Competitive ties: Subcontracting in the Japanese automotive industry

This study is an empirical and theoretical analysis of the relationship between the automotive firms and the suppliers of automotive parts in Japan. One part traces the evolution of subcontracting as a response to the structure of Japanese labor markets. The other part applies theories of the firm and of contracting to analyze management innovations which supported the adoption of a strategy of subcontracting parts production rather than of vertical integration.;To manage this relationship, the auto firms developed a mechanism of governing transactions by trust rather than by contract or hierarchy. Over time this enabled the auto firms to incorporate outside suppliers in their overall design and production system, working through supplier associations (kyoryoku kai) to maintain reputation and to implement just-in-time production controls, statistical quality control and value analysis of design and engineering parameters. An innovative pricing mechanism supported governance by trust, and enabled the auto firms to obtain competitive prices despite small numbers of suppliers. At the same time the pricing mechanism encouraged technical change. In the long run the contributions of suppliers to increased productivity and better product design proved far more important than their contribution to lower labor costs.;US firms are currently rethinking their purchasing strategies. This study of Japanese contracting practices can contribute to those efforts. At the same time, the analysis highlights the role of trust and other non-pecuniary facets of behavior. While this study draws the obvious conclusion that trust is valuable, it contributes by analyzing the role of trust, and by demonstrating that trust is not a cultural given but a good that can be produced through investment in interpersonal relations and the creation of business norms and reputation.;A subcontracting strategy was adopted initially in the 1950s to circumvent the power of labor unions and the impact of an egalitarian labor relations ethic (as well as to reduce capital expenditures). In this they were largely successful, but as a consequence the auto firms became interdependent with a small group of suppliers with which they maintained an on-going relationship.