Real Localization in Overseas Production of Japanese Manufacturers

Abstract

When firms shifts its production base overseas, first-tier suppliers shift with it, and it utilizes local suppliers for supplemental use. In general, when evaluating the local content, we use the first-tier local content. However, when observing carefully the production of each component, many of the components manufactured by local suppliers are composed of imported parts and materials. In the value-added terms, the first-tier local content is an overestimation of the actual value added by local suppliers. In the example of a Japanese automobile manufacturer in Thailand in 2007, the apparent local content was 90 percent, though the real local content measured in value added was 60 percent. However, Japanese Manufacturing Model has been changing these several years. Reliance on imports from Japan for parts and materials is a cost-disadvantage for Japanese manufacturers when facing competition in the local market. Manufacturers need to decrease the amount of value-added by Japanese companies and achieve an actual localization, which should lead to reduced cost. We call such phenomenon the “real localization” as opposed to the apparent localization. Lastly, we will discuss about the impact of real localization in overseas on Japanese domestic manufacturing, especially on Japanese suppliers.