Out Sourcerer

Japanese manufacturers insist that, when it comes to outsourcing here, the quality of U.S. components is a problem. What kind of magic is necessary to achieve a better than 50 percent local procurement ratio?

December 1 1990 by Chief Executive


Before his death in 1989, the founder of Matsushita Electric Industrial of japan, the world’s largest electronics firm, Konosuke Matsushita, saw that Japan would have to emerge from its closed industrial society in order to become a truly global business force. He called the final chapter of his last book “Japan Alone Can’t Prosper,” and wrote: “lt is impossible for Japan alone to prosper while its partners suffer huge trade imbalances…. [T]he moderation of Japan’s export drive is necessary in order to sustain the system of free trade, which will serve our long-term national interests. A drastic increase of imports, especially finished products, is of equal importance.” Now the company he founded, through its US. subsidiary, Matsushita Electric Co. of America (MECCA), appears to be embracing his last words under the guidance of its chairman and CEO, 56-year-old Akiya 1mura.

Established in 1918, Matsushita employs 190,000 worldwide, at 117 operating sites in 38 countries. Its 14,000 products are marketed under the Panasonic, Technics, Quasar, and National brand names. Net income in the fiscal year ended March 31, 1990 was $1.74 billion on sales of $44 billion, which is a 10.4 percent gain for the year. 1mura, who first joined Matsushita in 1957, was named president and CEO of MECA in 1987, following a 12-year stint heading up the company’s UK. operation, where his job was to “Anglicize” the subsidiary.

Taking a step to signal the same goal in the U.S., he moved up to chairman and CEO in 1989, when Richard A. Kraft was appointed president and COO, the first American to serve in that capacity. But with 1mura still in control of the firm, Kraft’s job is widely viewed as an opportunity for greater responsibility. A bigger step followed in 1990, when Matsushita went after US. entertainment marketer MCA.

In Japanese Matsushita sounds like maneshita, the word for copycat. The “Americanization” of MECA, symbolized by the planned Matsushita MCA acquisition, clearly follows Sony’s $5 billion purchase of Columbia Pictures, and is expected to cost from $6.7 billion to $7.5 billion. That’s enough to signal the firm’s commitment to its founder’s ideas. Writing in The Wall Street Journal, Yumiko Ono saw the point at once: “A deal with MCA would heighten Matsushita’s efforts to promote an international corporate image-answering US. criticism that Japanese companies weren’t importing enough.”

MECA itself is also moving to reverse the U.S.-Japan trade imbalance. Them first export to Japan of color TV’s made in MECA’s Illinois plant took place in 1988. Microwave ovens made the same reverse journey in 1989. MECA has a New Jersey high-definition TV (HDTV) lab in the works, and even bigger news is the $661 million Panasonic Corporate Campus planned for Texas. 1mura has announced goals of 50 percent local production by 1993 and 70 percent local content by 1997.

From the outsourcing perspective, a more significant event is an announced $10 million aluminum foil plant for Knoxville, Tenn. MECA, as 1mura told Chief Executive ‘s top two editors, is building the plant because it couldn’t find an acceptable U.S. supplier for micro-thin capacitator foil. Since all the foil used in the US. currently comes from Japan, this is a win-win step for MECA. At the same time that the company is throwing its gauntlet in the face of U.S. suppliers who claim that Japanese specifications can’t be met, it’s making a significant U.S. investment.

But the life of a Japanese supplier is not easy. Just ask Al Pace, former owner of Variety Stamping Corp. Pace won a supply agreement with Honda in 1987. Eighteen months later, $30 million Variety was broke. The firm contends it was used as a token to appease demands for more Japanese outsourcing in the U.S. Honda says Variety couldn’t meet its standards, and some of its U.S. suppliers do pass the test. MECA’s 1mura calls component quality a “bedrock” issue. But only if his “sourcerer’s” magic works can he live up to his founder’s mandate. 

MAKING IT HERE

Recently, Matsushita has pushed hard to increase manufacturing in this country. Does this reflect business concerns, or political considerations?

Naturally, with the Japanese government in talks with the U.S., there are political issues involved. But we have really promoted manufacturing in the U.S. to substitute deliberately, and for business reasons, for our own exports.

One of our company’s biggest corporate goals is to achieve a 50/50 balance in the U.S. We believe that at least 50 percent of our business overseas should be supported by local production. Another 50 percent of production can be supplied from Japan, or from other countries.

Our founder said that whenever we have business activity overseas, we must contribute to those countries first of all, and eventually that contribution will return to our company in the long run. Selling there means we have to manufacture there too. We can’t rely on importing 100 percent of what we sell. And our dependence on Japanese components will definitely lessen as we catch up on making local arrangements.

When you reach the 50 percent level, will you surpass it?

It is a very difficult job to exceed 50 percent because every year we have introduced new products in the U.S. market, and these are developed and engineered in Japan. These new products curtail the amount of local production.

We can say that 70 percent is ideal for local components, but I do think that 70 percent local procurement, according to my own earlier experience in the U.K., is really the maximum for us, considering the necessity of new product development.

Japanese manufacturers have brought their assembly plants to North America. Why not bring design and engineering here too?

We do want to build up these functions in the U.S. We are just now creating research institutes one by one, and we do plan for a gradual engineering exchange.

How soon will technology transfer be implemented?

It depends on the category of products you’re talking about. On the consumer product side, it’s not so difficult because we now employ small numbers of American people in these roles. This can be built up year by year, but when it comes to high-tech, particularly in the semiconductor area, it’s more complicated. In some areas the U.S. is dominant in engineering, and we would like to develop those areas in Japan. But in other areas that’s not so.

In those areas where Japan is ahead, why not bring top Japanese engineers here to train U.S. engineers?

Because the products related to those areas are marketed mostly in Japan. Of course, theoretically you can say, Mr. Imura, transfer all our engineers to the U.S., and export finished products back to Japan. But it’s more practical to aim for equivalent production in the U.S.

QUALITY IS A SUPPLY-SIDE PROBLEM

As you think about increasing manufacturing in this country, what hurdles do you find to be most serious?

That’s a critical question which I wanted to answer. When it comes to manufacturing overseas, it’s as though we are always hitting our heads against the same wall. To get past even a 50 percent local procurement ratio, we need the full cooperation of U.S. manufacturers. Without cooperation it’s almost impossible to pass 50 percent.

What are you doing to secure their cooperation?

Our own components meet very tight specifications and are very carefully inspected. Here the story is quite different. U.S. component suppliers ask us why we need this kind of quality. They say U.S. manufacturers never ask for it at all. But for us this is bedrock. That’s why we’ve made an effort to make this work. But they wouldn’t listen.

Not at all?

First, they request that we place a huge volume order. They say that new investment and new machines are needed to meet our specifications. They suggest that we increase our order ten times more, because they can’t supply those kind of components for such small orders. But Matsushita is gigantic in Japan; at the start we don’t need big orders here. It’s a tough job to exceed 50 percent local procurement without providing local suppliers with the investment and engineering needed to meet our specifications.

Take the aluminum foil we use in our capacitators. We have a factory in Tennessee that makes these components. Originally, we would take aluminum ingots produced here back to Japan, and there we would further refine it and turn it into foil, and then ship the foil back to our plant in the U.S. The foil has to be quite thin, but then we tried to bypass the procedure and procure foil locally.

We checked the foil available in the U.S. and found that we couldn’t use it. The problem went back to the refining process. We told the supplier that we needed it not this way but that way, and they said if they produced it that way they would need money for a new furnace.

So you find that U.S. suppliers want you to buy only what they have for sale?

The end result was that we have now decided to produce the aluminum foil itself in this country. We have just announced that. That’s a kind of genuine local manufacturing that shows we are not content with assembly only.

Is the attitude you’ve been speaking about more or less pronounced?

Small manufacturers tend to listen and pick up new methods, but many of the larger companies are absolutely impossible. My assumption is that the problem is rooted in the difference between Japanese and U.S. management objectives. Japanese management is very isolated from concern with stock price. U.S. managers feel obligated to sustain stock prices.

U.S. executives are very highly paid, and shareholders are not so patient in this country. That makes it hard to invest for the long term, though individual U.S. companies may have the freedom to take a more long-run view. Probably that’s a cultural difference, but a short-run attitude is no good for future growth. I’ve learned that only after many years in this business.

Doesn’t the Japanese consumer bear the burden of all this in the form of much higher prices?

Japanese firms spend more on R&D, which increases their costs. As part of the Structural Impediments Initiative (SII) talks, the U.S. has brought pressure on Japan, and the Japanese government has firmly recommended that all Japanese manufacturers look into the matter of higher domestic prices.

In the U.S., we supply products directly to some retailers, but that’s not the case in Japan. There we have to use a number of intermediate distribution companies, which in turn has an effect on consumer prices. Of course we could attempt to eliminate the middleman, but in Japan, tradition and the structure of business are against that. There are a huge number of people working in these sales companies.

Though Japanese labor costs are almost the same as in the U.S., land costs are extraordinarily high. That means shops in Tokyo need high margins to pay high rents. I sympathize with the need to lower Japanese consumer prices. Gradually, Japanese business organization will change and employment will shift into new sectors.

NEW PRODUCTS ARE INDISPENSABLE

At the recent Japan Electronics Show in Tokyo, Matsushita displayed an impressive array of HDTV technology. Can you estimate your potential costs and returns with HDTV?

It’s difficult to estimate at this stage since the format hasn’t been agreed on. Systems for Europe, Japan, and the U.S. may differ. But as long as we stay here, we have to develop HDTV systems for the U.S.-regardless of how much money will be needed. Otherwise we will have no future. Right now the only thing on our minds is giving consumers the HDTV they want.

Your questions make you sound like a boss, but I haven’t thought about market share, and even my own boss hasn’t asked me that yet. HDTV is only an experimental format; it’s not merchandise yet. We’ll be as proud, and I hope as successful, when we develop HDTV as we were in the past.

How do you plan to cope with a recession in the U.S?

It’s difficult, particularly when it comes to existing products. But we are constantly bringing out new products to satisfy consumers. And we are also using products from the office automation market in the home. In the consumer sector we will be able to sustain business, particularly with products that are made friendly for the homemaker through voice recognition.

You’re working on voice recognition?

We have a lab in California that’s involved with it, and we have several other very interesting consumer products coming. We are working on a high-tech English/ Japanese translating machine. But we’re also thinking about vending machines that incorporate voice recognition.

You mean reciting your order to a machine?

Accent is a problem. [Laughter.]

What else can we expect?

Image recognition by lasers may have some interesting consumer uses. I’m now recommending the production of wireless security systems for the home. These will incorporate a hidden camera, and an interior monitor, and because I hate wire, we’ll be free of it.

What else is in your plans?

I’ve told some secrets. We have just introduced a palm-sized camcorder. It has a unique digital image stabilization system based entirely on our own circuitry.

AUTONOMY IN A SUBSIDIARY

When you took over the American operation what advice did Tokyo give you?

I haven’t been given any particular expectations. I understand my mission here without it being spelled out.

Would you outline it for us?

My mission concerns two corporate objectives. First, our business in the U.S. must be localized, Americanized. That’s what I did in the U.K. Number two, I’m here to increase our local production. I want to promote an overall attitude that emphasizes thinking first about the particular nation in which we are operating.

What challenges do you want to personally involve yourself with?

The biggest single challenge is to give the highest quality possible to the consumer. I’m now trying to establish an expanded service network in the U.S. We want any of our products to be able to be repaired within two hours driving time from any home, and repaired well. This is my dream, and I continue to put money into it. If I succeed, our business will benefit in the largest sense because this is the kind of convenient and careful service that U.S. consumers want.

My second goal is more personal. When I left the U.K., I felt a great deal of personal sentiment for the entire staff there. I very much want to feel the same way when I’ve finished here. This is personally very important for me, no matter how sentimental it may seem.