Regional Supplier Networks and Competitive Advantage– Case Studies of Honda and Vietnamese Motorcycle Companies – (Draft) Pham Truong Hoang Graduate School of Information and Environment Sciences – Yokohama National University JVEC Workshop – 11/22/2003

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

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

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

(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)

(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

(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

2. Review of Motorcycle Industry in Vietnam and in East Asian region  Development, Consumer market, Competitors, Domestic suppliers Motorcycle industry in East Asian region  Overviews, Chinese motorcycle industry, Thailand’s motorcycle industry

Motorcycle industry in Vietnam Source: Ministry of Police quoted by NEU-JICA project 2002

Consumer market Rapid development: Income increased Price reduced Striking development of low price segment Largest segment: low price market Source: Department of Statistics and author’s investigation

Competitors, Market share, suppliers 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

Vietnamese Motorcycle Market’s Segments and Positioning in 2002 @ 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 $ 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

Motorcycle industry in East Asian region Chinese motorcycle industry Striking development: Price cutting “Copy and ameliorate” strategy Modularization Source: Honda's "World motorcycle facts and Figures 2001"

Thailand’s motorcycle industry From 1960s Market share: Japanese makers-98% Honda-70% Localization: 100% Closed-integral business architecture Source: Honda's "World motorcycle facts and Figures 2001"

Summary Vietnamese motorcycle industry: Striking development Increasing competition Low price segment enlargement Chinese component’s role East-Asian regional motorcycle industry Chinese motorcycle industry modularization Low price of components

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

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

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 Source: Ministry of Police. Ministry of Trade

Wave Alpha product Launch: 2002 Price: Sales: Successful development 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 Source: Ministry of Police, Ministry of trade and author’s investigation

HVN supplier system - cross product analysis - New style supplier system of HVN Japanese traditional style supplier system Supplier system of Wave Alpha Honda Vietnam Asian Honda (Thailand) Sundori Honda (China) First tier suppliers Second tier suppliers Supplier system of Super Dream Honda Vietnam Honda Asian (Thailand) Source: Author’s investigation

HVN supplier system changes and 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

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)

Main characteristics of new supplier system in HVN (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

Performance in summary Characteristics 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

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

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

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

(Hypotheses (1), (2) are supported) 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)

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

Cont. In-the-system relation: Product architecture Closed relation Integral system Supplier changing inside system Enlarging the system Product architecture Closed-integral Product architecture Integral Modular Closed Opened Hypothesis (3) is not supported

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

Cont. Entered market by wholly opened-modular Market-based relationship New changes: Increase close relation Apply in some parts with some suppliers Product architecture Integral Modular Closed Opened A B C Source: Author’s investigation by interviews carried in July and August 2003 Hypothesis (4) is supported

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: Integral Modular Closed Opened HVN Vietnamese ones New architecture

5. Conclusion & Discussion 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