Toyota and Denso

Currently I am working on a paper that examines the trust relationship between Toyota and Denso, and to what extent the essential features of a trust relationship have been successfully duplicated outside Japan, as this would have implications for the perceived source of competitive advantage of the Japanese automobile industry.

Emergent literature has identified the long-term relationship between car assemblers and their parts suppliers as one of the factors behind the phenomenal growth of the Japanese car industry in the three decades from the 1960's through to the early 1990's. A vertical keiretsu relationship provides quasi-market transactions which balance two transaction costs simultaneously: the cost associated with short-term market transactions where opportunistic behaviours cannot be ruled out, and the co-ordination costs associated with vertical integration.

However, the benefits of quasi-market transactions hinge on a trust relationship. Edwards and Samimi posited that a common interest objective existed for the Japanese auto makers and their suppliers in the 1950's, with unintentional MITI policies fostering such a trust relationship. The favourable export opportunities continued to provide incentives for both parties (assemblers and parts suppliers in Japan) to co-operate as the economic pie expanded. The bursting of the 'bubble economy' and the strong yen in the 1990's, however, altered the domestic environment dramatically. Shrinking demand led to the breakdown of this trust-relationship and anecdotal evidence suggests major re-alignment of the keiretsu system is taking place.

If features of a trust relationship can be replicated outside Japan, as Chrysler's South American experiment seems to indicate, one may start to wonder if the Japanese car manufacturers have not been too cautious in distrusting the local parts suppliers in countries like Thailand. Japanese foreign direct investment in the automobile industry is characterised by the assembler establishing its overseas presence usually with its major suppliers following suit. In more extreme cases, as in Indonesia, the operations were very much reduced to knock-down assemblies, with the higher value-added components being imported from Japan. Consequently, the recent Asian financial crisis, and the subsequent dramatic depreciation of some Asian currencies, (notably the baht and the rupiah,) has proved to be an expensive lesson for Japanese automobile manufacturers, for reliance on expensive home country parts rendered the host country manufacturing activities economically non-viable.