How globalization drives institutional diversity: the Japanese electronics industry's response to value chain modularity

Journal of East Asian Studies, Jan-April, 2007 by Timothy J. Sturgeon

The bursting of the Internet bubble in early 2001 led Japanese managers to step back from the brink of radical transformation, not least because it dramatically exposed some of the weaknesses and risks of value chain modularity. As a result of overanticipating demand, Cisco was forced to liquidate $2.2 billion of finished and in-process inventory, largely held by its contract manufacturers. The company cut 8,500 jobs and posted its first loss in its eleven years as a public company ($2.69 billion) in the third quarter of 2001. (42) Over the next few years Solectron, Cisco's most important contract manufacturer, suffered a total of $6.5 billion in losses and laid off nearly a third of its global workforce of 60,000.

However effective these developments were in driving Japanese firms back to their traditional industrial model, managers at Japanese electronics firms have nevertheless made significant breaks with past practices. Only key components, such as system-on-a-chip (SoC)--known in Japan as LSI--semiconductors, leading-edge flat-panel displays, high-capacity batteries, and advanced memory chips are to be produced in Japan, either in-house or in joint ventures with other Japanese firms. In-house final assembly in Japan is typically being limited to high-cost models with advanced features. Low-end models are to be produced offshore, especially in China, either by affiliates or by Taiwanese contractors. Divestiture of old, unprofitable, and unrelated businesses and products lines has accelerated, though these steps toward downsizing and specialization are being made incrementally. Increased specialization, increased complexity, and the continued importance of foreign component sales has led to increased outside purchasing and higher dependence on global markets for a wider variety of inputs, including technology inputs. (43) The remainder of this section presents evidence of these changes, and their limits, in three areas: alliances, outsourcing, and the provision of system integration services for corporate computing and communications.

Alliances

The renewal of traditional strategies of vertical integration at Japanese electronics firms has a high price. The fast pace of technological change in the technologies that underlie key components has required a spate of new investments in leading-edge factory production in Japan for advanced semiconductors and flat-panel displays (see Table 2 for some examples). The high cost of many of these new investments has convinced managers to forge an unprecedented set of production-sharing alliances. Seven of the twenty-five factory investments listed in Table 2 involve more than one firm. The shift in thinking about alliances is captured by the following statements made by the same top manager in 2001 and 2002:

   We have a terrace-house style management where we exchange ideas
   with people in the same house, so we don't want to sell our
   factories to other people. (Japanese electronics executive, June
   2001)

      We're thinking of a smaller terrace house now. And we're also
   thinking about having good neighbors. (same Japanese electronics
   executive, July 2002)