9 9 4--Lf 076;6() lil1 i 9 I 1' Il M.I.T. -JAPAN SCIENCE AND TECHNOLOGY PROGRAM THE JAPANIFICATION OF THE AMERICAN AUTO INDUSTRY by James P. Womack Research Director International Motor Vehicle Program Center for Technology, Policy and Industrial Development Massachusetts Institute of Technology MITJSTP 87-04 DISTRIBUTED COURTESY OF MIT-JAPAN SCIENCE AND TECHNOLOGY PROGRAM Room E53-447 Massachusetts Institute of Technology Cambridge, MA 02139 (617) 253-2449 THE JAPANIFICATION OF THE AMERICAN AUTO INDUSTRY by James P. Womack Research Director International Motor Vehicle Program Center for Technology, Policy and Industrial Development Massachusetts Institute of Technology MITJSTP 87-04 THE JAPANIFICATION OF THE AMERICAN AUTO INDUSTRY "Japanification". Like all neologisms, it has an awkward ring. However, the alternative, "Japanization", is no better, and a label of some sort is needed for a very profound process going on, as we speak, in the industrial heartland of the U.S. So, let's call it "Japanification". This said, let me hasten to add that this talk is not limited in application to the motor vehicle industry. Nor is it only relevant to Japan and the U.S. Cars and Japanese-American industrial relations are really but examples bearing on my broader concern. This is the periodic collision of industrial cultures -- confrontations between very different modes of thought'about organizing production -- which are one of the most dynamic aspects of world industrial history. The present collision between Japanese and American ways of thinking about the organization of complex manufacturing is certainly striking but this phenomenon is nothing new, even in the auto industry. What's more, there seems to be a pattern in the way these confrontations are resolved to reach a new equilibrium. Therefore, there is much to learn by taking the auto industry as our example today. By examining the automotive "collisions" of the past as well as the one now in progress, we may shine a light on means of making the current chaos into a positive-sum encounter. A Century of Transformations As it happens, the motor vehicle industry is just entering its second century as a practical, commercial activity. When it emerged in France and Germany in the mid- 1880s, motor vehicle manufacture had the characteristics of the classic "start up" industry. A host of tiny companies designed and assembled autos but most depended on pre- existing machine shops to fabricate the component parts. The work force was highly skilled in both the assembler and supplier firms, the product was changed and improved practically from week to week, and vehicles were largely custom built to the specifications of the tiny elite able to afford the early "horseless carriages". This pattern continued for about twenty years to just past the turn of the century. In 1906 German and French producers accounted for 60 percent of world motor vehicle production and were the industry's technology, prestige, and export leaders. Then as now, an American wanting the most sophisticated automobile bought it from a German 2 manufacturer. However, total world production in 1906 was only about 80,000 units, or about a third of the capacity of one modern-day auto assembly plant. The American Transformation At this point Henry Ford introduced several ideas which dramatically altered the popular image of the "motor vehicle" and its production system. The Europeans had envisioned the auto as a product for an elite little concerned with price but highly interested in superior performance. Ford envisioned the auto as a practical tool for a mass market of farmers oblivious to elegance and sophistication but vitally concerned with price, reliability, and simplicity of repair. The Europeans saw auto production as a new focus for traditional crafts, to be shared by a host of small firms, each with an array of highly skilled workers using relatively simple and flexible machines. Ford saw it as a new form of industrial activity which used specialized machinery, automated wherever possible, and a mass of unskilled workers performing repetitive tasks. After 1908 (when the Model T was introduced) and especially after 1913 (when the Highland Park plant was opened) Ford's simple standardized product produced at low cost by unskilled workers squared off against a wide variety of differentiated products produced at high cost by highly skilled workers. And Ford won. In 1921, at the peak of his success, Ford produced 938,000 Model T's, accounting for 54% of total worldwide motor vehicle production. By 1923 Ford had increased Model T output to 1.9 million identical units (43% of world production), which remains today the highwater mark for annual production of one model. We may term Ford's innovations, including the continuous flow assembly line, unskilled but well paid workers, and a product "designed for manufacture", the first "transformation" in the character of the motor industry. These innovations were soon complimented by a host of organizational advances introduced by Alfred Sloan at General Motors, who pioneered methods of managing the giant enterprises which Ford's production breakthroughs seemed to make inevitable. Sloan realized that a single product would not suit every "purse and purpose" (in his phrase) but that it was possible to cosmetically differentiate products without sacrificing the scale economies in mechanical parts which he believed were the key to cost competition in the industry. Similarly, Sloan experimented with ways to efficiently 3 manage the enormous bureaucracy created by production of cars in the millions and the downward integration of the assembler firms into component parts. At its peak, GM produced more than 8 million vehicles annually, covering practically the entire marketplace from cheapest to most luxurious, and added nearly three quarters of the total value in the product in its own factories. In combination, Ford and Sloan very nearly conquered the world. In the 1920s Americans were producing 85 percent of the world's motor vehicles and the U.S. and Canada accounted for about 70 percent of the world's motor vehicle exports. However, absolute conquest through exports of finished units ultimately proved impossible. The European Transformation In Europe, in particular, there was a determination to maintain a presence in motor vehicle manufacturing. European producers -- Andre Citroen and Lord Nuffield among them -- made pilgrimages to Detroit very similar in spirit to American journeys to Japan fifty years later. They observed an obsessive work ethic in America and a faith in automatic, dedicated machinery manned by unskilled labor. This was denounced as incompatible with the European tradition of skilled craftsmenship -- and copied as rapidly as possible once the European pilgrims returned home. To provide time for learning, European governments obligingly raised prohibitive trade barriers which the Americans could only hurdle by directly investing in European manufacturing. Despite rapid learning by European firms and major American investments in Britain and Germany, the European motor industry mounted no challenge to American-based production in the 1920s and 1930s. The trade barriers which kept American-made products out also stiffled trade within Europe and denied producers the mass markets available in America. It was only after the unification of the European marketplace toward the end of the 1950s that the conditions were right for an attack on American dominance of the world motor industry. The attack was not what might have been predicted. Rather than simply copying the American strategy, competing on the basis of the lower wages then prevailing in Europe, the European auto firms chose to compete on the basis of product diversity. This led to a second transformation in thought about the nature of the motor vehicle industry. Retrospectively, the basis of the European strategy was easy to see. A variety of producers, each based in one country, developed a variety of products to sell in national markets with very different tastes. Tiny cars predominated 4 in Italy, much larger sedans were the norm in Sweden, sports cars were an English specialty, and so on. The Americans viewed this proliferation of products as a sign of industrial immaturity. Detroit assumed that European producers would eventually settle on a "standard size" for the automobile, just as the Americans had in the 1920s. They would then compete in world markets on the basis of low costs made possible by lower wages and massive production volumes. Instead, when the Europeans realized that their product diversity was a strength rather than a weakness, they mounted an attack on American producers in their home market. They sought market niches Detroit had ignored, first at the bottom with the Beetle and then in luxury and sporty segments. This was not to say that Europeans ignored the advantages of mass production. Production volumes for individual products were still vast compared with pre-War practice, but the need to provide consumers in maturing auto markets with truly differentiated products was acknowledged as well. The consequences of the European strategy for U.S. auto production have been quite striking, indeed devastating, although the popular debate on Detroit's plight assigns practically all of the blame to Japan: EUROPEAN VERSUS JAPANESE IMPORTS TO THE U.S. MARKET, 1986 European Producers Japanese Producers Units Imported 650,699 2,618,708 Customs Value 10,969,366 21,057,708 (000s $) Source: United States International Trade Commission In 1986, European producers sold only 25 percent as many units in the U.S. as the Japanese but garned 52 percent of Japanese revenues! What's more, the Japanese sales were still largely at the small car end of the market, where the Americans have always lost money, while the Europeans grabbed practically the entire luxury car market, where Detroit used to earn vast sums. Can it be that Europe rather than Japan has done the most damage to the American industry? What was distinctive about the European industry was the product.