Production systems of Japanese and American
automotive companies in Europe.
By
Paul Ulrich
University of Groningen
Faculty of Management and Organization
MSc International Business and Management
Abstract
This paper researches if American and Japanese automotive companies have different production strategies for the European market and if this is influenced by their backgrounds. The research showed that the American company has a more diversified product portfolio compared with the Japanese company in this study. This was the opposite one would expect looking at the literature reviewed. Looking at the two companies in this research their home culture and institutions do not influence their production strategies in Europe. This could be due to globalization in the automotive industry or the way the European divisions of the companies are led.
Introduction
The automotive industry is a global industry, automotive companies are all large multinationals who produce, sell and develop cars in countries all over the world. But how do these companies look at their consumers? Do they see a global consumer who asks for the same car or do the companies produce their cars differently for each consumer?
Before Henry Ford started to automate the production process the Ford Model T was available in different colors, but when he automated the process Henry Ford said “Any customer can
have a car painted any color that he wants so long as it is black” (Ford and Crowther, 2005). This was due to the new production process and the black paint dried much faster then the other colors so in this way the process was not delayed.
In the automotive industry it is important to get economies of scale to remain competitive. It is believed that this is one of the reasons of the mergers between automotive companies, to gain larger economies of scale and in this way they try to remain competitive (Dobrev, 2002). By doing so, they walk away from the niche models and produce a more general car.
This can be seen in the way General Motors approaches the American and European market in the same way. They design one car and are going to sell it, with some minor adjustments, on both markets, doing so they are able to produce the cars on a larger scale (Shahmanesh-Bank, 2005).
Toyota on the other hand approaches markets in a different way, they do not try to sell the same car on different markets but they change their models. By doing so, they assume that the models have a better fit with the consumers needs on a specific market (Ciferri and Weernink, 2006). With this market approach Toyota is more capable to match the demand of the European consumer and to serve the niches available.
As these two articles point out both companies have a different market approach one tried to serve the niches and one aimed at the general public. The American company has a global approach whereas the Japanese producer has a more localized approach. But how do these companies produce their automobiles? How much freedom do the consumers have in buying a car?
The main focus of this paper will be to see if there is a difference in the way American and Japanese automotive companies produce automobiles for the European market and if this is influenced by the background of the companies. This leads to the following research questions:
“How do American and Japanese automotive companies differ in the way they produce for the European market? Can this difference be explained by their home culture or institutions?”
Literature review
First we take a look at the European market. In the past the European automotive market was limited by the countries borders, there was not one European market only different national markets. Almost every major European country had at least one automotive company and this company was market leader, there was some competition from foreign producers but this was just minor. These days Western Europe is one big automotive market, where automotive companies have to compete with companies from all over the world for some market share (Crain, 2006).
The European market can be divided into four large sectors. Almost every automobile producer is producing cars for more than one of these sectors. The largest market in Europe are the small cars, the second largest market are the medium cars and the third and fourth market are the premium cars and the SUV and minivan market. The reasons that small cars are popular in Europe are their low prices, the high fuel costs and the public awareness on co2 emissions. (Luca, 2007) For producers this is a dilemma because sales volumes are large in the small and medium car market but due to fierce competition margins are low but in the premium and SUV market sales volumes are smaller but margins are higher (Henry, 2002 Van Acker and Uludag, 2007 Cifferi 2007) Furthermore there are some small and more specialized markets as the sport car and luxury car market but these markets are generally served by ‘smaller’ more specialized firms. (Luca, 2007)
EU has gone too far with their legislation. The different governments should try to come up with some global standards, where producers have to comply to (de Saint-Seine, 2006). These legislations have an influence on the design of the car and they ask for innovations from the automotive producers but they are not the main reason for changes in the design of automobiles. The main reasons remain the customers demand for better cars, the market leads this demand and the regulations facilitate the process. Lookin at the different innovations in new cars, innovation which reduce emissions are mostly initiated by regulations but safety innovations ar most of the time market driven ( Bolduc, et al., 2005).
Innovations are the driving force in the development of new automobiles. Innovation can be a competative advantage for automobile companies. Innovation can be done by the automobile company but it can also come from the suppliers. The competitive advantage comes from the combination between the suppliers’ innovation and the producers ability to implement those innovations. (Sharfman, 2007). Automotive companies are engaging in more and more alliances with competitors. The companies will try to keep the different brands seperate, the companies will do their research and development together. By doing so they created platforms for the different market segments. With these platforms the different brands can produce different cars from the same core components (Bloch and Gruver, 2007 and Wernle, et al., 2000).
With this way of developing automobiles companies persue a modular strategy. For instance an engine can be developed and then fitted into different models of the brand or build into models from different brands. With this modularization strategy companies try to achieve growth and manage the complex structure of product portfolios, costs, time and quality (Lundbäck and Karlsson, 2005 and Kalmbach and Lunani, 2005). A modularization strategy can also be used to reduce costs and it encourages long term partnerships with suppliers (Ro, Liker and Fixson, 2007).
the consumer wants in the future but there are also other factors which influence the production process. Another factor, which plays with this strategy, is that a car is priced with a significant amount extra, so customers can be given a discount because they do not exactly get the car they want (Tierney, 2003).
The optimal way to produce cars is to build what the consumer wants, a pull strategy. This is called a build-to-order strategy (BTO). There are three dimensions on BTO value chain these are process, product and volume flexibility to get the greatest gain all three dimensions have to be optimized (Holweg and Pil, 2001). In Table 1 the dimensions are further explained.
Process flexibility Product flexibility Volume flexibility Link customer requirements
directly to production, so that decisions are based on real customer demand, rather than on demand forecasting.
Bring customisation closer to the customer to avoid relying on stock of finished products.
Reduce dependency on full capacity by negotiating with workers and suppliers.
Integrate suppliers to make orders visible to all value chain partners.
Manage product variety by understanding the cost and profit implications of choice.
Diversify production plants to cope with volume variability.
Perpetuate sales data through the supply chain to avoid any time delays and enable a fast response to changes.
Make support structures more mutable to enable total responsiveness.
Use incentives to manage demand level and profits, rather than reactively discount excess stock. Table 1 The three dimensions of a successful Build-to-order strategy (Holweg and Pil, 2001)
When companies work according to this strategy, they are able to deliver the exact car the consumer wants within a reasonable time, then order volumes will go up en profits will rise (Fahey, 2004). Mass customization as it is also called makes the supply chain of the companies more flexible to respond to changes in the market (Pine, 1993). One of the most obvious gains from a BTO strategy is the disappearance of finished stock, so there is not much capital invested in not sold finished products, except for showroom models (Waller, 2004).
Push vs. Pull Make-To-Order Locate-To-Order Amend-To-Order Hybrid Build-To-Order True Build-To-Order Goals • Produce standard
Products from long-term-demand forecasts • Manage stock reactively to allow for efficient production • Use MTF, but increase stock visibility (through the Internet, for example} to enhance customer choice • Provide custom orders when specifications of product in system can be easily amended • Rely on forecasting for high-volume, stable products, and build low-volume products to order
• Build products only after the customer orders them
• Make customer needs visible to all parts of the value chain
Benefits • Efficient production
• Local optimisation of factory operations • Higher chance of finding right product in stock • Inexpensive to implement • Higher degree of custom-built vehicles in production • Stable base production • Relatively short order-to-delivery times on average • Less inventory • Less discounting • No stock apart from showroom and demonstrators • No discounting
Weaknesses • High levels of
finished stock in market • MTF requires alternative product specifications and discounting to sell aging stock • Customer orders
compete with forecast for capacity
• MTF loses sight of real customer demand
• High stock levels remain • Discounting still required • Custom orders still compete with forecast for capacity • Extra cost to transfer product to location close to customer • Customer orders built only when they fit • Unsold orders are built anyway • High temptation to revert to MTF if demand drops • Stock is still in market • Still requires discounting to cope with forecast error • Danger of reverting to pure MTF when demand shifts • System is sensitive to short-term demand fluctuations, so will not work without proactive demand management • Active revenue management required to maximize profit
In an article by Dugay, et al (1997) they compare Push and Pull strategy on 7 variables seen in Table 3. As pointed out before and seen in the table there are major differences between the strategies.
Push Pull
Primary objective Low costs To improve quality, costs
and time simultaneously
Major orientation Process Customers and process
Favoured means of improvement
Innovation Continuous improvement and innovation
Workforce Work under supervision of
managers
Workforce makes the
product, identifies and solves problems with the support of managers
Suppliers Treated at arm’s length and made to compete against each other
Partners
Organization structure Mechanistic Organic
Technology Analytical Systemic
Performance evaluation Financial measures most important
Promotes continuous improvement
Table 3 Variables Push vs. Pull strategy (Duguay et al., 1997)
The variables mentioned in Table 3 can be related to the production strategies in the automotive industry. Automotive producers with a push production strategy focus on producing automobiles for the lowest price. To do so they design an organization with a clear hierarchy. A manager is responsible for his part of the production process. He is evaluated on the performance of his team members and is always looking for ways to do his work more efficient so his performance level goes up (Holweg and Pil 2001). They treat their suppliers in the same fashion. The producer always tries to get the best deal, meaning the lowest price (Liker and Choi, 2004).
Automobile producers who pursue a pull strategy also look at the costs but at the same time they look at the quality of the products and relationships. The managers are always looking to improve the automobiles or the production process with the workers and the suppliers. Performance is still evaluated but they do not only look at the financial part. There is still a clear hierarchy but managers work with the workers rather then controlling them (Holweg and Pil, 2001 and Liker and Choi, 2004)
consumer then can choose from packages to add on to the basic model of the car (Lundbäck and Karlsson, 2005 and Kalmbach and Lunani, 2005).
In the next section the home country properties of Japan and America are being compared to see where the Japanese and American companies are in the diagram of Duguay et al.. Whether they are more likely to pursue a push or a pull strategy.
First the differences between Japanese and American production systems are being researched. In the past American and Japanese automotive companies differ from each other in the way they produce their products. In the last decades American producers try to imitate the Japanese production system (Vasilash, 1998 and Harbour, 1995). First the two different production models are discussed and in the end how the American producers tried to adopt the Japanese system. Japanese auto production is managed with the Just-In-Time (JIT) principle (Florida and Kenney, 1991). Toyota developed this principle in the mid 1950s. First it was called the Kanban system later it was renamed to the JIT system (Schonberger, 1982), it is also called lean production (Liker, Fruin and Adler, 1999 Pil and MacDuffie, 1999). This JIT system is developed to produce more efficient by reducing the levels of inventory. The JIT system is a continuous production system. Employees work in production teams. All employees within these team are responsible for the teams part of the production process. Employees constantly rotate between functions. By doing so they get a broader view of the production process and interchangeability of employees raises and they are able to come with suggestions in improving the products or the production process. Each production team has a leader; they work with the other employees on the products and are the connection between management and the workforce. For Japanese companies their workforce is a source of suggestions and ideas. Problems within the company are often solved in teams with employees from different levels and departments within the company this is also known as quality circles (Florida and Kenney, 1991, Nelson, 1980). The system also leads to a low defect rate, so overall quality is high and there is no need to check the quality of the products regularly (Monden, 1982, Nelson 1980, Schonberger 1982).
functional integration of tasks’ in the American system has an ‘extreme functional specialization’ (Florida and Kenney, 1991).
Another major difference between Japanese companies and American companies is the way they treat their suppliers. American companies treat them at arm’s length and they let them compete with each other. There is some collaboration between the producer and the supplier but due to an excess supply of suppliers on the American market producers have the power over the relationship and this does not lead to an optimal situation (Meloni and Benton, 2000). The Japanese companies on the other hand collaborate fare going with their suppliers; this is due to the Japanese business structure. The Japanese automotive industry works with a typically Japanese business system called a keiretsu. Within a keiretsu buyers and suppliers have long-term relationships. Contracts are based on “long term purchasing relationships, intense collaboration, cross shareholding and the frequent exchange of technology and personnel”(Ahamadijan and Lincon, 2001). There is little competition within a keiretsu manufactures buy their supplies from companies within the keiretsu, it is very hard for suppliers outside the keiretsu to become a tier one supplier due to the intense collaboration and cross shareholding within a keiretsu (Asanuma, 1989).
The success of the Japanese automotive companies on the European and American market in the eighties have led to a lot of research on their production process by academics, industrialists and policy makers. They came up with reasons why the companies performed so well. These reasons were mentioned before like, the JIT production process, quality circles and the relations with their suppliers. From the nineties till now American automotive producers have tried to implement elements of lean production. However the American automotive producers do not reach at the same levels as the Japanese companies on the main elements of lean production as low costs and high quality. There are several reasons for this phenomenon. First there are no fixed labor-management relationships, there is (almost) no trust between management and labor. Second managers focus on the wrong measurements, for instance the cost of labor, whereas they do not look at the cost of inventory while these costs are higher. Furthermore managers think short term, they look at quarterly profits and not at the big picture. And they do not understand the phenomenon JIT, it is not just a delivery method but a solution to the management of all the materials and parts that go into the automobile.(Versical, 1996 and Oliver et al., 1996)
In recent surveys, under suppliers of the automotive industry on their relationships with the automotive producers, Japanese companies as Toyota and Honda scored high and American companies as Ford and General Motors scored low. Suppliers say that the Japanese companies are encouraging them to come with innovations, give them rewards for coming up with cost saving incentives and that there is a lot of mutual trust. Due to this nature of the relationship their suppliers can come with better technology and lower prices.
The relationships between the suppliers and the American companies on the other hand is still the complete opposite despite the companies incentives to implement lean production. American companies do not have a clear and long term vision in their purchasing policy. The producers go from one initiative to the next with every chance of CEO, CFO or purchasing manager. The relationships often go from cooperation to confrontation to get the lowest price. American automotive companies need to work with their suppliers, listen to them and be open for solutions and innovations instead of only getting down the prices.(Wortham, 2007, Automotive News, 2003 and 2007, Automotive News Europe, 2007)
Comparing the production systems of the Japanese and American automobile companies and their relationships with their suppliers with the data in Table 2 and Table 3 it seems logical that the Japanese producers will have a pull system and the American producers a push system.
Figure 1 Cultural influence on Organizational design
A large cultural difference between American a Japanese companies is the way they look at the concept of time. Looking at the production strategies a company with a push strategy will only look at the short term when decisions have to be made. Performance is evaluated by financial measures and their primary objective is to produce low cost. Companies with a Pull strategy promote continuous improvement always try to improve quality by doing so they look at the long term (Duguay Et al, 1997).
American production companies try to improve their productivity by reducing costs. Managers are focused on the short term, they look at their targets for that month or quarter, this leads to that they try to meet schedules and only look at they daily operations and they don’t take a long term view (Skinner, 1985, 1986)
Blackmon, 1998) American managers believe that there has to be a trade off between the long term and short-term choices. (Reitsperger and Daniel, 1990)
Looking at the concept of time in relation with culture it seems that the Japanese culture has a better fit with a Pull strategy and the American with a push strategy. Another factor that influences the companies are the institutions in the countries. A definition of institutions by North (1991) is as following “Institutions are the humanly devised constraints that structure
political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).” He states that institutions evolve thru time and that they are a combination of the past, present and future.
This definition tells us, that institutions can differ across countries. Looking at the different countries, their institutions and business systems. Business systems can be divided into two groups, liberal market economies (LME’s) and coordinated market economies (CME’s). Markets in countries with a liberal market economy come to equilibrium due to supply and demand, in countries with a coordinated market economy markets come to equilibrium due to strategic interaction between firms and sometimes other players on the market (Hall and Sokice, 2001). America has a liberal market economy and Japan a coordinated market economy.
A large difference between these economies is the amount of trust between companies and suppliers. In LME’s cooperation between companies is based on contracts. Automotive producers let suppliers compete with each other to get the best deal; this deal is then written into a contract so opportunistic behavior is minimized. These contracts limit the amount of freedom in the way the companies treat each other. In CME’s a lot of trust is involved in the way companies treat each other. Contracts are not so tight and there is a lot of freedom to work together, problems are solved together with the suppliers. The Japanese keiretsu networks are a good example of these inter firm relationships. (Gulati, 1995)
Methodology
In the previous section of this paper literature was reviewed to see which production strategies automotive companies can follow, which strategy is more successful e.g. profitable and which strategy is more suited for American and Japanese automotive companies. This is done to come to answer the research question “How do American and Japanese automotive companies differ in the way they produce for the European market? Can this difference be explained by their home culture or institutions?”. The factors analyzed can be seen in Figure 2, at the top left there are the factors Culture and Institutions, these country specific factors influence each firm or industries characteristics shown in the middle at the left of the figure. These characteristics influence the companies’ choice for a production strategy. Which can be seen at the bottom of the figure. On the right there are the market factors and the legislation which also have on influence on the production strategy.
Figure 2 Conceptual model
For this purpose two automotive companies were selected. One Japanese company Toyota and one American company Ford, these companies are traditionally also Japanese and American. The models offered by these companies are produced for different sectors of the European market. As written before the largest sectors in the European market are the small cars and the medium cars sector. The models of the two companies relevant for this research are the following for the small car sector are the Ford Fiesta with a market share in this sector of 9.3% in 2006 versus the Toyota Yaris with a market share of 6.3% (Luca, 2007). The automobiles selected for this research for the medium car sector are the Ford Mondeo with a market share of 11.1% in 2006 and the Toyota Avensis with a market share of 9.9%. Data on the automobiles will be gathered from the companies’ websites.
The automobiles will be compared in how much different cars the producer offers. Looking at the number of bodies, versions and engines the producers can compile different cars of the same type. The higher this number is, the better. Also how much freedom the consumer has in choosing options is part of the analysis do the only offer packages or has the consumer freedom to choose which options they want or not. Often automotive producers offer their customers some extra features these are split up into two different categories, Factory options and Accessories, the first are options who have to be build in during the production process or can be build in during the process. Accessories are options, which can be put in the car by the dealer, for instance a different radio.
Results
In this section data on the automobiles from the small car sector and the medium car sector will be analyzed. First the small cars, the Toyota Yaris will be compared with the Ford Fiesta. First we start with the Yaris; the Yaris comes in two bodies, three-doors and five-doors. The consumer has a choice of five different engines, three gas and two diesels. Each body can be produced with five different versions, standard, Spirit, Terra, Sol, Luna and TS, however there is a limit here not each version is produces with each engine. Toyota produces 17 different types of their Yaris. The Yaris can be delivered in 10 different colors. The consumer can buy some extra factory options on each version, there are 11 extra factory options but here is also a limit to which option can go on which version. Toyota can also deliver some accessories, 85 in total for instance a navigation system or alloy wheels.
Ford produces their Fiesta also in two types of bodies, a 3 and 5 doors. Ford offers a range of six different engines for their Fiesta four gas and two diesel engines. There are five different versions produced of both the bodies of the Fiesta. Ford has some restriction on the combination of engine and version so this results in a total of different automobiles of 27. Ford can color their Fiesta in 12 colors. Ford offers their consumer factory options in 6 different packages, the consumer can choose which package(s) they want. For instance, a comfort package with climate control and parking sensors. They offer 17 different options in 6 packages. The number of accessories is 25.
The data of the Toyota Yaris and the Ford Fiesta is summarized in Table 4.
Number of Toyota Yaris Ford Fiesta
Bodies 2 2 Versions 5 5 Engines 5 6 Total number of different automobiles 17 27 Colors 10 12 Factory options 11 17 (6) Accessories 85 25
If the data on the Yaris and the Fiesta is compared with each other, there can be seen that Ford is able to produce more different cars then Toyota with the same number of bodies and versions they only have one type of engine more. Ford also offers the consumer, unlike Toyota, to choose options on the car that they present for a different version of the car, so there is much flexibility in options. With the Toyota Yaris the consumer chooses a version they want and that’s what they get they don’t offer much flexibility. Taking all of this into account it seems that Ford has a more flexible production process for their Fiesta compared with the Toyota with their Yaris.
For the automobiles in the medium car sector the Toyota Avensis and the Ford Mondeo were selected. First the Toyota Avensis, the Avensis comes in three different bodies a Sedan, Liftback and a Wagon. Toyota offers a range of 7 different engines 4 gasoline and 3 diesel engines. The consumer can choose from five different versions each with other specifications there are limitations to the freedom of choice. Not every body can be delivered with every version and engine and also not every version can be delivered with every engine. This results in a total of 48 different automobiles. These automobiles can be produced in 10 colors. The consumers can choose from 10 extra factory options and can be complemented with 98 accessories.
Like the Avensis the Ford Mondeo is also produced in three different bodies. The Mondeo is produced in three different versions Trend, Ghia and Titanium. The Ghia and Titanium versions however can be produced with an extra package called x-pack that makes them more luxurious. Both the Ghia and Titanium have their own x-pack. The total number of engine types offered for the Mondeo is 6, 2 diesel and 4 gas engines.
Ford gives the consumer optimal choice in combining the three bodies, three versions and six engines so this gives a total of 54 automobiles. They can supply these cars in 14 different colors. For the Factory options the consumer can choose from 10 packages with in total 39 options. Ford can supply the automobiles with 10 extra accessories.
The data on the Ford Mondeo and the Toyota Avensis is summarized in Table 5.
Number of Toyota Avensis Ford Mondeo
Bodies 3 3
Versions 5 3(+2)
Engines 7 6
different automobiles
Colors 10 14
Factory options 10 39(10)
Accessories 98 10
Table 5 Data on medium cars
The data on the cars from the medium sector show the same things as the data on the small car sector. Ford is able to provide the consumer more freedom of choice with their Mondeo compared to Toyota with their Avensis. The total number of automobiles doesn’t differ much but Ford offers the consumer freedom in choosing between options from different packages unlike Toyota.
Conclusion
In this section the results from the analysis will be compared with the literature from the literature review. Literature predicts that Japanese automotive companies are more likely to pursue a pull strategy and American companies a push strategy due to cultural and historical influences. However data reveals a different perspective in the two largest sectors in the European automotive industry, the small and medium car sector. The analysis of data on four models offered on the European market by Ford (an American company) and Toyota (a Japanese company) shows that Ford is capable of delivering more flexibility in their models offered compared with Toyota. This implies that Ford has a more flexible production system then Toyota, the opposite of what was predicted in the literature review, so it seems that other factors influence the companies in how many different versions of their models or how flexible they offer their models to the consumers.
Producers who are able to translate the consumer’s wishes and needs into their automobiles will sell more cars and will get a higher premium on the deal (Fahay, 2004 and Waller, 2004). This seems right, looking at the market share of the different companies within the two sectors, small and medium cars, Ford beats Toyota twice, 9.3% and 11.1% versus 6.3% and 9.9% (Luca, 2007).
To come to an answer to the research question “How do American and Japanese automotive companies differ in the way they produce for the European market? Can this difference be explained by their home culture or institutions?” The answer to the first part of the question is obvious American and Japanese automotive producers produce their cars differently. The American company researched, shows higher flexibility in the models they offer, the consumer has more freedom in choosing the car they want. The Japanese company has a different strategy, they produce cars with a limited amount of options for the consumer and they let the dealer tune the car a bit for a personal touch. In this way, they try to satisfy the customer’s needs. This difference can not be explained by the external factors as culture and institutions. The parts of the companies home culture and institutions researched in this study showed a different results then was found in the data.
The framework by Thomas (2002) however shows culture influences the companies organizational design, so perhaps other factors of culture and institutions as unions or the financial system of the countries influence the companies.
influence of the market seems obvious. The producers have to produce what the consumer wants or they do not buy their products and the producers have to produce with regard of the legislation. How much this effects the production process has to be researched, according to the producers it definitely has an influence (de Saint-Seine, 2006).
Another factor that could play a roll is that the automotive industry is becoming a global industry. Automotive companies are turning into global companies, this is due to the global competition in the automotive market but also to the ongoing collaboration between automotive companies. For instance the alliance between Nissan and Renault. This collaboration between automotive producers makes it that they will loose their home culture and these cultures will blend into one company culture (Wingo, 1990 and Badrtalei and Bates, 2007)
Even though the automotive industry is becoming a more global industry and automotive producers are trying to gain scale economies. The automotive producers should always look at the local market. Global product strategies have failed numerous times in the automotive industry. This is due to the differences in demand of the consumers on the European, American and Asian markets. Therefore producers should always look “locally” for their product strategy.(Johnson, 2000)
The global competition on the automobile market and the adoption of best practices by the manufactures (Metalworking Production, 2005 and Pil and MacDuffie, 1999) could be causing a convergence in production and management practices at the automotive companies. There are already signs of convergence in the long term strategies of the major companies (Ruff, 2006).
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