1

Regional Supplier Networks and Competitive Advantage–

Case Studies of Honda and Vietnamese Motorcycle Companies –

Pham Truong HoangGraduate School of Information and Environment Sciences –

Yokohama National UniversityJVEC Workshop – 11/22/2003

(Draft)

2

Background and Motive for Study

Japanese style supplier system’s competitive advantage

Japanese direct investment in Vietnam Vietnam condition- near China, in

ASEAN Vietnamese motorcycle industry in

recent years

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Contents Introduction Key concepts and frameworks Review of Motorcycle industry in

Vietnam and East-Asian region Regional supplier system – Case of

Honda Vietnam Company Product architecture and component’s

supplier system – Cases of Honda and Vietnamese motorcycle companies

Conclusion

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1. Key Concepts and Frameworks(1) Supplier system Production cost & transaction cost:

Production cost: cost of input Transaction cost: cost to sustain

“asset specific” – (1)search cost, (2)contracting cost, (3)monitoring cost, (4)enforcement cost

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(2) Business architecture

Product architecture Product architecture: function-component’s

scheme Interface: components’ connection rule

Closed vs. Opened Closed: rule of interface designed by one firm Opened: interface is standardized in the industry

Modular vs. Integral Modular: one-to-one mapping Integral: complex mapping (non one-to-one)

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(3)Japanese style supplier system

High performance, competitive

Transferable to other countries

Exploiting transaction cost economy

Features: Long-term relation Specialization Pyramid structure Inside competition Group integration R&D concentration Information

exchange

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(4) Performance of supplier system

Short-term: Cost: low input cost Delivery: fast and accurate (JIT)

Long-term Quality: stable in physical feature Flexibility: fast in self-changing Design: fast in R&D

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2. Review of Motorcycle Industry in Vietnam and in East Asian region

Motorcycle industry in Vietnam Development, Consumer market,

Competitors, Domestic suppliers Motorcycle industry in East Asian

region Overviews, Chinese motorcycle

industry, Thailand’s motorcycle industry

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Motorcycles being granted circulating license

2770 2806 2846 2901 3275 36784209

48275206.1285549.2676387.207

8359.042

10273.659

36.4 40 55.2 374 286.2 403.3 531 618 379.128343.139837.939

1971.8351914.617

0

2000

4000

6000

8000

10000

12000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002 Year

Thousand units

Motorcyclein the wholecountry

Number inincreasingcomparewith pastyear

Motorcycle industry in Vietnam

Source: Ministry of Police quoted by NEU-JICA project 2002

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Household Income 1999

01000200030004000500060007000

* * up100

* Up200

* 300 * * * * *Income in USD/month

Number ofHousehold(thousand)

Household Revenue in 2001

0100020003000400050006000

* * up100

* Up200

* 300 * * * * *Revenue in USD/month

Number ofHousehold(thousand)

RURALURBAN

1.Rapid development:(1)Income

increased(2)Price reduced

2.Striking development of low price segment

3.Largest segment: low price market

Consumer market

Source: Department of Statistics and author’s investigation

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Competitors, Market share, suppliers

Figure 2.5 :Market share by producers85.1%

12.3%19.6%

30.9%

74.7%

40.4%

68.4%

13.4%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

Year

HVN shareImport Honda shareTotal Honda shareVMEP shareSuzuki VN shareYamaha shareOthers shareChinese m.c share

7 foreign invested, 45 domestic assemblers

Market share: fluctuating

Suppliers- more than 550 classified in three kinds: In Japanese keiretsu

ones Widely supplying foreign

invested ones Domestic ones

Source: Ministry of Police and author’s investigation

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@

Force

Piaggo

Vietnamese Motorcycle Market’s Segments and Positioning in 2002

Jupiter ($1600)Sirius ($1400)

Chinese parts product($500)

Dream Model Wave Model

Magic,star $1250

Sanda$850

$ 3,000

$ 1,300

$1,000

$700

Wave Alpha ($730)

Spacy

Supper Dream ($1330)

Dream II

Traditional Fashion Model

Dream Model

$ 6,000

Future $1660

Viva ($1500) Best ($1300)

Angel $850

$ 4,000

Chinese parts product ($500)

Source: Author’s editing based on expert’s measures and market data

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Chinese motorcycle industry Striking development: Price cutting “Copy and

ameliorate” strategy Modularization

0

2000

4000

6000

8000

10000

12000

14000

Thousand units

1980 1983 1986 1989 1992 1995 1998 2001Year

Table :Motorcycles Production in China

Motorcycle industry in East Asian region

Source: Honda's "World motorcycle facts and Figures 2001"

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Thailand’s motorcycle industry

From 1960s Market share:

Japanese makers-98% Honda-70%

Localization: 100% Closed-integral

business architecture

Table ..: Motorcycle production and sales in Thailand

0200400600800

1,0001,2001,4001,6001,800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year

Thousand Units

ProductionSales

Source: Honda's "World motorcycle facts and Figures 2001"

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Summary Vietnamese motorcycle industry:

Striking development Increasing competition Low price segment enlargement Chinese component’s role

East-Asian regional motorcycle industry Striking development Chinese motorcycle industry modularization Low price of components

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Hypothesis (1) Change in Vietnamese market Decline of Honda in Vietnam before 2002 Development and modularization in regional

motorcycle industry Transferability of Japanese style suppliers system Advantage of Japanese style supplier system

(1) Honda in Vietnam enlarged its supplier system to regional supplier network

(2) Change of suppliers is in some components

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Hypothesis (2) Modularizing in Japanese automobile industry Modularization in regional motorcycle industry Modularization in components Outsourcing and modularization’s relation Dynamics of product architecture

(3) Honda in Vietnam is modularizing partly and based on components

(4) Modularization in Vietnamese motorcycle companies and product architecture is changing dynamically

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3. Regional supplier system in Honda Vietnam Company (HVN)

Company background:

Joint-venture : Honda 70% Establishment: 1997 Capital: 104 million US$ Location: Vinh phuc, 40 km

from Hanoi Products: Super Dream

(1998), Future (1999), Wave Alpha (2002)

Labor: 2000 persons

0

50

100

150

200

250

300

350

400

Thousand units

1998 1999 2000 2001 2002 Year

Figure 3. Production of HVN

Super Dream

Future

Wave Alpha

HVN total

Source: Ministry of Police. Ministry of Trade

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Wave Alpha product Launch: 2002 Price:

2002-730US$;2003-850 US$

Sales: 2002: 315.000 H1/2003: 158.000 (82%

HVN’s sales) Successful development

Low price Good design Good quality

The role of supplier system

Figure 3. :Market share of Honda's different products

16%

28%19%

8%

31%

66%

12%20%

31%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1997 1998 1999 2000 2001 2002 H1/2003 Year

Super Dream

Future

Wave Alpha

Import Honda

HVN total

Total Honda share

Source: Ministry of Police, Ministry of trade and author’s

investigation

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HVN supplier system- cross product analysis -

Supplier system of Super Dream

Honda Vietnam

Honda Asian (Thailand)

Supplier system of Wave AlphaHonda

Vietnam

Asian Honda (Thailand)

Sundori Honda (China)

First tier suppliers

Second tier suppliers Source: Author’s investigation

Japanese traditional style supplier system

New style supplier system of HVN

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HVN supplier system changesand component classification HVN supplier system’s change:

(1) Increase domestic suppliers (2) Increase first tier: domestic ones, non-core

parts(3) Shift to Chinese suppliers(4) Concentrate on price(5) Increase second and third-tier suppliers

Component’s classification: Core components - Honda’s specific parts Non-core components – Honda’s none-specific

parts

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Performance of new supplier system in HVN

Main characteristics of new supplier system in HVN C D Q F Ds Notes

(1) Increase domestic suppliers, shift from some Thailand’s suppliers to Vietnamese one (mainly non-core components)

+ + (-) (-) (-)*Weak impact because components are non-core

(2) Increase first tier but most of new first-tiers are domestic ones with non-core components

+ + (-) (-) (-)

(C- cost, D- delivery, Q- quality, F- flexibility, Ds- Design+: positive impact, -: negative impact, x: unidentified impact, (): weak impact)

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(Cont.)Main characteristics of new

supplier system in HVN C D Q F Ds Notes

(3) Shift from some Thailand’s suppliers to Chinese ones:-With core components-With non-core components

++

(+)**(+)**

-(-)*

-(-)*

-(-)*

* With the development of production in China, negative impact are weak**Including some “-” impacts

(4) Take price is one of the decisive factor

+ + - - -

(5) Increase second and third suppliers

+ + - - x

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Performance in summaryCharacteristics C D Q F Ds

(1) + + (-) (-) (-)

(2) + + (-) (-) (-)

(3) ++

(+)(+)

-(-)

-(-)

-(-)

(4) + + - - -

(5) + + - - x

(C- cost, D- delivery, Q- quality, F- flexibility, Ds- Design+: positive impact, -: negative impact, x: unidentified impact, (): weak impact)

Source: Author’s investigation by interviews carried in July and August 2003

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Supplier system of core-components Honda keiretsu in

East Asia: Engine’s

component: suppliers in Japan (and some parts from Thailand)

Transmission’s component: suppliers in East Asia

Supplier systems of core-components

C D Q F Ds

Sustain suppliers in Honda keiretsu for most of core-components

- - + + +

Source: Author’s investigation by interviews carried in July and August 2003

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Supplier system in HVN- from performance analysis -

New supplier system: Supports short term performances: Cost,

Delivery Harms long-term performances: Quality,

Flexibilities, Design New supplier system for non-core

components Traditional supplier system for core

components

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Reasons for developing regional supplier system Regional condition:

Chinese motorcycle industry and modularization

Vietnamese motorcycle industry: High development Market (low price segment) enlargement

Regional strategy of Honda East Asia regional specialization

Institutional factors: Policy of localization

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Summary Regional supplier network in HVN

Component’s characteristics based Opened regional system for non-core parts In keiretsu regional system for core parts Focusing on cost and delivery, on short-term

production cost Reasons for new network: Industry’s condition,

MNCs regional strategy, institutional factors(Hypotheses (1), (2) are supported)

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4. Product architecture and component’s supplier system – Cases of Honda and Vietnamese motorcycle companies-

Case study of HVN Flexible component’s supplier

systems: Core components:

In-the-keiretsu suppliers Non-core components

Out-of-keiretsu Vietnamese suppliers Out-of-keiretsu Chinese suppliers

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Cont. In-the-system relation:

Closed relation Integral system Supplier changing insid

e system Enlarging the system

Product architectureClosed-integral

Product architectureIntegral Modular

Closed

Opened

Hypothesis (3) is not supported

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Cases of Vietnamese domestic companies Company A

Increasing in-house production Company B

Moving to closer relationship in system Company C

Keeping open supplier system Company D

Moving to component manufacturing

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Cont. Entered market by

wholly opened-modular

Market-based relationship

New changes: Increase close relation Apply in some parts

with some suppliers

Integral Modular

Closed

Opened

Product architecture

Source: Author’s investigation by interviews carried in July and August

2003

A B

C

Hypothesis (4) is supported

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4.3. Summary - Dynamics of product architecture in Vietnam Motorcycle industry-

HVN sustains closed-integral architecture in larger and regional supplier network

Vietnamese companies:

Move to closer relation with more closed product architecture

Sustain opened-modular architecture

Dynamics in product architecture:

HVNVietnamese onesNew architecture

Integral Modular

Closed

Opened

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5. Conclusion & Discussion Conclusion:

Regional supplier network in China-Asean region Mixing and flexible component’s supplier systems Dynamics of product architecture in components,

companies Discussion:

Change of Japanese style supplier system Modularization and component’s supplier system Flexibility of transaction cost & production cost