No. 78

社団法人 日本経済研究センター

Japan Center for Economic Research

March 2, 2006

Are Japanese Companies Closed in Their Local
Procurement Practices?
A Case Study of Auto Makers Operating in China
Fumihide Takeuchi, Associate Senior Economist
Shigesaburo Kabe, Senior Economist
Japanese manufacturing companies operating overseas are sometimes criticized bytheir host countries for not being positive about purchasing parts and materials fromindigenous firms. However, the selection of vendors is liable to be influenced by thetechnological capability of suppliers as well as the existence of an information network,
which develops only after a long period of operation in the host country. This study isa statistical analysis of automobile makers operating in China to ascertain whether
Japanese enterprises are “closed” in their procurement practices even after thesefactors are taken into account.

“Rational” if Based on an Assessment of Technological Capability
There has been persistent criticism in host countries, which expect technology
transfer through transactions between foreign companies and indigenous enterprises,that Japanese companies operating overseas are not positive about procurement fromindigenous firms and that their transactions are primarily with Japanese parts makers.
Japanese companies have the disadvantage of not having formed sufficient networks
with indigenous parts makers, because they have not operated overseas as long as their
Western counterparts. However, it has often been pointed out that practices unique toJapanese companies, such as heavy trading with affiliate, or “keiretsu” companies, standin the way of procurement from indigenous firms.
It could be argued that such practices result from the high marks that Japaneseassemblers give to the technological capability (high productivity) of Japanese parts
makers and that this is a rational decision. The question is whether there are someforms of “closed” business practice on the part of Japanese companies, even after taking
into account the technological capabilities of parts makers and the periods ofhost-country operations by assemblers.
This study has analyzed whether or not there are differences in the modes of local
procurement by Japanese, U.S. and European auto assemblers operating in China. It
forms part of “Multinational Firms’ Strategies in East Asia” (Organizer, Kyoji Fukao,Professor, Hitotsubashi University), a study being undertaken by JCER.

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JCER Staff Report No.78

Twenty-eight Japanese, U.S. and German Auto Makers Examined
Data on whether there were transactions between the approximately 350
automobile partsmakers and the 28 automobile assemblers operating in China, as wellas the attributes of each firm were obtained from two types of statistics found in China
Automotive Industry Yearbook 2004 and China Auto Parts Supplier Directory 2004.
Then, a probit analysis was conducted to find out the degree of influence of thefollowing explanatory variables on the approximately 9,800 trading relationships (350 x28) that were observed.
Variables that represent the attributes of parts suppliers are (1) nationalities(Japanese, U.S. and German); (2) labor productivity (or capital-labor ratio); (3) amountof assets; (4) location (Hubei, Tianjin, Jiangsu and Jilin), and others. The distance
between the parts supplier and the assembler and the number of years of operation in
China of the assembler were also used as variables. Manufacturers’ nationality andlocation are represented by a dummy variable that takes the value 1 if relevant
enterprise and 0 otherwise.
The parts suppliers in the sample include a considerable number of Chinese
enterprises as well as Japanese, U.S. and European firms, while assemblers do notinclude Chinese enterprises. The key lies in the coefficient of the dummy variable
representing the nationality, after taking into account the scale and productivity of theparts supplier. The coefficient is obtained by using Chinese parts suppliers as the base.
If it is positively (negatively) significant, it means that the Japanese, U.S. or European
nationality of the parts supplier is contributing to an increase (or a decline) in theprobability of transactions with the assemblers, as compared with Chinese parts
suppliers. Then the magnitude of the coefficient in comparison with U.S. and German
dummies will be examined.
Like labor productivity, the capital-labor ratio is a proxy variable of thetechnological capability of a parts supplier. The location dummy was used to examine
the benefit of being located in an automotive-industry cluster, or the effect of economiesof agglomeration.
“Something” Other Than Productivity and Years of Operation Is at Work
Table 1 shows the results of probit analysis about determining factors of Japanesecompanies’ procurement practices. The coefficient for nationality (Japanese) is very
high compared with American or German assemblers. Table 2, on the other hand,shows the results when the dependent variable is the existence or non-existence oftrading relations with German or American assemblers. The coefficient for the

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JCER Staff Report No.78

Japanese nationality is negative. Examining the magnitude of the nationality dummywhen the parts supplier and assembler are of the same nationality, unlike in the case ofJapanese companies, the trend that transactions are concentrated in the same-countrycompanies is not observed in the case of U.S. or German companies.

Table 1. Procurement Behavior of Japanese Auto Makers(Figures are coefficients obtained from estimations based on a Probit Model.
*Denotes the level of significance of the coefficient)
Explanatory variables
Constant termParts supplier attributes
JapaneseNationality
U.S.
(dummyCombination of variables that explain transactions
with Japanese assemblers
Model 1Model 2Model 3Model 4Model 5
-1.63 *** -1.69 *** -1.70 *** -1.69 *** -1.69 ***0.890.26*** 1.34
0.26***1.470.22*** 1.32-0.06*** 1.45
0.18

0.37

* 0.36*0.35* -0.06

0.01

Labor productivity -0.14
Productivity
Capital-labor ratio
Japanese only
Laborproductivity U.S. only
German only
Japanese only
CapitalU.S. only
labor ratio
German only
Amount of capital
3.32
Hubei
-0.73
Location
Tianjin-0.02(dummyJiangsu-0.41
variable)
Jilin
-0.22
Distance from the assembler
Distance-0.78
Square of distance
0.18
Distance (Japanese part suppliersonly)

0.06

variable)

GermanSquare of distance (Japanese partsuppliers only)

Assemblerʼs years of operation inChina
No. of samples
McFaddenʼs coefficient ofdetermination

Notes:

-0.04
0.06

-1.49

***

0.03

*-1.36
2.92
3.86
-0.94

**

2.48
** -0.74
-0.05
-0.43
-0.29

1.97
** -0.76-0.06* -0.42-0.23

2.61** -0.73-0.03* -0.36
-0.25

-0.09
0.07
0.78
2.19
** -0.75
-0.06
-0.38
-0.21

*** -0.69*** 0.15*** -0.74** 0.18*** -0.69*** 0.15*** -0.73** 0.17

-0.53

-0.43

-0.52

-0.43

0.17

0.12

0.17

0.12

1.49

1.67

* 1.49

**

1.53

1.63

4152

4152

4152

4152

4152

0.10

0.11

0.10

0.120.10

*
*
**

***
***

***: Significant at the 1 percent level; **: Significant at the 5 percent level; and *: Significant at

the 10 percent level.

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JCER Staff Report No.78

Table 2. Procurement Behavior of German and U.S. Auto Makers(Figures are coefficients obtained from estimations using the Probit Model*Denotes the level of significance of the coefficient)Transactions with German
Transactions with U.S.
assemblersassemblers
Model 1Model 2Model 3Model 1Model 2Model 3-2.38 *** -1.38 *** -1.41 *** -0.27* -0.31 ** -0.37 **Explanatory variables
Constant termParts supplier attributes
Japanese-0.42-0.22
Nationality
U.S.
0.93 *** 0.52
(Dummy variable)
German1.15 *** 0.80
Productivity
Labor productivity 0.70 ** 0.38
Capital-labor ratio
Labor productivity
Home country only
1.33
Capital-labor ratio
Home country only
Amount of capital
-2.88
-1.08
Hubei-0.36-0.22
Tianjin-1.30 *** -0.66
Location (Dummyvariable)
Jiangsu
-0.00
0.03
Jilin
-0.12
-0.11
Distance from the assembler
Distance-2.47 *** -1.31
Square of distance
0.75 *** 0.39

-0.22
-0.82
* -0.81* -0.82**** 0.48 *** 0.69 *** 1.18 *** 1.56 ***** 0.84 ** 0.67 *** 0.67 *** 0.64 *****0.40* 0.39*0.13 **
0.15 **
0.23
0.15
-1.19
-1.54
-9.79
-9.91
-9.43
-0.28
-0.58 ** -0.58 ** -0.64 ***** -0.67 *** -0.18
-0.18
-0.23
0.01
0.18
0.18
0.16
-0.07
-0.83 ** -0.84 ** -0.55 ****** -1.27 *** -1.47 *** -1.41 *** -1.35 ****** 0.38 *** 0.34 *** 0.32 *** 0.31 ***Distance (home country suppliers only)-3.07 *** -3.09 ***

-0.68

-0.60

Square of distance (home country suppliersonly)

1.47 *** 1.48 ***

0.15

0.10

** -5.05** -4.68

Assemblerʼs years of operation in China

12.92 *** 7.18 *** 7.24 *** -5.00

No. of samples

1384

1384

1384

1730

1730

1730

McFaddenʼs coefficient of determination

0.14

0.16

0.160.19

0.20

0.18

**

Notes: ***: Significant at the 1 percent level; **: Significant at the 5 percent level; and *: Significant at
the 10 percent level.

The results of these analyses lead to the conclusion that Japanese auto assemblers
operating in China are concentrating their sources of parts to Japanese suppliers forfactors which cannot be explained by the level of productivity of parts suppliers or thenumber of years of operation of the assemblers in China. Unlike U.S. or Europeancompanies, Japanese assemblers do not appear to be basing their purchasing decisions
on the level of productivity of parts suppliers. It is possible that factors other thaneconomic rationality are at work here.
Even though the results of these analyses are only provisional, they neverthelessattest to the peculiar character of the procurement practices of Japanese companies.
We hope to make further analyses of the impact of these procurement practices peculiar
to Japanese companies on corporate profitability, as well as to further examine the
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JCER Staff Report No.78

reliability of these results by scrutinizing other explanatory variables that affectcorporate procurement behavior.

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