Chapter 3
Quantitative Analysis of the Procurement
Structure of Supporting Industries
in ASEAN 4, Republic of Korea, and Japan
Toshiyuki Baba*

1. Introduction
The aim of this paper is to describe quantitatively the procurement
structure of supporting industries for key manufacturing categories in Asia. The
term “supporting industry” refers to a group of industries that supply the diverse
parts and materials used in the production of industrial products, such as automobiles and electronic and electrical products. In this paper, “supporting industries” is defined as a general term for all industries that supply parts and materials for the production of final products, such as automobiles and consumer electronics products. In the automotive industry, for example, a few ten thousandsof parts and materials that are ultimately assembled by car manufacturers are
manufactured by a variety of companies, including first-tier, second-tier, andthird-tier suppliers. Various materials (metals, plastics, rubber, glass, fibers,etc.) and processing technologies are therefore needed to produce a complete
automobile. Thus, to produce an automobile, it is necessary to have cooperation
not only within the automotive parts industry, but with a large number of otherindustries as well.
Regarding industrial development in Asia, there has been much discussion about the need to strengthen the supporting industries in order to boost
industrial competitiveness. Indeed, countries in Asia have already spent a few
decades developing their supporting industries, not only for automobiles but inother areas as well. To what extent have Asia’s supporting industries developed*

An associate professor of Hosei University, Japan.

51

Vietnam Development Forumas a result of these efforts? In this paper we conduct a quantitative analysis of
the procurement structures for the manufacturing industries for cars, trucks andmotorcycles (hereafter automotive/motorcycle industry in this paper) as well as
electrical and electronics products (ranging from air conditioners and washingmachines to televisions, CD and DVD players, and computers, etc.; hereafter
electrical/electronics industry in this paper) in the Association of Southeast
Asian Nations 4 (ASEAN 4: Thailand, Malaysia, Indonesia, and Philippines),
Republic of Korea (hereafter Korea in this paper), and Japan, and make inferences about the procurement structures from their supporting industries.
The procurement activities associated with supporting industries arecomplex and have certain special features. For example, (1) materials are procured from a large number of industries; (2) supplier relationships are intricate,with suppliers often supplying each other, and supplier-customer roles sometimes being reversed; and (3) in many cases, first- and second-tier suppliers andothers import from other countries the materials they need for their own production, even though these materials may be available within their own country.
Trade and industrial statistics alone are insufficient to analyze these complex
industrial linkages and trade structures; it is necessary to use industrial inputoutput tables. The Asian International Input-Output Tables used in this paper
reveal the industrial structures that are composed of the industries in each country (Figure 1). By using these tables, it is possible to accurately analyze theinputs from supporting industries into the industries targeted by our analysis. In
addition, by using back-linkage analysis, it is also possible to conduct analysis
converging on infinity of the linkages in each industry that provides inputs into
the industries targeted by this analysis. In this paper, by using the Asian International Input-Output Tables, we attempt a quantitative analysis of the structureof industries that support the automotive/motorcycle and electrical/electronics
industries, which Asian countries have selectively encouraged from among awide range of supporting industries. Many studies have already conducted
input-output analyses for Asia, but many of these have focused on the analysis
of industrial structures at the national level. Analysis that pays attention to theirsupporting industries is difficult to find.

52

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 1. Concept structure of Asian International Input-Output Table0 *

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2. Methodology
2.1. Industrial input-output tables and target of analysis
The input-output tables used in this paper include the tables for theyear 1975 (8 countries, 56 industrial sectors), 1990 (10 countries, 78 industrial
sectors), and 1995 (10 countries, 78 industrial sectors) of the Asian International Input-Output Tables from the Institute of Developing Economies (IDE, 1982,
1998 and 2001). The analysis in this paper compares ASEAN 4, Korea, andJapan. The selection of the industries for this analysis is based on the generalthinking model of Asian economic development that placed Japan as the leader;in this paper, under a similar development model, Japan and Korea are seen as
advanced countries compared to ASEAN 4 in terms of the automotive, electrical and electronic industries. The subjects of analysis in this paper are the automotive/motorcycle and electrical/electronics industries. The reasons for theirselection are that they are typical examples of industries that require extensive
supporting industries, and governments have strategically fostered both of themin ASEAN 4 and Korea.

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Vietnam Development Forum

2.2. Terminology and Analytical Methodology
In this paper we conduct the analysis with an emphasis on input structures, paying attention to the procurement of materials required for production.
First, the domestic linkage effects in each country are measured for the automotive/motorcycle and electrical/electronics industries. In addition, to facilitate adetailed analysis, the terms “direct procurement” and “indirect procurement”
are introduced, as well as their related indicators.
“Direct procurement” is defined here as first procurement activities
from various industries by industry j when industry j carries out production.
Column j in the intermediate transaction segment of the international input-output tables shows the “amount procured” from which “country,” of the raw
materials needed for the production of a product in industry j. The raw materials
needed for that production are indicated under the “intermediate inputs” category. Using these features of the tables, it is possible to analyze to what extent
industry j is procuring materials from which industries in which country.
“Domestic direct procurement rate” (DDPR) is defined here as the proportionof direct procurement done domestically as a portion of all direct procurement,
as shown in Equation 1.

DDPR=

ma
ij
i =1
g m
a

·c
×100,
· · cij
a i

(1)

=1 =1

in which DDPR: Domestic direct procurement rate,cij: Intermediate input coefficient of industry j in country a,am: Total number of industries in each country, andg: Total number of countries.
Procurement activities in supporting industries cannot be expressed,
however, only in terms of direct procurement. The production linkage effectassociated with production in the supporting industries themselves brings avariety of indirect linkage effects both inside and outside the country, and generates new procurement activities. For example, let us consider the case ofindustry i, and industry j, which provides inputs to it. An expansion of production in industry i will naturally stimulate an expansion of production in industry

54Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

j as well. At this point, if industry j is highly dependent on foreign sources, themore industry j expands production to meet demand in industry i, the more
imports from other countries will increase. In other words, newly-generated
procurement activity is dependent on other countries, but the concept of direct
procurement does not include the impacts of this indirect type of foreigndependency. In order to explain the production dependence structure caused bythis kind of indirect production linkage effects, it is necessary to introduce a
separate concept from direct procurement. We define “indirect procurement” as
the procurement conducted in the processes of continuous chain production
caused by indirect linkage effects. The “domestic indirect procurement rate”(DIPR) is defined as the proportion of indirect procurement done domestically,as shown in Equation 2.
m∑ abij−1

DIPR= i=1a
×100,
Bj−1

(2)

in which DIPR: Domestic indirect procurement rate,bij: Each elements of Leontief inverse matrix of industryaj in country a,
Bj: The sum of row elements of Leontief inverse matrix

aof industry j in country a, andm: Total number of industries in each country.
Direct procurement is based on roughly the same concept as thedomestic production ratio used in the automotive industry policies of ASEAN
and other countries. It must be noted that even if, at first glance, the domestic
production ratio seems high, in many cases in reality the supply of parts or subparts and materials may depend on imports from other countries. By examining
indirect procurement, we wish to quantify the structure of foreign dependency
for the materials needed to manufacture those parts.

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Vietnam Development Forum

Figure 2. Linkage effect of automotive/motorcycle industry and electrical/electronics industry
Automotive/motorcycle industry(1995)

Electrical/electronics industry(1995)





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3. Results
3.1. Domestic production linkage effects
The automotive/motorcycle and electrical/electronics industries aresupported by an extensive range of other industries, so their linkage effects arelarge. This is one of the reasons that Asian countries have made it a priority tofoster these two industries. How large has their domestic linkage effect become
after many years of nurturing for these industries? Figure 2 shows the domestic
linkage effect of both industries in each country as of 1995. The value of thedomestic linkage effect shows the multiple of production generated in eachrelated industry for every unit of production in each of the core industries.
The figure shows that in Japan, this value is 2.7 for the automotive/
motorcycle industry and 2.2 for the electrical/electronics industry. Notably, thevalue is above 2 for both industries in Japan. This indicates that the indirect
linkage effects are greater than the direct effects, and that both industries exert alarge influence on the Japanese economy. In the case of Korea, the values are
2.2 and 1.7 for the automotive/motorcycle and electrical/electronics industries,
respectively. In ASEAN 4, they are 1.5 and 1.4, respectively. From the perspective of the linkage effect, Korea is at about 80% the level of Japan, and ASEAN

56

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

is only at about 60%. This result suggests that ASEAN 4 in particular has alower domestic linkage effect compared to Japan. This may suggest that thedomestic linkage effect is lower due to the low level of domestic procurement,
which may be due to inadequate development in their supporting industries.
3.2. Direct and indirect procurement in automotive/motorcycle industries
Figure 3 shows the trends for DDPR and DIPR for the automotive/
motorcycle industries in ASEAN 4 and Korea. Characteristics of each country
could be summarized as described below. In ASEAN 4, the direct and indirect
procurement rates from their own countries were stagnant in the 40% range
from 1975 until 1990. Overseas dependency on Japan was strong, but particularly for indirect procurement, the dependency on Japan was stronger than thaton domestic sources. Later, from 1990 until 1995, procurement from thedomestic supporting industries expanded. In ASEAN 4, it appears that supporting industries were stagnant from 1975 until 1990, but that they developed from1990 through 1995. This period of their expansion coincided with a period ofmajor economic expansion in ASEAN 4. Meanwhile, in Korea, domestic direct
and indirect procurement expanded from 1975 through 1990, to the point that
more than 80% of procurement was done domestically. From 1990 through1995 this composition continued at roughly the same level. During this twentyyear period, Korea’s dependency on its most important procurement source,
Japan, steadily declined. One could conclude that supporting industries in
Korea expanded from 1975 through 1990, and thereafter maintained the samestructure. There is a clear tendency in both ASEAN 4 and Korea for the proportion of domestic direct procurement to be lower than the proportion of indirect
procurement, and one could say that their supporting industries depend on procurement of materials from overseas, particularly from Japan. Even for indirect
procurement, however, by 1990 Korea shifted to a structure with about 80%
domestic procurement. As for Japan, over the twenty years from 1975 through1995, there was almost no change, with almost 100% domestic sources being
used for both direct and indirect procurement.
3.3. Direct and indirect procurement in electrical/electronics industries
Figure 4 shows the trends of DDPR and DIPR for the electrical/elec-

57Vietnam Development Forum

Figure 3. DDPR and DIPR of automotive/motorcycle industry
ASEAN 4: DDPR of automotive/motorcycle

ASEAN 4: DIPR of automotive/motorcycle

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975

1980

1985

From ASEAN 4
From Japan
From Singapore

1990

1995

1975

1985

From ASEAN 4
From Japan
From Singapore

From Korea
From USA

Korea: DDPR of automotive/motorcycle

1980

1990

1995

From Korea
From USA

Korea: DIPR of automotive/motorcycle

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975
1980
1985
1990
1995
From ASEAN 4
From Korea
From Japan
From USA
From Singapore

1975
1980
1985
1990
From ASEAN 4
From Korea
From Japan
From USA
From Singapore

1995

tronics industries in ASEAN 4 and Korea. The characteristics of these countries
could be summarized as described below. In ASEAN 4, the direct and indirect
procurement rates from their own countries declined significantly from 1975
through 1990, as dependency shifted from domestic to foreign sources. This
foreign dependence continued during the 1990s. Of the foreign sources,

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Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 4. DDPR and DIPR of electrical/electronics industry
ASEAN 4: DDPR of electrical/electronics

ASEAN 4: DIPR of electrical/electronics

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0
1975

1980

1985

From ASEAN 4
From Japan
From Singapore

1990

1995

1975

From Korea
From USA

1980

1985

From ASEAN 4
From Japan
From Singapore

Korea: DDPR of electrical/electronics

1990

1995

From Korea
From USA

Korea: DIPR of electrical/electronics

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975

1980

From ASEAN 4
From Japan
From Singapore

1985

1990

From Korea
From USA

1995

1975

1980

From ASEAN 4
From Japan
From Singapore

1985

1990

1995

From Korea
From USA

dependence on Japan and the United States steadily increased over these twenty
years. In ASEAN 4, between 1975 and 1990, for both direct and indirect procurement there was a shift from domestic supporting industries towards choosing more foreign procurement. This structure has continued since then. Meanwhile, in Korea, domestic direct and indirect procurement expanded during the59Vietnam Development Forum

period from 1975 through 1990, to the point that about 60% of procurement
was sourced domestically. From 1990 until 1995, the foreign proportion of procurement increased. In Korea, direct and indirect procurement from domestic
supporting industries expanded from 1975 through 1990, but after 1990 thistrend was reversed, and it appears that in many cases procurement from overseas increased. In those cases, the main sources were Japan and the UnitedStates. As for Japan, over the period from 1975 through 1995, the compositionof domestic procurement stayed above 90%, for both direct and indirect procurement. During this twenty-year period, however, the procurement ratio fromforeign sources has steadily increased, with the largest foreign supplier being
the United States.

4. Review
The above discussion has been on a country basis, but because thisanalysis revealed that there were differences between the automotive/motorcycle and electrical/electronics industries with regard to changes in direct andindirect procurement, the author would like to proceed now by focusing theanalysis on industries. First the author summarizes the results of analysis to thispoint. For the automotive/motorcycle industry (with the exception of Japan,
which procured almost 100% domestically), between 1975 and 1995, Korea
shifted to an industrial structure with over 80% domestic procurement, followed
by ASEAN 4, which also increased its domestic procurement rate. The changes
in procurement for both ASEAN 4 and Korea were similar in that they generally experienced a steady expansion of domestic procurement. Meanwhile, in theelectrical/electronics industry, from 1975 through 1995, in Korea the domestic
procurement expanded temporarily, but then foreign procurement increased
again.
ASEAN 4 shifted towards an industrial structure with foreign dependence, with foreign exceeding domestic procurement, and this structure persisted. As shown above, the automotive/motorcycle industry emphasizes domestic
procurement, while the electrical/electronics industry is structurally foreigndependent.

60Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

4.1. Differences in characteristics of parts
How did this difference arise between the automotive/motorcycle andelectrical/electronics industries? To begin with, one could consider the differences in characteristics of the parts being handled. The characteristics of automotive and electronic parts differ greatly. The first aspect is the nature of thoseparts. Many automotive parts are large and heavy, while many electronic parts
are small and light; thus, one could say that automotive parts are not as easilytransported as electronic parts. In interviews with car manufacturers, procurement managers state that one of the reasons they have encouraged local production and procurement is the nature of automotive parts, and their transport-related characteristics.
Conversely, electronic parts are light. Thanks to this, they are easy totransport by air. Interviews with Japanese electronic parts makers indicated thatmany of these exports are carried by air transport. In addition, due to their small
size and light weight, electronic parts are likely to be high in value per gram. In
studies on procurement of electronic parts in developing countries, Kodama andKiba (1994), Letchumanan and Kodama (2000) and others have shown quantitatively that the higher a part’s value per gram, the more likely is the dependency on foreign production. Based on such differences in the nature of parts, compared to automotive parts, electronic parts could be characterized as being easier to import.
The second aspect relates to design and standardization. It is common
for automotive parts to be custom-designed for each car model. Electronic parts
are more commonly composed of standardized components. Kokuryo (1999)
presented the concept of “open architecture.” Fujimoto (2001) and Shibata(2001) assert that automobiles are composed of non-standardized parts in aclosed architecture, while products such as consumer electronics products andpersonal computers are composed of standardized parts in an open architecture.
In addition, Shibata gave the label of “black box” parts to automotive parts
designed through cooperation between car makers and parts makers, and pointed out that many automotive parts consist of these parts. Substitution of suchspecialized “black box” parts is not easy, making it difficult to purchase themfrom just any source in the world. In contrast, electronic parts are standardized
and can be easily substituted thanks to their modular design, making it possible

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Vietnam Development Forumto procure them from anywhere in the world, depending on cost and performance. These differences in the physical features and standardization of parts arethought to be among the factors affecting differences between the procurement
situations for automotive and electronic parts.
4.2. Differences in quality required by the market
Next, one could also consider differences in the quality required by
the market. If the we calculate each country’s domestic demand ratio in theautomotive/motorcycle and electrical/electronics industries from each year’s
figures from the Asian International Input-Output Tables, we see for 1975
through 1995 that in ASEAN 4, the automotive/motorcycle industry was almost
completely oriented toward satisfying domestic demand. The
automotive/motorcycle industry in Korea was also mainly focused on domestic
demand. Meanwhile, in the electrical/electronics industry, from 1975 through1990, in ASEAN 4 the industrial structure was focused on exports, and this tendency became stronger after 1990. In Korea as well, the export ratio of the electrical/electronics industry was high, compared to that of the automotive/motorcycle industry, and production for overseas exports rose steadily. Aoki (1993)
states that one issue regarding Malaysia’s electronics and electrical equipment
is that its industrial structure requires the import of more than 50% of the intermediate materials needed to produce manufactured goods for export. He indicates that the reason for this is that procurement cannot be done from thedomestic supporting industries, so the raw materials and parts must be imported. A number of inferences can be made from these points. Specifically, theautomotive/motorcycle industry was oriented toward satisfying domestic
demand, and products were acceptable at a level that was competitive domestically. For this purpose, it was not necessary for procured parts to be of highquality. In contrast, because the electrical/electronics industry was export-oriented, it was necessary to manufacture products that were internationally competitive. One could infer that in cases where domestically procured parts could
not achieve the required quality, it was necessary to procure high-quality parts
from overseas.

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Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

4.3. Differences in policies
One final aspect is differences in policies. ASEAN countries eitherbanned imports or placed high import duties on automotive parts in line with
policies to promote the domestic production of these parts. Meanwhile, ASEAN
countries poured their efforts into encouraging exports and gave preferential
treatment to exporting industries, using, for example, import duties and importsurcharges on the parts and raw materials necessary for production of export
products. Because the electrical/electronics industry was export-oriented, as
shown above, it was possible to import electronic parts duty-free or with very
favorable import duties. The differences between the automotive/motorcycle
industry compared to the electrical/electronics industry (in both direct and indirect procurement) are probably also due to such factors.

5. Conclusion
We have conducted an analysis of the procurement structure of theautomotive/motorcycle and electrical/electronics industries in the Associationof Southeast Asian Nations 4 (ASEAN 4), the Republic of Korea, and Japan,
and made some inferences about the state of development of their supporting
industries. It was not possible to draw conclusions on a country basis regarding
their supporting industries, so it was necessary to examine things by industry. In
the automotive/motorcycle industry, each country increased its domestic direct
and indirect procurement year by year, and supporting industries expanded. In
the electrical/electronics industry, however, the opposite results were found. We
could conclude that the automotive/motorcycle industry emphasizes domestic
procurement, while the electrical/electronics industry is structurally foreigndependent. Reasons for these differences include such factors as differences in
the nature of parts, differences in the quality required by the demand markets,and differences in government policies.

References

Aoki, K. (1993). The export-oriented strategy: The light and shadow seen in Malaysia.

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