The 15th GISPRI Symposium on
Economic Partnership in East Asian Economic Region
And Reinforcement of Economic Competitiveness

Meeting Report

　Under the auspices of the Ministry of Economy, Trade and Industry and Japan External Trade Organization, the symposium entitled “Economic Partnership in East Asian Economic Region and Reinforcement of Economic Competitiveness” was held in Toshi-Center Hotel, Tokyo, on the 10th, March 2005. Prof. Hideo Kobayashi　(Graduate School of Asia-Pacific Studies, Waseda University) delivered a keynote speech on “Public-Private Partnership to Develop Supply Chains in East Asia” followed by panel discussions: “Business Strategy in Economic Alliances and Trade Policies in East Asia” and “Business Activities and Challenges in ASEAN Region.”

I. Keynote speech

“Public/Private Partnership to Develop Supply Chains in East Asia”

Keynoter: Prof. Hideo　Kobayashi
Graduate school of Asia-Pacific Studies, Waseda University. President, Institute of Japan Automotive Parts Industry

　East Asia has undergone two major changes: integration into global market and the arrival of the era of global production or “international specialization.” A new age has come where manufacturing processes are linked together beyond borders and nobody can win the global competition unless consumer needs are reflected almost instantly to production.

　How will Japan be able to survive the era while maintaining its win-win relationships with Asian countries? That was a basic question to be discussed in the symposium. Although Asian countries had been seriously affected by the currency crisis, they could successfully forge complementary and competitive relationships through the exchange of trade, investment, information and people. That, however, needs to be refurbished in a more efficient way. And this is the reason why a supply chain (SCM) and free trade agreements (FTAs) should be noted.

　Now, the East Asian region could be divided into three markets: China, ASEAN and Japan/Korea. It is important to know what kind of linkages leading industries such as electrics, automotive and textile have in respective markets in the region. Electric industry has beautifully formed and developed international division of processes, while keeping close linkages between China, ASEAN, and Japan/Korea markets. Automotive industry, on the other hand, has developed closed markets. In that sense, considerable diversities could be found both in industry sectors and regions. Amidst the background, one might need to consider how SCM or FTAs could be developed for East Asian Economic Region and how the governments and corporations could cooperate through them in future.

　How can we create a win-win East Asian community that could achieve economic, political and cultural ties at the same time? What could each industry do for the objective? These questions were explored in panel discussions.

II. Panel Discussion-1

“Business Strategy in Economic Alliance and Trade Policies in East Asia”

Moderator: Prof. Fukunari Kimura
PhD. Faculty of Economics, Keio University

　Economic linkages within the entire East Asia appear to be too slow to be called as SCM in terms of tempo and speed, as seen in mild connections in upper and lower streams. Specifically, in view of competitiveness, Japanese corporations can hardly win against Korean, Chinese, European, or American rivals in the global market.

　In this session, two panelists will talk about the new trend in East Asia, from the viewpoint of corporate strategy or corporate perspective. And the remaining one third of the session will be allocated to discuss future activities required for the development of SCM. Although it has only been achieved by few limited industries at home, how could it evolve into East Asia? Also, trade policies are to be discussed later.

　The international production/distribution network established in East Asian countries with differing degrees of income base and location advantage is one of the most advanced systems in the world in that it has evolved “fragmentation of process,” or splitting of production process into more than one step across borders.

　The fragmentation of production process is two-dimensional: 1) separate locations in terms of geographical distance and 2) the difference of　“intra-firm”　or “inter-firm.” Separate locations and concentrated locations have been evolving simultaneously. Thus, higher and lower locales, in terms of “service link cost” that connects separate production blocks, are scattered in East Asia. Naturally, lower-cost locales have accumulated the fragmented. In the case of inter-firm division of process, the vendors who have capabilities to meet tighter specifications or deadlines and realize stable technology (for those that is the key) to offer products are more in demand for manufacturers. In that sense, we can witness accumulation in the form of vertically fragmented production process across borders at the same time.

　Why is SCM required? From the perspective of Japanese corporate competitiveness, production network and market demands should be synchronized. It can never be achieved without a consistent management in the production/distribution chain from top to bottom. Without tailored customer service or small-lot/wide variety marketing, Japanese firms can no longer sustain competitive edge over Chinese or Korean counterparts. Time-cost saving and cash flow management have now become top-agenda for Japanese businesses.

　Speaking of trade policies, there are two challenges in manufacturing sector for developing countries. One is reorganization of import-substituting industry. It used to be oriented primarily for domestic sales, protected by trade barriers. In many cases, utilization rate has been extremely low with low production capacity. That needs to be reorganized across borders. Trade tariff should be lowered to facilitate the reorganization.

　Another challenge concerns how to reinvigorate and sophisticate the international production/distribution network in the sectors that have already developed to some extent like electric and electronics including auto parts. Then, what is needed to advance the international production/distribution network further to be referred as real SCM? What policy should be incorporated, if any, into an EPA? That would also require our consideration in near future.


Mr. Toshimasa Asaka
Chief Researcher, Global Strategy Research Institute, Matsushita Electric Industrial Co., Ltd.

　Since the dawn of the 21st century, Japanese business has been heavily affected by FTA, interdependence between ASEAN and China, global synchronization of product/technology/distribution mechanisms, and fierce competition from Korean and Chinese corporations. Japanese corporations have been forced to shift their production and R&D bases to other Asian countries, causing hollowing-out of Japanese manufacturing businesses. Today, Japan is shifting away from Foreign Direct Investment or an FDI approach. These were phenomenal in the first decade of the 21st century.

　Let us consider how much impact FTAs and EPAs have had so far? I would like to review it first from macro level (national) and then from micro (corporate) level.

　First, on a national level, more and more Japanese investments have gone toward East Asia. Meanwhile, Japan has experienced expansion in investment, employment and tax revenue as well as revitalization of business and economic growth. Amidst the background, a favorable economic cycle has emerged in East Asia, returning the share of dividend and loyalty to businesses in Japan. Then, capital investments and R&D investments have been promoted, further expanding business, raising share prices, and consequently reinvigorating Japan as a nation. Thus, FTAs and EPAs can be recognized as key ingredients for the positive cycle.

　From an individual management level, what impact would an FTA have for a company? With respect to import/export flow, you might consider whether or not the current situation is going all right given the tariff rate. You might also review the need for reorganization/integration/termination of certain business bases in your company. You will find both risks and opportunities in business due to the structural reform in your country or your counterpart. These are some of the strategic concerns for each company.

　In the context of “FTAs/EPAs” discussion, SCM can be understood as a way to expand trade and investment to achieve interdependent international market. As a consequence, borderless market competition will be accelerated. Whether or not one succeeds in SCM will be a key factor for a company to survive the market competition and become the survivor or winner of the war. It is where I think the SCM can be positioned in the business context.

　Another factor to consider is increasing interdependency between ASEAN countries and China. The trade between these regions has been dramatically increased. Bilateral trade between China and ASEAN has already risen by 27-28% per annum in all product categories. It is no longer a discussion of the progress of FTA. Rather, ASEAN and China have been already experiencing de-facto trade partners with “quasi-FTAs.” While China/Japan or ASEAN/Japan relationship is complementary, business managers share some concerns over the future of China and ASEAN in terms of trade and investment.

　Let me give you an example. Matsushita Electric Industrial Co., Ltd. has invested some 200 billion yen in ASEAN countries over the past 40 years and completed its payback period already. Before that, everyone was against or at least held negative attitude toward investment on China. However, it injected 100 billion yen in no time.

　On production front, China produces around 580 billion yen, while ASEAN as a whole produces 900 billion yen. The production front moves from Japan to China, or Japan to ASEAN. Then, the value of China/ASEAN trade has reached more than 100 billion yen. In other words, both horizontal and vertical divisions of production process across the border are emerging in China and ASEAN region. And they deliver products to big markets such as Europe, U.S and Japan. Thus, “the Greater Asia Strategy” has come up in an attempt to differentiate “export from China” and “export from ASEAN.”

　Where on the earth does Matsushita gain profit? It is definitely in Asia/China, or ASEAN/China. To put in other words, the company can no longer survive unless it succeeds in ensuring profit in the Greater Asia region.

　Finally, I would like to thank you for your interest in my view on business strategy of electronics industry in the East Asia Alliance.


Mr. Michio Ohkawa
Counselor, Toray Industries, Inc.

　Toray is one of the largest general chemical companies in the world, with its integrated business domains involving raw material, weaving, dyeing/staining and synthetic textile. It has 109 overseas subsidiaries in 18 countries and 23 related companies in Japan.

　Thus, FTAs/EPAs have been of high interest in the company. Now that I work on Asia-Pacific Committee at Nippon Keidanren (Japan Business Federation), I would like to talk about how the business community has addressed to FTAs and what kind of demand does it have on FTAs, based on my experience at Nippon Keidanren.

　Keidanren took up the issue of FTAs/EPAs comprehensively in June 2001 and released a report entitled “A Grand Design of Japan's Policy as a Nation Built on Trade.”

　In September 2002, it also made a policy proposal in which the ground design on Japan-ASEAN comprehensive economic partnerships should be materialized. It called for further promotion of FTAs/EPAs with comprehensive and balanced agreements that could cover a wide range of sectors and countries in the ASEAN region.

　In January 2003, Mr.Okuda, the chairman of Keidanren, presented a vision statement in which the need for enhanced economic alliance with East Asian countries was stressed to face the challenge of global competition. He likened the circumstance to Japan's epochal open-door policy in the Meiji era by saying that Japan should open itself for the third time. His vision advocates free cross-border movement of production factors such as goods, services, people, money and information and promotion of intra-region cooperation, and realization of cooperation to help solve global issues.

　In March 2004, Keidanren released a report entitled “Urgent Proposals for Enhanced Economic Alliance”, addressing urgent agenda to realize an East-Asia Free Economic Zone to facilitate economic alliance. It proposed; liberalization and facilitation of multilateral trade in goods in consistent with WTO rules; fair and neutral rules of origin; establishment of advanced investment rules; promotion of investment to Japan; development of infrastructure that facilitates acceptance of both external human resources and non-Japanese; acceleration of agricultural structural reform; reinforcement of strategic EPA-alliances.

　Although textile import is said to have suffered from fierce low-cost competition or price competition, it rather seems to have maintained a certain level of competitiveness. Except for very limited items such as business suits or luxury ladies apparel, everything is sewn by the sewing machine in China or Vietnam before coming to Japan. However, considerable amount of fabrics and textiles used over there are actually made in Japan. Therefore, textile could sustain its position as export industry, although apparel has sunk into an industry with excess imports. With Japan's current import penetration rate at about 70%, you will see that most textile products around you including sewn products are predominantly made outside of Japan. Yet, you will also find some of them use Japan-made fabrics and return to Japan in the form of sewn products. Thus, Japan's textile industry keeps its international competitiveness in technology and R&D pretty well.

　Three of ASEAN negotiators--Thailand, the Philippines, and Malaysia--have moved toward industry agreements in textile, prior to intergovernmental FTA negotiations. The key points would be as follows: mutual and immediate removal of tariff; adoption of rules of origin for textile products; adoption of reciprocity principle.

　Rules of origin have much to do with SCM. Japan wishes to adopt changes in the Harmonized Commodity Description and Coding System (the Harmonized System or HS) as well as two-step standard. The two-step standard allows more than one country to perform both dyeing and finishing processes, say, for sewn products manufacturing.

　Japan calls for the rule that requires a country to be in charge of more than a single process - sewing and knitting for instance-, because it would allow normal development for textile industry in both countries involved. Nevertheless, some countries demand certification of origin just because they are charged with a single process ? say, sewing? in their countries.

　Another point to be noted is that Japan would also reduce the tariff to zero. Despite its weakness in cost competition and high import penetration, as I mentioned earlier, Japanese industry should brace itself to join the international competition in a new way to work for the sake of the industry. In return for the zero-tariff system, the rule of origins should be closely linked to the two-step approach such as “textile and sewing.”

　Although we have not yet reached the stage to conclude an FTA agreement with China, a consortium was set up last year for the cooperation and development of all businesses relating to fabrics and textiles in Japan and China. It aims to realize a higher level of alliance in free trade, investment, establishing favorable business environment, exchange of people and technology, bearing future FTA talks in mind.

　China has significant influence on us. And fortunately, three years have passed since China’s accession to WTO. WTO member countries have to comply with various rules other than reducing various tariffs. The establishment of trade rights or intellectual property rights would form a basis for future FTAs/EPAs. Thank you very much.


Mr. Sadahiro Sugita
Director, Trade Finance and Economic Cooperation Division/ Trade and Economic Cooperation Bureau, the Ministry of Trade, Economy and Industry

　An EPA requires elimination of domestic or cross-border regulations and systemic harmonization on either bilateral or multilateral basis with the objective to deregulate or facilitate mobilization of people, goods, and money.

　The key is that each country makes efforts to change or harmonize internal systems through bilateral or multilateral negotiations. I think deregulation and technological innovation would have potential to be major vehicles.

　On the other hand, an FTA would entail elimination of barriers in tariff or service. In that sense, an FTA could be interpreted more narrowly than an EPA. Discussions over FTAs could be focused on WTO: past demands, commitments and offers from member states to WTO, all of which are sources of discussion in an FTA negotiation.

　Under Article XXIV on territorial application, tariffs shall be eliminated in the given territories of the contracting parties. Yet, you might have to understand that the clause agreed in WTO or FTAs exists on the condition that it will spread to other member states in future.

　Barriers to investment exist in many forms, hampering SCM in terms of flow of goods, in addition to trade tariffs. Moreover, you could say that services, logistics, lease, wholesale/retail, and legal or accounting services are extremely closed sectors.

　Meanwhile, transnational movement of people is more important than you might think. Currently, about two % of the total population in Toyota City is comprised of non-Japanese residents who are mostly related to Toyota Motor Corporation. Toyota depends on them for temp workers. However, I heard that the number of recall for domestic products was on the rise. The quality of labor at home seems to be dwindling a bit. I think it is the time for us to ensure education for people from outside of Japan and reconsider Japanese way of production.

　Rules of origin should be discussed in the context of multilateral trade agreements as well, especially when we have to focus Japanese/ASEAN economic partnerships. It could be seen as a sort of harmonization. It is like you are insisting products made in respective countries/region should either be called as “Japan/ASEAN origin” with a single label when their parts or components transcend the border. However, increasing complexity in the rules of origin would only make the real-life SCM more difficult to implement. That is what we call a “spaghetti bowl phenomenon,” a major challenge to be averted.

　Recently, the entire East Asia region has been called as “East Asian Community.” Now, we could discuss in the East Asian context, which would be up on agenda at the East Asia Summit to be held in Malaysia this December. China is now inviting the summit next year.

　Today, Mr. Ohkawa mentioned that China is also important. From economic perspective, I think it is extremely important. But I doubt if both countries could share a certain value in the area of politics or on the mobility of people. China has not seriously been committed to democracy yet. Keeping that in mind, I think consideration on future China’s status in the context of the East Asia and on our relationship with China will be a significant agenda. First, we have to remember that unresolved issues still exist in China despite its commitment to WTO.

　How could we create an East Asian community? I think it is a theme to be discussed. You may have to consider not only manufacturing businesses but currency and service when you think about it, as I already mentioned in explaining about SCM. Also, I think it is vital for us to discuss how we could forge an Asian currency.

　For example, ISUZU has recently issued corporate bonds and debentures on Thai baht basis to finance the construction of a new ISUZU plant in Bangkok. In fact, the financing was guaranteed 100% with trade insurance. Because their bonds and debentures could be rated as high-grade, we decided to take some political and other risks to help their issuance on various currencies. In a nutshell, you could imagine a basket currency like the EU-basket to create a common currency unit for East Asia in future. It would make a pivotal discussion in creating an East Asian community. Thank you very much.

III. Panel Discussion-2

“Business Activities and Challenges in ASEAN Region”

Moderator: Prof. Hideo Kobayashi
Graduate school of Asia-Pacific Studies, Waseda University. President, Institute of Japan Automotive Parts Industry

　The panel discussion-1 addressed quite greater general aspects concerning supply chain, FTAs and policy issues. Now, I would like to take automotive or electronics industries to reveal how the supply chain has been evolved. Thus, discussion-2 will take up more specific issues based on the discussion part-1 and elaborate on various cases including successes and failures.

　Speaking of ASEAN, you might need to shed light on China as well given the regional and sector-based diversity. For example, electronics sector has stronger tie between ASEAN and China than automotive and auto-parts sectors. Then, you can imagine that the SC would have developed differently depending on countries and sectors. So, we would like to consider those things and discuss how we could break such barriers.

　Based on the recognition, Mr. Noguchi will talk about actual situations by introducing questionnaires conducted by JETRO. Then, Mr. Ohashi will guide you around electric industry by describing specific examples of success and failure. Lastly, Mr. Kobayashi will show you the reality of automotive and auto-parts industry.


Mr. Naoyoshi Noguchi
Director, Asia and Oceania Division Overseas Research Department
Japan External Trade Organization

　First, I will outline an SCM survey conducted by JETRO. JETRO carried out the questionnaire survey mainly for Japanese expatriates working for Japanese firms in Asia and India. Last year, JETRO staff flew all over in the region with the result to conduct hearings for all respondents. I would like to talk about the findings, in addition to some case studies in China.

　I will start from the SCM focusing on introduction status. Some respondents introduced SCM primarily for procurement, while others for reducing lead time. So, a wide variety of answers could be found. We asked the objective of the introducing SCM, because, in our definition, SCM is something that connects established systems organically.

　Of all 1,130 companies responded, 40% have already introduced or planned to introduce SCM in future. Thus, less than 20% respondents have actually introduced SCM. That is, I think, the present situation of SCM in Asia.

　That is what we have learnt from the interviews done for SCM-introduced respondents. Almost half of them were able to have expected results, although the remaining half was not. What brought such difference? I think the key is hidden in the answer in future FTA negotiations, our demands against EPA partners, and something that needs to be improved with Japan's technological cooperation and others. By identifying and examining what barriers stand for them, we would be able to make some useful recommendation.

　Comparing and contrasting the tabulated result with the smile curve, we can see concentration of SCM cases in the middle of the chart where profit margin is the lowest. In my opinion, total optimization or maximization of the total profit would be the ultimate goal of SCM. However, as you can see, the SCM in Asia stands only at the stage of partial optimization.

　Now, I will talk about their procurement destination. Not to mention the lead time, cost competitiveness and material procurement should be considered as top priorities. Thus, we have to turn our eyes to the vendor from which the ASEAN or India-based companies purchase their material. It turned out that most of them complete procurement locally in the very country they made inroads. Next to the answer was “intra-ASEAN region”, making “China” the last destination for procurement to our surprise.

　Then, what points do they value in expanding their local procurement? Most of the respondents said that they neither care for SCM nor FTA. Instead, the basic requirement for them was the potential ability of suppliers to improve in quality. Thus, training and education for suppliers and technological capabilities would be the source for future competitiveness.

　The respondents are highly concerned with the difficulty of local material/component procurement. That constitutes their highest concern, followed by cost reduction. Rigorous management by SCM is one of the key approaches to reduce cost. Procurement or inventory management would be considered as rather partial solution. I think they would need to spread the SCM from the upper to lower stream in business.

　This time we have asked questions, focusing on three industries: automotive, home appliance and IT/electronics.

　First, I will show you case studies in automotive industry. In ASEAN region, all models launched seem to sell well without the effort of carmakers to siphon up local market needs. That is still the case in ASEAN. The point is that not many models are marketed in the market. As a result, they could achieve cost reduction by minimizing the stock of components.

　In Toyota Motors, its proprietary systems such as Kanban system in assembling or “milk-run” in procurement have already been adopted in all points in ASEAN region. In that sense, supply chain is pretty much on track for development. Yet, you need to train staffs of local vendors to learn more about the concept of SC. I feel that must be one hurdle for establishing SCM. In addition, their dependence on Japanese imports in integral parts and components makes Japanese suppliers to feel it unnecessary to establish SC over there. Furthermore, automotive industry implements marketing activities especially for domestic market. Under the current business strategy, they are not yet ready for “the Greater Asia strategy.”

　Now, let me introduce some examples of consumer electronics industry. Japanese consumer electronics makers have been faced with intense Korean competitions. They can no longer win the competition without some annual price reduction by 10 % in so-called “white goods” such as vacuum cleaners, refrigerators, washing machines and air conditioners.

　They recognize that their efforts in cost-cutting have almost reached their limits. Then, SCM could be an effective solution. Also, robust cost control that could lead to total optimization is integral for those consumer electronics manufacturers. Meanwhile, they have quite different views depending on products. For example, more audio-video manufacturers have already introduced SCM than white-goods manufacturers who hold skeptical views toward the effect of SCM per se.

　Electronics industry needs more speedy action, given their short product life cycle. And reduction of that time is their No.1 priority. Moreover, minimizing unnecessary inventory is also important in that it could bring cost reduction. These are major requirements for SCM functions.

　For a total optimization, Vendor Managed Inventory, or VMI, was adopted in IT and electronics industries to achieve total optimization.

　In case of China, labor cost amounts for 10% to 30% at most in total spending whereas remaining share goes to material cost. And 40-50% of the material cost depends on imports. Now, their goal in China is to increase local purchase or switch to onsite procurement system at the lowest total cost. However, most of the locally procured materials actually come from foreign capital companies. Besides, they import the very core components from Japan. Thus, to raise local procurement rate, or increase made-in-China parts and components would be integral cost-cutting strategy in China. It appears that their effort have gradually brought fruits in terms of reducing lead time. Yet, some issues still remain to be solved for Japanese companies, as manufacturing short life cycle products with only Chinese components is still difficult. Thus, further efforts from different perspectives may be required to develop supporting industries.

　Currently, SCM seems to be considered for assembling manufacturers. Reducing inventories for the interest of assembling manufacturers would translate into increasing inventories for others. In short, SCM is not good for parts makers and vendors. And it is a far cry from the principle of total optimization.

　In the field of information and communication infrastructure, little problems can be identified in China in order to build supply chains. This is what I hear from many companies. With China growing its market, demand forecast is extremely difficult. China is too large to grasp its nation's needs. Besides, Chinese consumers are extremely different. However, as long as China builds good infrastructure, it would be possible in the end. China's lagging behind ASEAN countries may inversely benefit China in introducing the latest system. That is a part of our findings. Thank you for listening.


Mr. Kenichi Ohashi
General Manager, International Operating Div. Toshiba Corporation Industrial and Power Systems & Services Company

　I would like to illustrate some cases that successfully introduced VMI approach. Firstly, I will show you Toshiba's supply system for PC-MB (motherboard). The company supplies PC motherboards for a PC-assembling plant in the export processing zone of Hangzhou, introducing VMI system.

　Export processing zones in China have regulatory constraints in which any parts or components should be imported from outside even if they could be manufacturable within their own premises. Under the regulation, Toshiba was forced to use its Singaporean supplier (Toshiba AP) for the supply of PC-MB in temporary shortage and make it export for the EMS located in another bonded plant at free trade zone in China in order to realize just-in-time delivery for the PC plant.

　The Hangzhou plant places necessary orders for Toshiba AP in Singapore and supplies components of the PC-MB for an EMS plant in Suzhou, using a logistic company that functions as a VMI hub in Waigaoqiao free trade zone in Shanghai. In this system all components are gathered in a hub and then supplied to an EMS who is commissioned to process PC-MBs required in the Hangzhou plant for today.

　It eventually extended three free trade zones in China, requiring intermediate stock for a few weeks. You could say there was a big problem in China indeed, although the operational system was successful. Because the custom-house in Shanghai opens at nine in the morning and closes at five, you can not use the system from five o’clock on Friday through Saturday and Sunday. Besides, they do not adopt E-customs clearing system nor harmonized commodity description and coding system (HS). Such inexperience on the part of China has disrupted customs procedure at the beginning. In fact, underdeveloped regulatory environment in China was one of the obstacles we faced when we launched this VMI. No regulation/rule existed in China to specify the change of ownerships and its implementation. Therefore, we had to run around to explain all the customs about these things to gain their approval for the system.

　The point is that all stakeholders including parts vendors, plants, EMSs, and VMI-hubs shared a common set of information on the website and run it together, which I believe was a key to successful implementation.

　Second, I will show you renowned model of Dell Computer's PC manufacturing system. Dell has a large production base in Penang Island, Malaysia and applies unique direct business using SCM. The key points would be that Dell, being a direct business, could gain a competitive edge due to its maximum efforts in reducing intermediate cost. Also, reduction in both lead time and inventory could limit its potential risks.

　Now, the Dell's order management system should be noticed. It offers component vendors a supply-demand forecast of components in the next three months based on the global order forecast produced three or four months earlier. Commissioned VMI warehouses carry stocks for about two weeks, which are to be shipped out for local component vendors with a “pull-signal” on the web whenever necessary. The signal means that a component will be out of stock within six hours in the line. The component maker places an order for components of which ownerships still unchanged. The items produced in the line are shipped by the same delivery company to the door of customers of all over the world. Dell proudly sells its product, saying that it never fails to deliver a product to the customer on the other side of the world in seven days.

　Information on the order status from customers flows into each process to be shared, facilitating physical flow of goods. There are some keys to success; the order management system and well-qualified logistical operators materialized the signature Dell System.

　The second example is the supply chain of Motorola's mobile phone business. Motorola set up a global VMI hub in Tianjin, China to gather all parts and components based on product forecast. All of them, including made-in China parts, are gathered, grouped into a proper set of items as kit, and sent out for respective regions or assembly plants under the Motorola system.

　Motorola has made its foray in China for its mobile phone business about ten years ago, although it experienced an outright failure within three years and decided to make a complete withdrawal from the market. Since then, however, it has learned Chinese environment and reentered the market a couple of years ago. That is when it started global VMI hub system in Tianjin, a renowned success example. The integrated system allows the company to manage procurement of parts and components in a single center and provide them to the world.

　Also, its real-time information sharing on the web enabled to minimize stocks and time in the middle process, drastically decreasing the labor hour for sales and purchasing functions. They no longer have to run around to make urgent calls for requests of order.

　One of the successful factors in the VMI system using SCM might be a real-time web system. The system should be a solid one with good records, off course. In addition, you need a manager who can operate and implement with full and complete knowledge of the entire system. Undoubtedly, you would fail it if you only introduced the system without knowledge. Furthermore, you need to ensure proper benefits to all the stakeholders, including suppliers, warehouses and logistical operators, besides clients or business employers. In other words, all three parties should benefit from the system in a “win-win relationship.” I believe those are the keys to sustained success.

　Speaking of accelerated business speed, electronics industry, especially in PC business, has to respond to extremely short product life cycle. It is unavoidable for the industry to catch up with the market demand of shortened cycle and minimize the inventory risks.

　Thus, what you need would be: online information system that enables real-time inventory information and its visualization, change in the way to produce and procure, automated inventory management of parts and components, and simplified purchase procedures. Drastic simplification in inventory management and logistic operations, reduction of inventory risks through reduced time from procurement and product delivery, and improved cash-flow would inevitably bring you substantial benefits, if properly introduced.


Mr. Masanori Kobayashi
Adviser, JATCO Ltd

　Today's discussion focuses on East Asia. In the case of automotive industry, however, circumstances differ greatly depending on countries in the region. But in general, I should say they are still in pre-SC stage. I would take China as an example to illustrate the actual condition.

　Almost all the carmakers of Japan, US, Europe, have entered Chinese market with local production. There are many Chinese manufacturers as well. In 2004, more than 100 manufacturers produced 5.07 million cars in total. The overwhelming number of auto manufacturers is one of the characteristics in Chinese market.

　Another characteristic is that Chinese-made cars are rarely exported. They are marketed exclusively for domestic market in China.

　On the other hand, a few Japanese carmakers dominate the entire Thai market with local production. Their goal is not simply marketing their products to local Thai market. Actually, Toyota, Nissan, Isuzu and others aspire to make it an export base for their business fleets and low-priced models.

　Automobiles are completely different by model for each model, with different parts and components. For example, low-priced models with manual transmission sell in Thailand, while luxury models with automatic transmission sell in China. Thus, there is no universal preference. In that sense, we witness a pre-SC stage, as I mentioned earlier.

　On management front, Chinese carmakers face extremely tough competition due to the huge number of makers. You could say that it is an infant stage for automotive industry.

　Only one billion out of thirteen billion Chinese people can afford a car. The number shows many carmakers have to compete to secure the small pie. Winning the battle of the Chinese market share comes first before exporting. Higher quality is required to export cars. They have not reached the level yet.

　Next, I would like to talk from the viewpoint of Chinese parts industry. Most of auto parts suppliers have started to enter Chinese market, following their keiretsu in Japan. Few Chinese parts suppliers have competitive edge over Japanese counterparts in both quality and cost. In a nutshell, they have not yet reached the level as to produce full-fledged products because they are lagging behind in development capability. To work together with carmakers and accumulate experience is the only way for them to grow. Thus, it would take a long way for them to go.

　It is a huge agenda for Japanese manufacturers to ensure purchasing of cheaper parts from China to contribute to cost reduction. All companies are making their utmost efforts to do so, although they seem to find it hard against their expectations.

　In recent days, General Motors and Ford, for instance, have been trying very hard to buy Chinese-made components with annual budget of around $10 billion or \1 trillion. But the quality comes as the first and foremost bottleneck. When you are not sure about the quality, you can't make such huge investment.

　American carmakers choose a part supplier and sign a contract for each model. Say, Cadillac, would continue for four years. Then, the supplier would sell specific parts for the model during the four-year period under the agreement. In other words, the part supplier has no assurance to supply when the next model comes up. A model change would be a make-or-break time for suppliers.

　On the other hand, suppliers under keiretsu would have greater possibility to sell their parts after change of model. Therefore, they can make investment without anxiety. Although opportunities appear to be very big, deals are always risky in the U.S. That is why Japanese parts vendors are hesitant to follow American makers.

　Consequently, Chinese parts vendors have not yet developed. Despite the commitment of GM and Ford to buy enormous amount of parts, such a dilemma exists in reality.

　Import tariff, however, is the biggest issue. WTO has set a goal to lower tariff to 10% by 2006. Yet, the number is still too high. Take 18 % duty on parts and components for example. The number would mean that the suppliers would have to pay 9% of the total cost on import duties because they export almost half of materials from Japan.

　Meanwhile, Japanese component industry is more like process industry, where labor cost accounts for 10% in total at most. Therefore, lower labor cost in China than Japan could not possibly compensate for the higher import tariff they are burdened. Then, they would naturally think that exporting their products from Japan would be much easier.

　Also, to find right people is another stumbling block for Japanese component suppliers to launch their business in China. They have fewer talents than carmakers from the beginning. Besides, they have used up their human resources to respond to U.S and European business of carmakers. Naturally, no Japanese candidates with Chinese language skill can be found any longer for the launch of Chinese business.

　Even worse is the story of outage or late delivery of material in China. Given the circumstances, you can hardly expect supply chain to happen any more. All those factors hamper Japanese auto-part suppliers to make inroads into Chinese market.

　In a sense, the easiest way is to receive a loyalty payment from licensing production. From my limited experience, Chinese people have less respect for such technology and unwilling to pay loyalty. This is related to copyright and other legal issues that would develop into various legal cases. This is another area to be considered carefully.

　So many issues have yet to be solved. However, in the long run, China will outgrow Japanese market. Then, you need to increase production there. To that end, we would have to brace ourselves even to overtake the pioneering electronics industry by gaining experiences.