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COE-RES Discussion Paper Series Center of Excellence Project The Normative Evaluation and Social Choice of Contemporary Economic Systems Graduate School of Economics and Institute of Economic Research Hitotsubashi University COE/RES Discussion Paper Series, No.69 July 26, 2004 From Exit to Voice: the Evolution of the Supplier Relationship in the German and the Japanese Automobile Industries Hiroyuki Okamuro (Graduate School of Economics, Hitotsubashi University) Naka 2-1, Kunitachi, Tokyo 186-8603, Japan Phone: +81-42-580-8350 Fax: +81-42-580-8351 URL: http://wakame.econ.hit-u.ac.jp/~koho/1intro/COE/index.htm E-mail: [email protected] From Exit to Voice: the Evolution of the Supplier Relationship in the German and the Japanese Automobile Industries Hiroyuki Okamuro Graduate School of Economics, Hitotsubashi University E-mail: [email protected] Abstract: The purpose of this paper is to investigate the development of the supplier relationship in the German automotive industry from the 1920s to the 1960s and to examine the continuity between the prewar and the postwar periods from a comparative perspective with the Japanese experience. Using original documents mainly from the DaimlerChrysler Archive and focusing on Daimler-Benz, I found that the postwar relationship in Germany is quite different from that in the prewar period. While the arm’s-length relationship was dominant in the prewar period, the postwar relationship is more stable and characterized by intensive mutual commitment. An important turning point in the evolution of the supplier relationship can be found in the wartime economy. However, more direct reasons for the postwar changes lie in the new economic environment and experiences in the postwar period. As a whole, the evolution of the supplier relationship in Germany shows remarkable similarities with that in Japan. But the formation of the stable and cooperative relationship in Japan was more directly influenced by the new conditions in the postwar period, especially at the beginning of the motorization. Key Words: Supplier Relationship; Evolution, Automobile Industry, Germany, Japan, Daimler-Benz JEL classification: L14, L62, N64, N80, N84 1 1. Introduction Business relationship between manufacturers and their suppliers is an important aspect of inter-firm networks. The extent of the vertical integration of production ("boundaries of the firm") and the organization of the relationship with suppliers have been theoretically and empirically studied from different approaches, such as the transaction cost economics (Monteverde and Teece 1982, Williamson 1986), the exit / voice theory (Helper 1990, Helper and Levine 1992), and the sociology of organization (Sako 1992). The purpose of this paper is to investigate the development of the supplier relationship in the German automobile industry from the 1920s to the 1960s and to examine the continuity between the prewar and the postwar periods. So far there have been few detailed researches on this topic (Okamuro 1998, Okamuro 2003), though it would provide insightful evidences for the related fields of research. Numerous studies have been done on the introduction and the development of the Ford system in the German auto industry, such as Kugler (1987), Bönig (1993), Braun (1995), Wellhöner (1996), and Filk (2001). However, they focus on the internal production process and the organization of labor force and hardly refer to the network with the suppliers. Moreover, historical researches on the German carmakers pay little attention to the relationship with the suppliers1. In this paper, historical evidences from Germany will be compared with the findings from recent Japanese studies and evaluated from the comparative perspective. Some comparative historical studies on the American and the Japanese automobile industries have been carried out, such as Helper (1990) and Helper and Levine (1992), 1 Cf. Kruk and Lingnau (1986), Pohl et al. (1987), Hamburger Stiftung für Sozial-geschichte des 20. Jahrhunderts (1987), Roth and Schmid (1987), Bellon (1990), Gregor (1997) and Nishimuta (1999) for Daimler-Benz AG; Siegfried (1987) and Mommsen and Grieger (1996) for Volkswagen; Heyl and Neugebauer (eds.) (1997) and Neliba (2000), Billstein et al. (2000) for Opel. 2 but German experiences would form an interesting contrast to the American and the Japanese cases. The supplier relationship in Germany has changed since the 1980s adopting some factors of the Japanese manufacturing system, but little is known about the relationship before that. Some surveys carried out in the 1970s and the early 1980s suggest that the supplier relationship in Germany was basically long-termed and stable, which is similar to Japan, but the suppliers were less dependent on their customers compared to Japan2. In general, we can position the supplier relationship in Germany somewhere between the traditional American and the Japanese patterns. The supplier system in Japan is characterized by the close and long-term relationship between the carmakers and the core suppliers, involving very intensive cooperation and information exchange between them3. This system, which became popular and attracted world-wide attention in the 1980s, is neither traditional nor stable, but it has changed and developed through many years of trials and errors under the restriction of historical conditions, and was established in this stylized form at the beginning of the 1970s at the earliest (Wada 1991, Ueda 1997). We can still observe a conflict of opinions among the Japanese scholars on when and how this system has been formed, specifically on the continuity between the wartime experience and the postwar development. We will come back to this argument at the end of this paper by surveying some recent Japanese studies. Both Germany and Japan are the latecomers in the automobile production and the 2 According to Kunz (1972), about 60% of the surveyed small suppliers in the metal and machinery industries have maintained the business with the largest customer for more than 11 years. Hutzel (1981) reports that the proportion of the sales to the largest customer is less than 25% for most of the surveyed suppliers. Monopolkommission (1977) analysed the relationship between the carmakers and the parts suppliers from the viewpoint of the competition policy and confirmed mutual dependence between them. Okamuro (1988) summarizes the results of various surveys on the subcontracting and supplier relationship in West Germany from the 1960s to the 1980s. 3 See Nishiguchi (1994) for an extensive survey of the historical development and the recent practices of the Japanese supplier system as a whole. 3 “Wunderkinds” of the postwar era. Germany is regarded as the country “where the automobiles were born”, but the large-scale production and the diffusion of cars in Germany began in the 1950s, 30 to 40 years later than the USA but 10 years earlier than Japan, as Table 1 shows. The German carmakers introduced the “American style of production” in the 1920s to increase production efficiency. In the 1930s, we can observe the beginning of the large-scale production, which was soon hindered to develop, however, by the wartime regulation. Therefore it is since the 1950s that the motorization shows full development in (West) Germany (Figure 1). Figure 1 also shows that the car production in Japan was negligible in the prewar period and began to increase drastically in the 1960s. Though the start of the production of trucks and mini-cars goes back to the 1920s, the domestic production of cars began in 1936 and already peaked in 1937 with only 1,819 cars produced. The postwar car production began in 1947, two years later than in Germany. The produced number of cars exceeded 100,000 in 1960 in Japan, 11 years later than in Germany. Though the production of motor vehicles in Japan has been heavily focused on trucks than on cars until the end of the 1960s, the difference in the development of the automotive production between Germany and Japan is remarkable. This fact suggests that the German and the Japanese automotive industries had different initial conditions and life cycle stages both in the prewar and the postwar periods and that the impact of the experiences from the wartime economic regulation and the military production may be also different among them, despite of some similarities as the latecomers to catch up the US automotive industry. This paper deals with the long periods from preparing for the large-scale production to its full development. In the following part of this paper, we separate the observed years into three periods from the German point of view, namely 1) the prewar period from the 1920s to the 1930s, 2) the regulation and wartime economy 1939-1945 and 3) the postwar period from the second half of the 1940s to the 1960s, and describe the development and the characteristics of the supplier network in Germany in each 4 period. Then, the findings from our study on Germany are compared with the evidence from Japan at the end of this paper, before some concluding remarks are given. As far as the German experiences are concerned, the discussion in this paper is based on original documents from the corporate archives in Germany, mainly from the DaimlerChrysler Archiv and Stiftung AutoMuseum Volkswagen. We focus on Daimler-Benz AG, particularly with regard to the prewar period, because of the restriction of data. However, it would not be inappropriate to discuss the evolution of the supplier relationship in the German automotive industry based on the evidence from Daimler-Benz, for it has been one of the major carmakers throughout the prewar and postwar periods4 and played an important role in the wartime economy, as shown below. 2. The Prewar Period (the 1920s and the 1930s) The automobile production in Germany reached a turning point in the middle of the 1920s. That is, the transition from the artisan-style, separate production to the American-style, assembly-line production.

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