Keywords

The introductory chapter elaborated on two features of the Vietnamese motorcycle industry which make it an illuminating case for analysing the trajectories and mechanisms of supplier learning. The first is the rapid development that the industry has undergone in the period of a decade. The second is the coexistence of two groups of motorcycle manufacturers or assemblers—or simply lead firms, to use the terminology of the conceptual framework adopted in this book to be developed in Chap. 4—that developed contrasting patterns of coordination in their relationships with suppliers.

Indeed, the development of the Vietnamese motorcycle industry is best understood in the context of the competition between two groups of lead firms cultivating contrasting types of linkages with their suppliers. However, before going into the detailed discussion of the Vietnamese case, a brief overview of the structural transformation of the global motorcycle industry is essential because it provides an important context to the evolution of the Vietnamese motorcycle industry. This chapter therefore starts by discussing the global context of the industry. An overview of the Vietnamese case will follow.

2.1 The Global Context

In the global motorcycle industry, Japanese motorcycle manufacturers have maintained leading positions since the 1960s (Fujita 2013a). To start with, motorcycles have integral product architecture. Because such products are characterised by complex mapping from functional elements to physical components and tightly coupled interfaces among interacting physical components, they call for fine-tuning between the whole product and its component parts if overall product performance is to be maximised (Ulrich 1995; Baldwin and Clark 2000). Since Honda launched the highly acclaimed Super Cub in 1958, which eventually became a dominant design (Abernathy and Utterback 1978; Abernathy and Clark 1985; Teece 1986) in this industry, motorcycle manufacturers have adopted proprietary product designs carrying components customised to particular models.Footnote 1 Honda, as well as three other Japanese motorcycle manufacturers that successfully followed suit, namely, Yamaha, Suzuki and Kawasaki, emerged as global industry leaders by producing high-quality models that carried lead firm proprietary designs.

To ensure a stable supply of large quantities of high-quality components customised to their specific models, the Japanese lead firms developed long-term and exclusive ties with a small number of fixed suppliers.Footnote 2 Using the terminology of the global value chain (GVC) approach, these lead firms developed captive chains with suppliers, in which suppliers were subject to centralised control and extensive intervention from their lead firms (Gereffi et al. 2005). By entering into transactions with Japanese lead firms, suppliers could expect large orders in the long run. They were also were offered various forms of assistance by the lead firms so that they could attain the lead firm requirements. However, suppliers were virtually locked into relationships with particular lead firms and were under pressure to reach their goals and specifications, often by ceding autonomy (Fujita 2013a).

However, the dominance of the Japanese motorcycle manufacturers came to be challenged by the end of the 1990s. The challenge came from China, whose motorcycle production surpassed that of Japan in 1993 to emerge as the world’s largest motorcycle producer. Unlike the case of Japan discussed above, the huge Chinese market was dominated by copies or slightly modified imitations of popular Japanese models that were produced by local manufacturers and sold at approximately 30–70 % of the price of the originals (Ohara 2005: 69). In a market where consumers prioritised prices over product quality and intellectual property rights are weakly protected, roughly a dozen of popular models developed by Japanese motorcycle manufacturers, which had been introduced into a number of Chinese state-owned motorcycle manufacturers under technological licensing agreements in the 1980s, were widely shared and replicated by Chinese manufacturers by the 1990s (Ohara 2001; Ge and Fujimoto 2004).

The sharing of several popular models across numerous players within this industry, which this book refers to as de facto standardisation of Japanese models, had an enormous impact on the relationship between lead firms and suppliers. De facto standardisation enabled a large number of lead firms and suppliers to enter into the assembly of motorcycles and the manufacture of components, respectively, and engage in arm’s-length transactions of standardised components without being locked into particular relationships. The extensive use of market forces, with frequent switching of partners in terms of prices, enabled Chinese motorcycle manufacturers to achieve remarkable levels of price-based competitiveness and to thrive in the huge domestic market as well as other emerging markets.Footnote 3

It needs to be emphasised, however, that de facto standardisation of the sort that prevailed in China failed to ensure full compatibility of components. For products with integral product architecture, full compatibility of components could only be guaranteed insofar as they were manufactured precisely in accordance with the original drawings of the Japanese base models (Fujita 2013a). However, this has not been the case in China, where repeated duplicative imitation of a given dominant model adopting different measuring methods and varying degrees of precision often gave rise to components that were not compatible with each other (Ge and Fujimoto 2004, 2005). Non-compatibility problems were typically addressed in an ad hoc manner by making ex post adjustments (ibid). Even such adjustments did not render components strictly compatible but was sufficient to make them assemblable. This means that Chinese firms compromised on product quality for the sake of reducing the need for explicit inter-firm coordination.

2.2 The Vietnamese Motorcycle Industry

The rivalry between the Japanese and Chinese motorcycle manufacturers outlined in the previous sub-section is the key to understanding the evolution of the Vietnamese motorcycle industry. On the one hand, three major Japanese motorcycle manufacturers established production bases in Vietnam in the late 1990s. Following their conventional practices, they launched sophisticated products and sought to manufacture them to high quality standards by developing their exclusive supplier networks. Value chains developed by these manufacturers, referred to as Japanese chains, were characterised by captive model of industrial organisation.

On the other hand, in the early 2000s, Vietnamese lead firms started the assembly of component kits imported from China, which were largely low-priced, low-quality products imitating popular Japanese models. Similar to the Chinese case discussed above, the value chains developed by these assemblers, referred to as Vietnamese–Chinese chains, are best categorised as market chains. In excess of 50 Vietnamese assemblers initially assembled imported Chinese components. However, as the Vietnamese government strengthened import controls and local content rules, these assemblers gradually expanded local sourcing by engaging in on-the-spot transactions with a moderately large number of Vietnamese, Taiwanese, Korean or Chinese suppliers based in Vietnam. Because the components are standardised to the extent that they imitated popular Japanese modelsFootnote 4 and the product quality requirements were low, transactions involved little need for explicit coordination between lead firms and suppliers, with frequent changing of of partners on the basis of price.

Focusing on the repeated rounds of competition between the Japanese and Vietnamese lead firms, the development of the industry can be divided into three stages (Table 2.1).Footnote 5

Table 2.1 Stages of Vietnamese motorcycle industrial development
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In Stage I (mid-1990s to the end of the decade), three Japanese and one Taiwanese motorcycle manufacturer engaged in domestic production of motorcycles. Following the Vietnamese government’s decision to launch an import substitution policy to promote the domestic production of motorcycles, Honda, Yamaha, Suzuki and Taiwan’s Sanyang established local factories (Table 2.2). As their sophisticated products were priced substantially higher than what ordinary Vietnamese consumers could afford, motorcycle sales as a whole stagnated, but Japanese–brand motorcycles still accounted for the bulk of the market (Fig. 2.1). This small, protected market hardly attracted any scholarly attention at this stage.

Table 2.2 Major foreign motorcycle firms in Vietnam
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Fig. 2.1
figure 1

Motorcycle sales in Vietnam by manufacturers. Notes: Data on “Honda (Imported)” was available from the Motorbike Joint Working Group (2007) up to 2005 but the figures were zero from 2002 onwards. Source Fujita (2013b), based on the Motorbike Joint Working Group (2007), Industrial Research Institute (2011) and General Statistical Office (various years)

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Stage II (2000–2004) was a period characterised by a major external shock and its repercussions. It was during this period that the Vietnamese motorcycle industry attracted wide interest from businesses, researchers, and policymakers in Vietnam and abroad. In the early 2000s, massive volumes of low-priced imitations of Japanese-brand motorcycles were imported from China—a phenomenon often dubbed the “China shock” (Fujita 2007). Since the Vietnamese government had prohibited the import of assembled vehicles, Chinese imports arrived in the form of knockdown component kits that were assembled by more than 50 local firms. With prices as low as a third to a quarter of foreign-brand models, these imitations quickly penetrated the medium- and low-income consumer markets that had hitherto been unexploited by foreign manufacturers. The market expanded four-fold in the late 1990s, and local assemblers of Chinese motorcycles commanded roughly 80 % of these extended sales (Fig. 2.1).

The China shock provoked a series of reactions from incumbent producers and policymakers. As Vietnam became a symbol of an expanded Chinese threat that had already become apparent in China, Japanese companies initiated company-wide efforts to regain market shares. This culminated in the launching of a new, low-priced model by Honda Vietnam (HVN) in 2002. The new model, named Wave Alpha and priced at approximately one-third of the company’s previous models, quickly gained popularity as the low-quality of Chinese motorcycles had by now become apparent to Vietnamese consumers (The Motorbike Joint Working Group 2007).

The Vietnamese government responded by enacting a series of policy changes to restore order and promote the sound development of the industry. However, the uncoordinated, sudden, and often arbitrary ways in which policy changes were enacted—frequently running contrary to previously announced plans and/or discriminating against foreign motorcycle manufacturers (Fujita 2011)—created serious side effects.

First, restrictions on the importation and registration of motorcycles were introduced. In September 2002, the Vietnamese government suddenly announced that imports of motorcycle components for the year should be limited to 1.5 million units (Cohen 2002). This was followed by restrictions on motorcycle registrationFootnote 6 and limits on investments for expansion of production capacity by foreign motorcycle manufacturers from 2003.Footnote 7 Whilst these measures were intended to prevent the uncontrolled proliferation of motorcycles on Vietnam’s streets, the consequence was stagnation of the overall market growth, with annual sales of motorcycles declining from over 2 million in 2002 to 1.17 million in 2003 (Fig. 2.1).

Second, in an attempt to encourage the development of local assemblers into fully fledged motorcycle manufacturers, the government stepped up the enforcement of local content rules, which hitherto had been circumvented by local assemblers,Footnote 8 and instituted standards for motorcycle manufacturers, with the requirement that a minimum of 20 % of local content had to be achieved by in-house manufacturing of key components.Footnote 9

Notably, some of the aforementioned policies were implemented in ways that explicitly favoured local assemblers. When the government suddenly introduced quantitative restrictions on component imports in September 2002, local assemblers received a favourable allocation of import quotas, whilst insufficient quota allocation to HVN and Yamaha Vietnam (YVN) drove these companies to temporarily suspend their production.Footnote 10 From 2003 onwards, as noted above, the government restricted foreign motorcycle manufacturers from investing in the expansion of production capacity beyond the original proposals authorised by the Vietnamese authorities upon the issuance of FDI licences. This brought about serious damage to foreign motorcycle manufacturers because the rapid expansion of the market in the 2000s had not been envisaged in the 1990s when the investment decisions were made. HVN, in particular, suffered because this policy hampered the company’s ambitions to use the Wave Alpha to regain lost market shares.

A new phase of industrial development (Stage III; 2005–2008) began as the end of the policy turbulence brought about rapid, FDI-driven growth. Diminishing academic interest in the industry notwithstanding, this was in fact the time in which the most dynamic development occurred (Fujita 2011). In 2005, the Vietnamese government abandoned restrictions on motorcycle registrationFootnote 11 together with the policy that had prevented foreign motorcycle manufacturers from investing in additional production capacity.Footnote 12 As a result, domestic motorcycle sales climbed to 2.8 million units in 2007, far exceeding figures during the China shock (Fig. 2.1).

Japanese firms chose to satisfy the growing market in Vietnam via FDI for local production, following their conventional approach to the localisation of production in countries with a large demand for their products.Footnote 13 Accordingly, they actively invested in expansion of production capacity, capturing an increasing share of this fast-growing market. In the meantime, local assemblers lost their market share but still held roughly one-third of the total sales as of 2006 (Fig. 2.1). They survived primarily by catering to low-income consumers in the rural areas where Japanese-brand models still had not penetrated.

2.3 Conclusion

This chapter has set out the context for the empirical analysis of the Vietnamese motorcycle industry. The key to understanding the evolution of this industry was the rivalry between Japanese and Chinese motorcycle manufacturers exhibiting contrasting types of competitiveness by developing very different types of value chains. Indeed, the rapid transformation and development of the industry has been driven primarily by the competition between Japanese motorcycle manufacturers, which sought to replicate the conventional Japanese sourcing practices, and local Vietnamese assemblers, which essentially followed the Chinese style of producing copies or slightly modified versions of popular Japanese models.