From Copycats to Quality
Issues in Leveling Up Manufacturing
Industries in Developing Countries

Kenichi Ohno(GRIPS/VDF)

June 18, 2005

General Questionsz Can latecomer countries with weak domestic

capability industrialize under globalization?
z What is the pattern of successful
industrialization in latecomer countries?
z What is the appropriate industrial strategy inthe early 21st century?
z Can government and ODA really help
industrialization? How?

1

Past Industrial Strategies
z Free trade doctrine (19th century UK, IMF&WB)z Socialist planned economy (USSR, China, Vietnam)z Infant industry protection (Japan, Korea)z FDI-led growth but gradual trade andinvestment liberalization (Thailand, Malaysia, Indonesia)Î But today, free trade and investment is required
from the early stage of development
Î Global competition is dynamic and intense (esp.
with China)

Development of Motorcycle Industry with import ban,
localization requirement and tariff protection
VietnamThailandIndonesia

1960
1964 Vietnam War
1970

1975

1964 Yamaha
1965 Honda
1967 Suzuki
1971 Local content restriction(over 50%); ban on construction 1971 Hondaof new asembly plants
1974 Yamaha Suzuki
1977 Local content restriction1977 Local content restriction(more than 70%); lifting of ban onwith penalty
new assembly plants of 1971
1978 Ban on importing CBU
Increasing tariff for parts

1980
1986 Doi Moi
1990
1993 Local content restriction
with incentive
1996 Suzuki
1997 Honda, ban on importing
CBU
1999 Yamaha
2000
2003 Import Liberalization ofCBU

1996 Import Liberalization of1997 Abosolution of local
content restriction
1999 Import liberalization ofCBU

Source:Kohei Mishima in
VDF industry
book (2005)2

Three Recent Ideasz Business architecture theory (explaining Japan’s
manufacturing strength & weakness)

Prof. Takahiro Fujimoto (Tokyo Univ.)z Three-stage industrial development (stylizedfact from extensive empirical research)

Prof. Keijiro Otsuka & Prof. Tetsushi Sonobe (GRIPS)z FDI-led growth + promotion of domestic

capability & linkage (policy proposal to Vietnam)
Prof. Kenichi Ohno (VDF/GRIPS)Î Can we combine these ideas?

ReferenceszTakahiro Fujimoto, Japan’s Manufacturing (monozukuri)
Philosophy, Nihon Keizai Shimbunsha, June 2004 (Japanese).

zTetsushi Sonobe & Keijiro Otsuka, Roots and Strategies ofIndustrial Development: Lessons from the East AsianExperience, Chisen Shoin, June 2004 (Japanese).

zKenichi Ohno & Nguyen Van Thuong, eds, Improving
Industrial Policy Formulation, VDF/Publishing House of
Political Economy, forthcoming (English & Vietnamese, preliminary
printing in March 2005) (Especially Chaps.1&2).

3

(1) Business Architecture
Theory (Fujimoto)
How parts are designed and connected:
Integral—designing unique parts for each product,adjusting interface carefully for high performance
Modular—combining common parts available in themarket for ease, speed and flexibility

ClosedIntegral

Modular

Closed Integral TypeJapanese motorbike, car, minisize consumer electronics,
game software

Closed Modular Type
mainframe computer,machining tool, lego (toyblocks), etc.

OpenOpen Modular Type
Chinese motorbike, computersystem, internet products,
bicycle, etc

Performance vs. Time
Performance
Integral

ModularTime4

Implication for Business
Strategyz Architectural design of industry & productmay change over time and across countries
Computer: integral Î modular
Motorbike: Japan (integral) vs. China (modular)z For competitiveness, product architecture

and organizational capability must match
Integral product<==> Integrated organization

long-term relation, information
sharing, integrated decision

Modular product<==> Open organization

Decentralization, outsourcing,
contract based on low priceSuccessful Production
Partnership
From the viewpoint ofbusiness architecture
matching,
Japan & ASEAN
USA & China
are potentially goodpartners

Japan

Integral Countries
Modular Countries

China

Potentially nodirect competition
if products arechosen properly

TaiwanUSA

Industrialized

ASEAN
Developing

Based on Prof. Fujimoto’s
presentation modified by K. Ohno5(2) Observed Pattern of Industrial
Development (Otsuka & Sonobe)zA common three-stage pattern was found fromextensive empirical research
Japan, Taiwan, China, India, Philippines, Ghana, etc.

<Endogenous Industrial Development>(1) Initiation(2) Quantitative expansion(3) Quality improvementz

Each transition may be carried out by merchant-type
entrepreneur or engineer-type entrepreneur

Image Chart

Global Competition
Creativeimitator(3) Quality improvement

CompetitivenessElimination of copycats

BREAK
THROUGH

Low quality(2)

Excesscompetition

Copycats(1)
Initiator

Low price& low profit(2)

No R&D
Copycats

6

Suggested Policies
Otsuka & Sonobe propose the following:
Initiation

Quantitativeexpansion

Qualitativeimprovement

Reduction oftransaction
costExpanding
innovative
opportunities

Agglomeration support
Model plants
FDI attraction

Creating trading
posts (ichiba) &industrial zones

Intellectual support
Technical &vocational
training
Technicalassistance

IPR protection
Higher education
R&D in industrial
technology

Some Comments
Vietnam’s problem—how to move from Stage 2 toStage 3 (prepare for China, FTAs & WTO)z Africa’s problem—how to start Stage 1 and reachStage 2z Should Gov’t assist in every step (VN already has too
many copycats)?
z Gov’t failure may be serious due to the lack ofinformation, political pressure, etc
z Need to incorporate impacts of global integration
into this framework more fullyz7

(3) FDI-led Growth & Strengthening
Domestic Capability (Ohno/VDF)
Policy advice to MOI & MPI (also by “4J”)
Strengthen FDI marketing--FDI inflow is still below
critical level to ignite strong industrializationz Indirect competition--VN can’t compete directly inglobal markets now; link with FDI to compete!
z Strategic positioning--end extensive quantitative
targets & join East Asia’s production networkz Break the glass ceiling--go beyond agglomerationto achieve production management & design skillszVietnam’s Industrial Dualism
Domestic Sector

Export Sector(Hitherto protected)(Competitive under free trade)

supplying domestic
marketMissing link

Materials& parts

FDI assemblers

Vietnamese firms(SOEs, SMEs,mini-industry groups)(EPZs, IZs; EPEs)
Missing link

Assembledproducts

Global Production Network

FDI firms

Is direct competition possible?

8Agglomeration
Initial concentration has anaccelerating effect
SiliconValley

Fragmentation
PB: production block
SL: service link

International division of laborin parts production & assembly

SLPBSLPBSLPBPBSLSLPB

How to Participate in Asian Dynamism
Become a link in the regional production network byagglomerating a particular process in Vietnam--New products are always emerging (esp. electronics)--MNCs are constantly looking for alternative location
Illustration
Vietnam
Parts
Assembly
Materials

TaiwanR&D
DesignJapan

ChinaParts

MarketingHong Kong

ThailandSoftwareIndia9Building Optimal Regional Links
While localization (agglomeration) is important,
optimal localization is not 100%:z Internalize processes in which VN has dynamic
comparative advantagezOutsource other things from the rest of Asia

If this choice is made incorrectly, VN will losecompetitiveness
VN is ideally located to become a bridge between
China & ASEAN (all Japanese business men say so)

Breaking the “Glass Ceiling”

Technicalabsorption
Agglomeration

STAGE ONE
Simplemanufacturing
under foreign
guidance

Vietnam

STAGE TWO
Have supporting
industries, but still
under foreign
guidance

Creativity
STAGE THREE
Technology &management
mastered, canproduce highquality goods

STAGE FOUR
Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Korea, Taiwan

Thailand, Malaysia
No ASEAN countries have broken through theinvisible barrier between Stage Two & Three.

10Preparing to Go Beyond
While VN’s immediate goal is agglomeration, itshould also prepare for technical absorptionz VN can become the first country in ASEAN to breakthrough the barrier if its highly skilled labor iscombined with--Good government policy--Good enterprise managementz If this happens, Japan & Vietnam will become ideal
production partners for integration-based products
zSome Questions for Vietnamz Continuity from Stage 2 to Stage 3?
z Survival under market segmentation?
z Can government effectively intervene?
z Do these theories say anything new?

11

Can Locals Survive and Prosper?
z Emerging local enterprises--can they survive

global integration & competition?
Lixohaka (motorcycle), Lotus Steel (galvanized steel),
Hoa Phat (furniture etc), Sacombank/Dong A Bank(finance), Hai Au (transport), Fivimart (retail distribution),
Biti’s (footwear), Vinamilk (SOE: dairy products),
Saigontourist (SOE: tourism), SSC (SOE: billet & coldrolled steel), etc
Can they survive by themselves or do they need foreign
partnership & support?

AlternativeScenarios(3) Qualitative improvement
Domestic firms are major players; or(2) Quantitativeexpansion(1) Initiation

Domestic firms are minor players; orLocalFirms

Domestic firms are eliminated

FDI &Imports

12Market Segmentation
FUTURE?
NOW

High

Local

MiddleLow

MiddleQuality

ORLocalLow Quality

High

Virtually All
Foreign

HighMiddle
Low

Can Policy or ODA Help?
z Is it possible (for officials) to distinguish?
z Unproductive copycats (who drive out quality

producers and perpetuate low-quality, low-price, noimprovement trap)z Innovative imitators (who absorb new technology& management and accelerate industrialization)z Does gov’t know how to intervene effectively?
z Political pressure/connection to distort policy

13

What Do These Theories Say?
z Similarity & overlapping of 3 ideas (from different
viewpoints of theory, empirical study and policy advice)z Not just quantitative expansion, but levelingup of technology & operation is essential--This is what Japanese FDI & ODA have been saying &doing all along (finding local venders, training programs, JICAexperts, JP-VN Joint Initiative, study in Japan, VDF…)--But these theories put ongoing efforts into a new context
and framework--This may help Vietnamese policy makers to thinkregionally/globally and improve capability

The End14