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Topic 10 Case Study - ASIAN case RESEARCH Joumat vol 8...

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Unformatted text preview: ASIAN case RESEARCH Joumat. vol. 8. Issue 1. sr—ss {20114} This case was yin-puma by Dr Em {fang and Wilmer I-‘h'l'l'l'ette all" The University of Texas at Arlington, as a insisfirr class-non: difl‘lrsfitm rather Hurt to illustrate either stilettos or inaflrctive herr- dling afar: administrative or business situation. Please address all mrresgm- dean: to: Dr Bin hang. Department of Infinrratiou Syslrrmr and Operation-1 Management, The Units-o slip of Texas at Arir'rrgtort. Ba: 19%.”, 535 Business Building, Arlington, Texas racism-er, LISA. E-ntail.‘ tn'rrjiangfimersiuii.usc.edu Why Giants Change Their Minds BACKGROUND INFORMATION Ten years ago China's endless supply of cheap labor pro- duced an endless supply of cheap [and often shoddy] products, primarily toys and textiles. China still makes those plus much more. it is now the world’s fourth-largest indus— trial producer behind the U.S., Japan and Germany. China produces more than Sfl'lh of the world’s cameras, 45% of its microwave ovens, 30313 of its air—conditioners and televisions, 25% of its washing machines and nearly 20% of a1] refrigera— tors. Now China is emerging as the workshop of the world. The ability to make nearly anything in China with high qualityr at a very reasonable cost, then sell it to customers both near and far, is having a big impact on multinational companies. Most large, multinational, manufacturing firms, rang- ing from consumer personal care companies such as Johnson .5: Johnson and Unilever to auto manufacturers such as Gen— eral Motors and Volkswagen and high tech manufacturers such as lntel and Dell, have developed production and export bases in China. Gino—international joint ventures are even more numerous. How to integrate China into their glo— bal supply chain systems is becoming a popular topic for multinational companies [MNCs). According to AT. Kearney’s ”HIDE FDI Confidence index", the United States lost its lead in the foreign direct investment {FBI} attractiveness race to China. For the first time in five years, the United States was knocked out of the top spot as the number one foreign investment destination o not by World Scientific Publishh‘ng Co. Table 1. The FBI Confidence Index Rank. 2002 mm EDGE! 199? 1993 1 China U5. U5. 1.1.5. LLB. 2 U5. Cldna UK. China Brazil 3 UK. Brazil Cl'dna LLK. China 4 Germany UK. Brazil Brazil UK. 5 France Mexico Poland Mexico Gunman}.r Sam-cc: FLT. Keamey. "FDI Confidence index". Septembe: ZDDE. for global investors from the world's largest LBEHJ corpora- tions {Table 1). Nearly onethird of senior executives from the world's largest 1WD MNCs are looking to China for first-time investments over the next three years. three times more than those interested in entering the United States. For foreign in— vestors T.vith operations throughout the world. China’s entry into the WTD World Trade Organization] is a good opportu- nity to shift production bases from their home countries and other Asian countries to China. Furdter to China's benefit. the anti—terrorism campaign and security concerns in coun— tries such as Malaysia. Indonesia and the Philippines may fruther lessen their attractiveness to MNCs' executives. in China. most FDI inflows go into building manufac— turing facilities for foreign-invested enterprises (Flt-Is} rather than into financial assets like stocks. bonds or other service industries. There are more than Milli] FIEs in China, and most of them concentrate on manufacturing industries. For— eign investors are finding that using China as a manufac- turing and export base is often more profitable — and almost always far easier — than selling goods inside the country. The result is that China. once viewed by wide—eyed execu— tives as the market of future riches. has instead become the world's factory floor. Today. FIEs contribute more than half of all IChina’s exports. Table 2 shows the significant role of FIEs in {ZIl'Iina’s exports. This means that China's emergence as a reliable. stable producer of high-value. technologically- sophisticated products is rewriting the economics of a wide range of global manufacturing industries and their global W'E-[Y GIANTS CHANGE THEIR MINDS 319 Table 2. FD] Flows, Total China’s Exports, FIEs' Exports Performance [1930—Sepbember 21302} 3131 China's Exports 2133 Exports 2133' Share 31 1311113113 31 L133} {billions of US$} {311113113 31 1.133} China’s Exports 19311 11.3 13.12 13.111 3.1991. 1931 na 22.111 1:11:13 {1.12. 1932 33 22.32 13.33 13.293 1933 1.31:1 2223 111.33 1.393 1934 1.23 23.14 3.132 13.393 1933 1.33 22.33 9.311 1.1 93 1933 1.32 39.94 9.33 1.993 1932 2.31 39.44 1.21 3.193 1933 3.19 42.32 2.43 3.293 1939 3.39 32.34 4.91 9.493 1993 3.49 32.39 2.31 12.393 1991 4.32 21.91 12.33 13.393 1992 11.1.11 34.94 12.33 23.43 1993 22.32 91.24 23.24 22.393 1994 33.22 121.111 34.21 23.293 1993 32.32 143.22 43.33 31.393 1993 41.23 131.112 31.31 411.291. 1992 43.23 132.231 24.911 41.993 1993 43.43 133.23 311.93 44.1 91. 1999 43.39 194.93 33.33 43.394 21:11:19 42119 249.21 119.44 42.993 2391 43.93 233.13 133.43 331.993 21:11:12 33.31 323.32 133.94 31.393 Source: Claim: Statistird Yearimi: 2001. The data for 2:701 and 21112 are taken from the official website of National: Bureau oi Statistics oi 1:13:13. supply chain systems, not fust in industries that are labor intensive. Matsushita and Sony, the two largest consumer elec- tronics makers in Japan and in the world, inevitany stretdled their supply chains to their low—cost nunufaehfling neighbor, Cline, to reduce costs. Among Matsushita’s I44 overseas manufacturing subsidiaries, 49 of them are scattered 41] acre in China: six of Sony’s 35 factories abroad are located in China. However, in EDGE when Matsushita was accelerating its pace on stretching the supply chain in China, Son},r unex- pectedlj,»r decided to shift some of its manufacturing business in China back to Japan. ERADICA'HNG AND CREATING: MATSUSHITA'S SUPPLY CHAIN REBUILDING STRATEGY Matsushita's Embarrassing Loss Since 1993 Matsushita Electric Industrial Co., Ltd, the largest horne appliances and household equipment [HAHE] pros ducer in the world, has competed with low—priced Chinese counterparts in the international market. The managing di- rector Yukio Shohtoku, who is responsible for Matsushita's overseas business. continuously hears bad news from overseas branches: Chinese producers keep grabbing Matsushita's market shares by working as OEMs [original equipment manufacturer]. Because the Chinese price is be— coming the world price, Matsushita must continue cutting its profit margin to follow its Chinese competitors’ low price. otherwise it will lose more market share in the world. Table 3 shows the influence of some low—priced Chinese commodities on the US. market: Table 3. The Impact of Chinese Products Commodities Price [5} Price {Eli} Decrease {it} [without Chinese imports] {with Chinese imports} DVD 491 {in 199?} 165 {in 20th] 65.4 Fax Machine 314 {in 199?} 136 (in 2%} 56.? ms 155' {in 1995'} as {in rear} 55.4 Telephone 19 [in 199?] 12 {in anal} sas Glass Windshields 2141.! sqm {in 199?} 13.3mm [in 2W} 32.5 Source: Nikkei BF Network. Nalional Automotive Glass Consultants. WHY GIANTS Ci [AME-E THEIR MINDS 4] However, in these endless price wars, Matsushita has a fatal weakness — high cost; Chinese labor costs are only one— tweniieth of the Japanese and Chinese land prices are only one—thirtieth of the Japanese. Four decades ago, when Japa- nese manufacturers began to beat their US. counterparts, the Japanese labor cost was one-fifth of the American. Recalling this experience, Matsushjta is very worried about its HAHE segment which is experiencing huge pressure from cheap Chinese substitutes. To maintain its leadership in the Harts market. Matsushita believed that the combination of Japanese ad- vanced techniques;r parts and Chinese low—cost labor will en— hance its competitive advantage in the world. So it gradually established some assembly lines in China. For example, in 1994 Matsushita established Shanghai Panasonic Micrmvave l[CI-'ven Company that was able to produce 500.1300 units annu- ally. Since 198'? Maisushiia has established 49 subsidiaries or joint ventures in China. All of them import most of their nec— essary parts or materials from Japan and assemble the final products with Chinese workers. Matsushita believed that this operation model could maintain the traditional advan- tage of Japanese products — high quality, and also make use of China's traditional competitive advantage — low cost la— bor and land. This model greatly helped Maisushiia cut its products’ prices. The Shanghai subsidiary's “Panasonic" Ini- crowave oven was thirty percent cheaper than its counterpart made in Japan. Matsushita dreamed that this operation model would eliminate or at least alleviate the impact of low—priced Chinese products. However, ivlatsushita's dream did not come true. The Shanghai subsidiary only produced llilflflfl units per year and had to stop producing one month in 1993 to lay off many employees. By the end of 2WD, the Shanghai subsid- iary was facing bankruptcy. At the same time, lGuangdong Galanz Enterprise Group Co., Ltd, Matsushita’s largest com- petitor of microwave ovens in China and in the world, was producing 12 million units per year and beefing the l'vlatsushita’s microwave ovens in every individual market around the world. For other HAHE products, such as DVDs, 42 ace] Tits, and refrigerators, Matsushita is facing similar stories: it keeps losing its market share to Cl'iinese counterparts. The hiridamental reason for Matsushita’s loss is high price. The Nikkei BF“ Network reports, for example, that in the U.S.market, a ”Panasonic" iron is $29, but a Chinese fa- mous brand "Haire" iron is only $9.90; a "National” DVD player is $169.99, but a Chinese DEM product under the American brand “APEX" is only $99.99. in China, the cheap- est "Galana" microwave oven was RMBE99 ($36} in 2099, but the cheapest Shanghai subsidiary’s "Panasonic” microwave oven was RMBEBH {$36}. Matsushita possesses world-class brand names, cut- ting-edge techniques, perception of high quality, powerful promotion campaigns, and affluent capital, as well as the low~cost Chinese labor in production processes, but it still lost so painfully. The embarrassing loss forced the Matsushita management to think hard about the reasons why it could not organize its valuable resources effectively and efficientlyr along its supply chain. At last, Mr. Kurtio Nakamura, the CEO of Matsushita, believed that the current supply chain was obstructing the development of I'viatsushita. He decided to initiate a supply chain revolution in hiatsushita, and named his strategy as ”Eradicating and Creating.” Rebuilding the Matsushita's Supply Chain in China Managing diI'Ector Yukio Shohtoku was in charge of this “Eradicating and Creating” supply—chain rebuilding project. Before becoming the managing director of overseas business, Mr. Shohtoku worked as the president of lvlatsushita Electric {China} for six years. His motto is: "Once you are beaten in China, you will also be beaten consequently elsewhere in the world by the winner in China.” He believed that Matsushita would be in an unassailable position in China and in the world as long as its new supply chain could make full use of China's competitive advantages. Under Mr. Shohtoku's supervision and direction, Matsushita began its supply—chain rebuilding project in EDD]. WHY GIANTS CHANGE THEIR MINDS 43 Compared to its former supply chain, there are four funda~ mental changes in Nlatsushita’s newr supply chain: Move manufacturing activities to China Matsushita closed its fax machine factory in Germany by the end of 2WD, and closed its nucrowaye oven subsidiary and air—compressor factory in the US. in 2on1. Matsushlta is now asking more than more Japanese employees in its manufac— turing sector to retire early. All of these closed businesses and cancelled job positions were or are being moved to China. By EDIE, Matsushita will transfer its one—third of its manufacturing business from Japan and the rest of the world to China. Establish the new ”brain" in China Although Matsushita entered China twenty years ago, there are only around Iflflt} technicians in China compared to its total Chinese employees of over 30,001 In Matsushita’s Former supply chain model, all important parts were de- signed and produced in Japan. China’s subsidiaries only handled the pure assembly tasks. However, the Japanese de- signed the products based on their understanding of Japa- nese manufacturers. For example, Japanese designers would like to increase equipment costs rather than increase labor costs. But in China the labor cost is much lower than in Japan. So the original Japanese design only increases costs in China's factories. On the other hand, }apanese designers do not know Chinese customers“ demands very well. For example, Japanese customers want the microwave oven with the barbecue function. but Chinese customers rarely taste barbecue. In February 20G]. Mr. Yoichi Morishita, the Chairman of Mabsushita, arrived in China just to announce that Matsushita decided to establish a new "brain” — Matsushita Electric REID Center {China} in Beijing. This center would be the second largest one among Matsushita’s sixteen Ran 44 AER] centers around the world [the largest one is in Matsushita’s headquarters). He said that it was too difficult to explain everything about China to Japanese designers; to really make use of China's special competitive advantages and to really meet Chinese customers” demands, Matsushita decided to hand over its Citinaqelated development and research issues to local researchers and engineers. ”We have definitely made up our mind to rebuild our supply chain in China from the very beginning pomt — the design paper.“r Mr. Morishita said. Localize material supplies After carefully studying China’s logistics industry, Matsushita surprisingly found that not only could it access all its longtime Japanese suppliers in China. but also the japanese suppliers' prices in China were twenty to thirty percent cheaper than in ,lapan. Polystyrene, a common mate— rial in the home appliance indushy. is a typical example that explains this unbelievable result. Because China's undeveloped infrastructure and re- gional fragment distribution channels make it impossible for polystyrene suppliers to reach as many potential customers as possible and vice versa. the Chinese government estab- lished a national polystyrene distribution and trade center in Zhefiang province. In this center. a customer can meet more than an polystyrene suppliers from China and other maior polystyrene producing countries. After investigating each supplier's price. the center will publish the average prices of different products everyday. Armed with this pricing infor- mation the customer can save a lot of negotiation cost and the individual supplier cannot increase the price arbitrarily The competition among these suppliers not only decreases the price level, but also increases the customer supply chain’s flexibility. Supported by several hundred suppliers. a cus- tomer can easily build up a highly agile polystyrene supply link. Matsushita has a few fixed longtime polystyrene suppliers in Japan and their prices are negotiated at the beginning of a year. Even though the fixed suppliers can WHY GENTS CHANGE THEIR MINDfi 45 decrease Matsushita's supply chain risk, the fixed prices are generally much higher than Hie flexible prices. Adding the transportation costs from Japan to China, the polystyrene in Matsushita’s fon'ner supply chain in China is more expensive than in Japan. There are many other material distribution and trade centers in China providing steel. paint, hardware, and so on. All of them function with a similar mechanism as the poly- styrene distribution and trade center. After investigating relevant distribution centers and its Chinese competitors“ suppliers. Matsushita decided to use as many Chinese sup- pliers as possible for its operations in China. Stretch the distribution link In 2300, when Matsushita's Shanghai subsidiary produced 140$“) microwave ovens annually, its Chinese competitor Galanz produced momma units in the mean time. The ob— vious reason for such a huge sale difference is the price gap. The cheapest "Panasonic" microwave oven was sold at ENE-63D (sans), but l[Salarutfs lowest price was only RM3299 ($36]. Beyond the price reason, however, the distribution link also contributed to the huge sale gap. low-cost labor and large economy of scale are two competitive aces in the Chinese producers hands. Foreign companies can make use of the first one quickly and easily, but they usually cannot enjoy the second one even if they have hoen in Cluna for a long time. Generally, foreign com- panies concentrate in China's coastal cities where markets will mature, but the rural and inland markets, in which “Hi percent of Chinese customers live, rarely offer foreign com- panies' HAHE products. On the contrary, powerful Chinese firms [such as Galanz, Haire and TCL} continue working hard to increase their sales in rural and inland markets. The huge demand of the one billion rural and inland customers encourage Chinese firms to keep improving their economy of scale and cut their costs further. With undeveloped infrastructure and low—income levels, however, the rural and inland markets have too many 45 AER] special requirements for delivery, services,r and credit man— agement. So l'viatsushita selected TCL, the largest T'iu' pro— ducer in China, as its strategic partner to stretch its supply chain to Chinese rural and inland markets. TCL has 32 re- gional distribution subsidiaries, 13711 distribution centers,r and was sales agents. Its products can reach nearly 20.1300 retail- ers in China. According to the agreement hetvveen lviatsushita and TCL, Matsushita can use TCL’s established distribution net— works to sell its products in China's rural and inland market. in return, Matsushita provides its latest patents for Dvfls, digital Tits and air-conditioners to TCL. Exciting Dawn of Success By the end of Eflfll, Matsushita’s new supply chain promoted its first product — NN—MXZUWF microwave oven. From the design paper to the final product, NN—MXZDWF passed the following phases along this new supply chain: Design: Chinese engineers dominated the design of NH— MXZUWF. These low-cost Chinese talents only took RMBEGDU [$362) salary per month, but theyr creatively reduced the cost of parts by thirty percent. They overthrew Matsushita’s de- sign mode by devoting themselves to applying local materi- als or parts and to exploiting Chinese factories’ competitive advantages to the fullest. Purchase: Based on the new product design, Panasonic [Shanghai] used local supplies for polystyrene and electronic components. (truly the sheet iron was imported from Japan because the oversupply of sheet iron in Japan lowered its price even cheaper than in China. Produce: After closing its microwave oven factory in the U.S., Matsushita also stopped producing low-end microwave ovens in Japan. All these production capacities were moved to the Shanghai subsidiary, raising its capacity from Eflllllflfi units to 2 million unim. Such a scale dramatically cut this subsidiary’s operation cost. WHY GIANTS GiAWE THEIR MINDS 4'? Marketing: By the end of EDD], Matsushita simultaneously promoted the NN—NIXZUWF oven in China, Japan. and the US. The prices were RMBSQB ($43), 39930 {$82}, and $69 in these three markets, respectively. The average price cut was over thirty-seven percent. Even though these prices were not the lowest in the three markets, the combination of reason— able low price and high brand} quality perception of Matsushita still deeply touched customers’ hearts. From November 2031 to January EDGE. lvlatsushita sold nearlyr illmfl units of th...
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