J-Firm Auto Supply
Robert E. Cole
Doshisha Business Cases 07-01
March 2007

J-Firm Auto Supply
Robert E. Cole, Omron Distinguished Professor, Doshisha University

This case was prepared by Professor Robert E. Cole with the support of Doshisha University andthe Institute for Technology, Entrepreneurship and Competitiveness (ITEC). Copyright © 2006
by Robert E. Cole, the Doshisha University. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording, or otherwise – without permission from the author or DoshishaBusiness School.

Introduction
As Nakamura Taishiro, Chief Technology Officer and Board member of J-Firm
Auto Supply, strolled through the firm’s state of the art R&D facility in Mie Prefecture,
he found himself thinking of how impressive this new facility was compared to thefirm’s humble beginnings. The firm was now capable of sophisticated nanotechnology
research and it used cutting edge simulation technology. These kinds of activities
represented a tremendous growth in the firm’s capabilities. While J-Firm had R&D
facilities in the United, Europe and Southeast Asia, this facility at Mie was at the heartof the R&D development process for the firm. Like many Japanese manufacturing
companies, J-Firm had operated with the view that technology must be developed inhouse, and in-house meant it must be developed domestically and held closely, where it
would not be lost to competitors. It had proved a highly successful formula.
Notwithstanding, he also found himself worrying about the firm’s future. The firm
had experienced tremendous growth from its modest beginnings as a supplier to only
one of the major Japanese OEMS to its eventual large scale business from four JapaneseOEMs and as well as foreign OEMs. As he saw it, the firm’s biggest challenge was tofigure out how to continue to grow revenues at the high rate the firm had experienced
over the last 20 years. At the same time, he believed that they needed to improve theirprofit performance to fund more aggressive R&D investment. Current operating profit
stood at a mere 4%. The company prided itself on not borrowing which meant that all
investment in R&D had to come from profits. With such modest profit margins,opportunities for investment were greatly limited. Moreover, the global competitiveenvironment was undergoing rapid change and success was hardly assured.
J-Firm specialized in what are increasingly called “engineered commodityproducts” --midway between custom/ system integrated products and simple

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J-Firm Auto Supply
Robert E. Colecommodity products. Its family of products included gears for transmissions, oil pumps
and differentials. They also manufactured specialized bearings, and driveshaft universal
joints and constant velocity joints. Their manufacturing competencies were in forging,machining, and assembly. These were products that a variety of other firms werecapable of producing. As a consequence, despite the fact that these products involve ahigh degree of technology, contribute unique value added, and were critical to thefunctioning of the automotive product, they command only a modest price premiumcompared to the larger system products that many of their global customers weredemanding. Moreover, long term, Nakamura is concerned about the rise of a large
number of Chinese competitors which are improving rapidly and have low labor costs.
The key to success for this family of products is finding a way to differentiate oneself
from other competitors. J-Firm has done this largely through service. They prided
themselves on working closely with customers over time as they designed their products
for specific makers. This involved paying very close attention to customer requirements
and working with them in an iterative process to meet their needs.

Changing Times
In the 1960’s and 1970’s, J-Firm developed its capabilities primarily in theJapanese market. Then, in the early 1980’s, it became leader among Japanese
automotive suppliers in aggressively building plants in the U.S. and then Europe as it
started to sell its main products to overseas Japanese plants. More recently, Japanese
OEM customers greatly expanded their operations overseas to grow their businesses andJ-Firm followed and also started to sell products to foreign customers. In the past, they
only needed to forge relationships with domestic car companies. Now there are complex
alliances such as that between Renault and Nissan and Japanese OEM’s have a presencein new places like Eastern Europe. European manufacturers like Volkswagon andMercedes Benz have production facilities in the U.S. and new production plants arebeing established in places like China and Brazil.
In short, there has been tremendous globalization and J-Firm is struggling toestablish partnerships with these various entities. With the Japanese domestic market
already beginning to shrink with the aging population, developing new business
relationships overseas has become critical to sustaining their growth trajectory. To keep
existing alliances and build new ones, Nakamura believes J-Firm must build up theircurrently modest overseas R&D capabilities to get better and more timely information
about customers requirements and to be able to work collaboratively on product design.
Moreover, he believes that they can not cover the rising needs and opportunities withjust Japanese developed technology. Increasingly, good technology can be found anddeveloped around the world. In addition, a projected shortage of R&D workers in Japan

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J-Firm Auto Supply
Robert E. Coleas a result of demographic changes is still another reason to expand R&D sites abroad.
All these developments point to the need to build up their tech centers in U.S., Europeand elsewhere. What does that mean, however, for their historic focus on domesticbased R&D as the driving force of the company? Moreover, what is the best way tobuild up these global sites given their current status and how should they be integrated
into overall R&D activities? Moreover, can this be done without damaging theirdomestic R&D capabilities?
The challenges are different in different parts of the world. Europe is hardest to
supply because of the high level of indigenous technology, demanding customers, andthe presence of strong competitors. The U.S. situation is quite different with themachine tool industry stagnant and the local auto industry in decline. However,opportunities in the U.S. present themselves in the expansion of Japanese producers andin the replacement market but the latter would require considerable investment to build
up a strong sales network. ASEAN represents still another situation where there isstrong pressure on J-Firm from many Japanese companies located in ASEAN to provide
local R&D. Here they might need a Tech Center as a hub to provide services to theseJapanese customers rather than just new and upgraded R&D sites. China presents still
another challenge. Initially, J-Firm thought it could just transfer their technology toChina in the form of exports but the local companies have been improving rapidly.
There is also movement by the local automakers to shift purchasing to local producers
and local competition is intensifying. Under these conditions, J-Firm feels strongpressure to locate facilities in China and to grow the local Tech Center to keep pacewith them. How can they do that and still protect their proprietary technology? All thesedifferent challenges made Nakamura’s head spin.

The Current Situation of Globally Dispersed R&D Units
These challenges are still further amplified by the current state of their existingoverseas R&D sites. As Nakamura thought about the status of the various overseas
R&D sites in relation to the home company, he was struck by their isolation from one
another. They have their own data systems with no shared database. Personnel in theoverseas R&D units have little knowledge or opportunity to work on the emerging
technology and designs being developed at the Mie facility. Nor do they have any
significant regularized contact with other overseas units.
The domestic R&D staff, after being recruited directly from school, goes throughrigorous and standardized training programs. One consequence of these sharedexperiences is that Japan-based R&D researchers rely heavily on tacit knowledge(shared unspoken assumptions) to do their work. By contrast, the overseas R&D staff
undergo different training regimes depending on their geographic location. Moreover,

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J-Firm Auto Supply
Robert E. Colemany of the overseas R&D staff are hired as experienced workers and have haddifferent corporate experiences shaping their approach to R&D work.
The differences between the domestic R&D workers and those overseas mean thatthey often had different views on such fundamental matters as how to analyze a problem,
how to conduct an experiment and how to organize work tasks. Further aggravatingthese differences is often a language barrier. While many of the Japanese R&D workers
have good reading skills in English, they lack English oral skills, or if they have them,
they are often too shy to try to use them. Correspondingly, few of the overseas
engineers had Japanese language skills.
All in all, these differences made it difficult for researchers to work collaboratively
across national boundaries. Somehow these barriers needed to be mitigated oreliminated. But how? Nakamura had talked with consultants at a major Japanesemanagement consulting firm about this matter. They argued that Japan’s unique social
relationships based on standardized career training, promotion and long term
employment continue to be key to Japan’s success. Any efforts to dismantle thesesystems, they said, would cause Japanese firms to lose a major competitive advantage.
For the most part, the overseas R&D sites were engaged in adapting Japanesedesigned products to the local market and served as monitoring posts. They had no
direct relationship with local automakers in their respective countries. Personnel
dispatched from the Mie facility and sales engineers assigned to the respective markets
were responsible largely for working with these overseas customers. Employees at thelocal R&D sites were not expected to exercise autonomous or very creative action;instead they were just supposed to follow orders issued by the home office. In short,these local R&D units, often consisting of 20-30 engineers, were quite disconnectedfrom the firm’s core strategic activity, designing and developing new products.
Still another problem was that the quality of talent in the overseas R&D sites,
particularly in the U.S. and Europe, often did not match that of the domestic R&D
workers. To be sure, the firm felt no need to recruit superstars. Indeed, Nakamura
believed that superstars created too many problems and interfered with good teamwork.
Still, he acknowledged that better talent for some of their overseas R&D sites would behelpful. The firm often blamed the difficulty of recruiting abroad on the fact that they
were an auto parts company and thus did not have the name recognition that large
Japanese OEM automakers had. J-firm did not even bother recruiting at major U.S. andEuropean engineering schools but aimed their efforts at a second tier level. Moreover,because not much was expected from these overseas R&D units, J-firm invested
relatively little in training and upgrading the existing talent. All these problems wereaggravated by the fact that J-firm tended to pay below market wages in the U.S. andEurope. This was in response to pressure from corporate HR to minimize the salarydifferences between domestic and overseas R&D site employees.

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J-Firm Auto Supply
Robert E. ColeThe promotion opportunities for foreign nationals in overseas R&D sites is limited.
At best, they might hope to rise to Director of the local unit but further opportunities up
the corporate hierarchy do not exist. This depresses motivation for the most talented.
The net result is a sub-optimization of local talent in these units. A major consequencesof this underutilization is that turnover of employees was high. The loss of IP associatedwith this turnover ironically is used to justify not giving important tasks to these units.
In short, there is a self-fulfilling prophecy in which lack of challenging work led to highturnover and loss of IP which is then used to justify not giving these units morechallenging work.

Conclusion
Nakamura drew a figure to capture the dilemma the company faced (See Figure 1).
In essence, he believed that the company had created a vicious cycle which perpetuatedan underutilization of overseas R&D assets. The challenge Nakamura sees is how totransform this vicious cycle into a virtuous cycle that will bring about the integration ofthese overseas R&D operations into the mainstream of product development andthereby enable J-firm to work locally with overseas customers on a close and continuingbasis. Only in this way, he believes can J-firm continue to grow their business. As hereflected on all the challenges he had just reviewed, he wondered what direction to takeand was it really possible to integrate and coordinate these units in a way that better
utilized upgraded overseas R&D assets without jeopardizing its domestic R&D assets.
He had presented his ideas to the Board a few months earlier and they had
enthusiastically supported his analysis and had authorized him to work with a small
team to put together plan of action. What policies should be central to their action plan?
Many competing possibilities filled his head. Could he achieve his dream for the firm ofdeveloping overseas R&D units whose capabilities were comparable to the domestic
R&D department? If so, he thought J-Firm Auto Supply could truly become a globalcorporation!

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Robert E. Cole

Figure 1
Unable to Become a Global Corporation by Creating a
Vicious Cycle for Underutilizing Overseas R&D Units
Little autonomy
for local units

Hire mediocre
local talent:
not-much training

Work based on unspoken
understandings in Japan;
Isolated overseas R&DunitsTurnoverhigh leading topotential loss of IP

Pay below
market salaries

Promotion
ladder extends only to
Director of local unit
Don’t utilize talentsof local staff very well

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