Chandler, A., 20 Chang, H-J., 28–9, 31

Chinese commercial aircraft industry, 75–7, 197n27 Christensen, J. F., 46–7 Clark, K. B., 43 Cohen, W. M., 88, 100–1 commercial aircraft industry, see under individual countries competence of the firm, 47–8, 162–4 see also product-related; market-related; relation specific competence competence backing, 98–9, 127– 9, 153–4, 155 component knowledge, 100 concurrent engineering system, 150, 151 Condit, P., 168 control in sourcing relations, 83–9 see also under dependent firm; Japanese commercial aircraft industry; lead firm convergence proposition, 15 Cool, K., 48 cost reduction sourcing (CRS), 92–3 Dahl, R. A., 41 dependency theory, 14 dependent firm, 40–1, 42 ‘controlled’ growth of, 81, 87–90, 181, see also under Japanese commercial aircraft industry learning dimensions by, 81–3 learning process of, 99–102, see also under Japanese commercial aircraft industry learning trap of, 88–9 Dirickx, I., 48 Dore, R., 198n7 Dosi, G., 46, 81 dual-faceted competence underpinning FLI, 50–1 Dunning, J. H., 23, 25–6, 30, 66

220

Index 221 dynamic strategic fit, 96–102, 127–131, 152–61 see also under upgrading process, determinants of Dyer, J. H., 86 electronic data interchange (EDI) system; 151, 155 Embraer, 8, 50, 170 Emerson, R. M., 41 EPIC (Electronic Pre-assembly in CATIA), see electronic data interchange Fairchild Dornier, 57 Fine, C. H., 43, 89 firm-based late industrialization (FLI), 3–4 changing context of, 33, 61–4, 71–2, 177–8 see also global business transformation mechanism of, 51–2 strategies of, 34–5, 52–5, 175–6, see also catch-up strategy; upgrading strategy flexible specialization, 21 Fokker, 57 Foss, N. J., 46 Freeman, C., 18 Friedman, D. B. 147 Fuji Heavy Industries (FHI), 9, 118, 125, 140, 170 Gereffi, G., 36, 38 Gerschenkron, A., 15, 18 global business transformations, 7–8, 56–61, 64–71, 176–7 global firms, 23, see also globalization debate globalization conceptual problems of, 4–5 of production system, 5 see also globalization debate globalization debate, 22–31 globalists, 2, 22–3, 23–4 hyper-globalists, 26 skeptics, 23, 24, global sourcing, 66 see global business transformations

global value chain conceptual elaboration, 39–52 of the commercial aircraft industry, 37 perspective, 36–8, 194–5n3 government intervention, 21–22, see also industrial policies, Gray, J., 27 Gulati, R., 86 Held, D., 4 Hepler, S., 92 Hirschman, A. O., 92 Hirst, P., 24 Hobay, M., 41 Humphrey, J. 40 Indonesian commercial aircraft industry, 75–7, 197n26 industrial network, 103–4, 131–2, 160–1 industrial policies, 22, 28–31 integral architecture, 43 international collaboration project (ICP), 66–8 different types of ICP partners, 66–7 Ishikawajima-Harima Heavy Industries (IHI), 9 Itami, H., 96–9 Japanese commercial aircraft industry Aircraft Industry Association, 117–18 Aircraft Industry Promotion Law of 1958, 124: revision in 1986, 142–3 Aircraft Manufacturing Law of 1952, 117 Aircraft Production Council (Shingikai), 118 All Japan Consortium, 126, 132–3, 138–9, see also industrial network Civil Transport Development Corporation (CTDC), 138–9 Commercial Aircraft Company (CAC), 145

222 Index Japanese commercial aircraft industry – continued Commercial Transport Design Research Association (Yuken), 124 ‘controlled’ growth of, 81, 87–90, 164–9 diversification, 169–71 Higher Level Meeting, 159–60 Imperial Aircraft Industry, 112–4: Independent Aircraft Technology Plan of 1932, 112; Naval Air Arsenal (K¯ugish¯o), 112–3, 114; weakness of, 114; ‘Zero’ fighter, 113 International Aircraft Development Fund (IADF), 143 international collaboration project (ICP) with Boeing, 137–61: B777 project, 142–6; B787 project, 173; limits of upgrading, 162–4, 181; problem of national autonomy, 138, 139; reasons for the success in upgrading, 146–61, 180; Stamper Letter, 165; YX/B767 project, 139–42; workshare, 140, 144–5 , 172, 173 ICP with regional jet makers, 169–71 Japan Aircraft Development Company (JADC), 142 Kimura Mission, 159 learning to upgrade, 154–8 lessons for current upgrading, 181–2 licensed production, 118–21: indigenization, 120–1; limitations for the industry’s development, 121–2; subsidies offered by the US government, 119; technical assistance offered by the US licensors, 120; Nihon Airplane Manufacturing Company (NAMCO), 125–6 overview of post-development, 72–7: comparison with other latecomers, 75–6 seven-year prohibition of aircraft activity, 114–5

shift in FLI strategies, 135–6: redefinition of success in aircraft industry development, 135–6, see also catch-up strategy; upgrading strategy; revision in Aircraft Industry Promotion Law of 1958 upgrading process of, 172 YS-11 national project, 124–33: reasons for its failure to catch up, 126–33, 179, see also dynamic strategic fit; local institutional setting; knowledge system Kaplinsky, R., 36–7 Kawasaki Heavy Industries (KHI), 9, 119, 120, 121, 125, 140, 144, 170 knowledge of the firm, 100 see also architectural knowledge; component knowledge; tacit knowledge; capability; competence; learning of the firm knowledge system, 103–4, 132–3, 161 Korean commercial aircraft industry, 75–7, 197n26 Kruger, A., 18, 21–2 Lall, S., 17, 18, 49 Langlois, R. N., 86, 94 latecomer firm, 41, 42 late industrialization, see under firm-based late industrialization lead firm, 39–40, 44 control over dependent firms, 83–90, 165–9, 181 sourcing strategies of, 90, 91–6, see also Boeing, sourcing strategies of lean production, 70 of Boeing, 71, 150 learning of the firm, 81, 87–8, 99–102 path-dependency / domain-specificity, 88 see also under dependent firm lessons for current latecomers, 181–2 Levinthal, D. A., 88, 100–1 Levy, D., 66 List, F., 14

Index 223 local institutional setting, 102–4, 105–8 of the YS-11 national project, 126 of the B777 project, 146 see also industrial network; policy network Lukes, S., 86 Lunvall, B-Å., 18, 88 Maema, T., 123 market-related competence, 47 McDonnell-Douglas, 57, 67, 196n19 McGrew, A. G., 4, 64 Ministry of International Trade and Industry (MITI), 117, 121–2, 132, 135–6 Mitsubishi Heavy Industries (MHI), 9, 120, 125, 133–4, 140, 170 module architecture, 43 module lead firm, 44 module system maker, 43, 44 Mowery, D. C., 95 Mulaly, A., 150, 151 Mutual Defense Assistance Agreement (MDA) between Japan and USA, 119 national innovation systems (NIS), 18 Nelson, R., 5–6, 47 new international division of labor (NIDL) analysis, 14, 193n1 newly industrializing economies (NIEs), 1 see also individual countries Nippon Aircraft Manufacturer (Nippi or JAMCO), 9, 145, 197n25 Nishiguchi, T., 86–7, 94 Nolan, P., 3–4, 5, 42, 65, 72, 94 offsets, 95, 147–8 Ohmae, K., 24 Penrose, E., 39, 46 Perez, C., 15–16 Pfeffer, J., 45, 49 piece-part subcontractor, 42, 44 Piore, M. J., 21 Porter, M., 5–6, 19, 38

power asymmetry, see asymmetric power relationship problem solving sourcing, 86–7 product architecture, 43–4 product cycle model, 15 product-related competence, 48 program participant, 66–7 program partner, 66–7 Radosevic, S., 81 Raytheon, 170 regional jet market, 57, 196n14 Reich, R., 24 relation-specific competence, 82, 157, 160 resource-based view of the firm, 46 see capability; competence; resource of the firm Richardson, G. B., 45 risk and revenue sharing partner, 66–7 risk-sharing partner, 66–7 Robertson, P. L., 86, 94 Ruigrok, W., 31, 86 Sabbagh, K., 149, 150 Sabel, C. F., 21 Sako, M., 85, 86 Salancik, G., 45, 49 Samuels, R. J., 135–6, 143, 147, 148 Schmitz, H., 40 Shin-Meiwa Industries, 9, 125, 145, 197n25 significant suppliers, 66, 67, 100, 155 Soete, L., 15–16 Strange, S., 27, 81, 198n4 Sturgeon, T. J., 43, 44 sub-system supplier, 42, 44 Suehiro, A., 17, 18 supplier status, 42–5 tacit knowledge, 88 Taiwanese commercial aircraft industry, 75–7, 197n26 techno-economic paradigm, 16 technological backlog, 15, 16–17 technological capabilities, 17 Teece, D. J., 85 Thompson, G., 24

224 Index transaction cost economics, 85 transaction value in global sourcing, 93–4 transnational corporations (TNCs), 1 oligopolistic competition among, 1 turn-key supplier, 43 upgrading process in GVCs analytical framework for, 79–110 determinants of, 90–108, 179, see also lead firm, sourcing strategies of; dynamic strategic fit; local institutional setting

glass ceiling of, 89, see also Japanese commercial aircraft industry, limits of upgrading learning dimensions in, 81–3 upgrading strategy, 35, 52–5, 175–6 value creation sourcing (VCS), 93–5 van Tulder, R., 31, 86 Vernon, R., 15 Williamson, O. E., 85 Winter, S., 4–5, 47 Yin, R. K., 6