Toyota and Denso – A Rarely Researched Aspect of Japan's Competitiveness: Abridged Version

Evelyn Anderson (Lecturer, Australian Catholic University)

(Abridged version of the paper presented at the 13th Biennial Conference of the Japanese Studies Association of Australia, held at the Queensland University of Technology in Brisbane, Australia, July 2 – 4, 2003)

The keiretsu concept gained enormous currency in the 1980s, when many observers attributed the success of the Japanese automobile industry as a whole to this uniquely Japanese industrial structure. The number of articles that dealt with this subject matter grew dramatically during this period. Both academic and anecdotal interests on this topic reached new heights in the latter half of the 1990s as two major Japanese assemblers were taken over by foreign concerns and the keiretsu system frayed progressively at the edge. This seemingly paradoxical development left many analysts dumb-founded and a vacuum exists today as to how such contradiction can be best reconciled.

Miwa and Ramseyer (2002) broke new grounds by making an unequivocal statement. That horizontal keiretsu exists only as figments of imagination in the mind of academia and populist journalism. In an earlier article (2000) they analysed the Japanese automobile industry and were hoping to prove that Williamson's credible commitment in the form of Relationship-Specific Investment (RSI) is not widely found in this industry within a vertical keiretsu framework.

This paper attempts to show that the noble notion of commitment was made credible, but not necessarily with the aid of RSI, or cross-shareholding. It did exist in a fabled world, albeit a small one, where the aged old samurai tradition was honoured and the gentleman's word was his bond. Although the vocabulary and the paradigm used here were not what business literature made them out to be, the economic consequence was nevertheless as reliable as sound economic theories had predicted.

Unlike the bulk of previous literature, this paper concentrates on the case study of one company. The company studied is not Toyota per se, but an important and related company, which has hitherto received little attention from academic and the media alike. The company studied is Denso. Its relationship to Toyota, in the mind of the latter's founder, would be the equivalence of Microsoft to IBM in the modern era. The study reveals that the keiretsu notion perceived in popular culture is not the same as that is used in the Toyota language. In this respect, this paper lends support to the latest controversial claim that keiretsu, the way it has been misinterpreted, would not constitute a sustainable competitive advantage for the giant automaker.

Denso's achievement was obvious. The company was first housed within Toyota as an electrical department. At the time, the department lacked capital and human resources with the requisite technology. It was fortuitous that the post war economic circumstances forced upon Kiichiro Toyota to shed its own electrical department. The independent Denso also had the good fortune to have Bosch as a partner who willingly imparted with proprietary technology.

Denso survived against all odds despite a very difficult start. In fact the company managed to thrive partially through the open relationship that Toyota encouraged Denso to develop with other carmakers. Whether that was a Toyota policy by design is a moot point here. The important point is that through Denso seeking out customers other than Toyota and through diversification, the company gained invaluable expertise and economy of scale. The two seemed to feed upon each other, the end results of which were not difficult to see.

In this respect, Toyota's strategy differed from other Japanese carmakers. The keiretsu system that Toyota had developed, at least as far as Denso was concerned, was not exclusive. The only excluded customer was Nissan, which was considered to be Toyota's archenemy, for the two companies were neck-to-neck in terms of domestic market share in the 1960s through to the early 1990s. As if by tacit agreement, Denso supplied to every other car assembler but Nissan right from the inception of the company. It was this very open relationship with other car manufacturers, Nissan excepted, that gave rise to Denso's competitive advantage which in the end, translated back as strength for Toyota vis a vis the latter's archrival Nissan.

Denso had developed ahead of Toyota in a number of instances. The company took the prestigious Deming Prize four years ahead of Toyota. In doing so, Denso paved the way for Toyota to implement its own Total Quality Control program. Denso worked closely with Toyota in product design, and the company was obviously innovative and proactive in new product development and in providing creative technological solution, the most notable of which was the O2 sensor and the microcomputer in the EFI system. It has also assisted Toyota in lowering co-ordination costs with the SIMS management system. As Denso constitutes about 14% of Toyota's value added, any innovative cost reduction at this level has the greatest impact on Toyota's competitiveness. Indeed Denso must be an invaluable asset to Toyota.

The hierarchical paradigm of Japanese society naturally drew focus on Toyota as the chief commander at the top of a pyramid structure. This paper attempts to document what underpinned Toyota's success may not be solely Toyota itself. Rather, it argues that Denso played a far more important role than credit was given.

The Toyota-Denso relationship paid off handsomely. Toyota's phenomenal success has been so well documented that it would be superfluous to reiterate here. Needless to say, Denso's achievement has been truly impressive. The company's sales multiplied eight folds in a ten year period between 1964 and 1974. In that ten-year period, the company experienced a double-digit annual growth on average, and in some years, the growth reached as high as 30%. The company grew three times during the same period in terms of the number of employees.

In summary, the Toyota success story can be explained in terms of game theory and transaction costs with the strong sense of trust historically developed between Toyota and Denso, where the latter's competitiveness has resulted from its open relationship with some other automakers. In this sense, Toyota's competitive advantage does not seem to be due to the so-called keiretsu relationship, i.e., its exclusive relationship with subcontractors or affiliates.

References:

Miwa, Y., and Ramseyer, J. M. (2000), "Rethinking Relationship-Specific Investment: Subcontracting in the Japanese Automobile Industry," Michigan Law Review, 98.8, 2636-2658.

Miwa, Y., and Ramseyer, J. M (2002), "The Fable of the Keiretsu," Journal of Economics and Management Strategy, Summer, 11.2, 169-224.