Japanese Subcontracting System

In the Japanese economy, it seems that there are many large industrial firms. However, the actual work of those firms is carried out by small and medium subcontractors. Therefore, if the contractors have any problems within the market, they can pass that to their subsidiaries. Subcontracting has always been important source of competitiveness and efficiency. ЃgThe importance of subcontractors is especially great in industries where diverse parts, processing and a high level of technology are required, such as in the general machinery, electrical machinery, motor vehicle and precision machinery industriesЃh.(Okimoto & Rohlen, P84)

Subcontracting (in Japanese is Shitauke) can not be specified exactly, as it is not clearly defined. However, this word is often used in Japan. Subcontracting can be defined and existed when a company (which is called as a contractor) makes an order with another company (which is called as a subcontractor) for the production of components, parts, assemblies or sub assemblies to be sold by the contractor. These orders might include the processing, transformation or finishing of parts or materials by the subcontractor if the contractor requests for it. Subcontractors might be asked to supply parts of products that are not available at their firm, in this case, it must be either manufactured by the assembly industry, imported from other countries or purchased from other companies. These actions differ on an order basis, according to the buyer.

There are also several types of subcontracting.

• One of them is called Ѓefull capacity subcontractingЃf; this comes to be being when a firm is not capable of doing something, so that a percentage of total output is regularly subcontracted.

• Another type is called Ѓespecial subcontractingЃf which means that subcontractors manufacture and supply parts and components permanently. This includes the use of specialised machinery equipment and techniques.

• ЃeMarginal subcontractingЃf is another type of subcontracting, which means that subcontractors receive the orders that are infrequent or small orders.

• Another type is called Ѓecost saving subcontractingЃf which means that because the overheads, tax and expenses in wages and other payment to employees are much lower in subcontractor firms, the costs of production of items are much cheaper.

• The last but not least is Ѓecapacity subcontractingЃf. This is often occurred when a factory overloads its account due to a unexpected increase in demand, machine breakdown and other causes.

For the further distinction in subcontractor system, it could be divided into two categories.

• One of them is known as Ѓeindustrial subcontractingЃf. This is where a firm(contractor) places an order with subcontractor for carrying out the specific tasks within its own production process. Those tasks are normally labour skill intensive.

• The other subcontracting system is known as Ѓecommercial contractorsЃf. This is used when the contractor is not taking a part in its actual production process. However, contractor takes the marketing and financing part. In this case the

Kawasaki(1998,p.38)Ѓh defines a subcontracting relationship as a contractual relationship in which a large firm asks a small firm to conduct a commissioned work(producing parts, components, or finished products) under a dominant positionЃh. Subcontracting is seemed to be a long term relationship between contractor and subcontractor. Only one transaction is not seen as a subcontracting arrangement. Moreover, relationship might include distinctive subcontractor control, risk sharing arrangements and technology diffusion mechanism. These are known as (Uekusa 1987,p.500) ЃgKanban systemЃh. Nevertheless, it does not mean a subcontractor can not have multiple clients. Some subcontractors might have multiple clients and in addition, financial links could be observed.

Nintendo. This huge Japanese company has been using subcontracting to enhance their business.

They started with a small business producing ЃehanafudaЃf(Japanese card game).

ЃgNintendo Co., Ltd. of Kyoto, Japan, is the acknowledged worldwide leader in the creation of interactive entertainment. To date, Nintendo has sold more than 1.4 billion video games worldwide, created such industry icons as Mario® and Donkey Kong and launched franchises like The Legend of Zelda® and Pokémon™. Nintendo manufactures and markets hardware and software for its popular home video game systems, including the Nintendo 64, NINTENDO GAMECUBE, Game Boy Advance and Game Boy - the world's best-selling video game system which has sold over 120 million units.Ѓh( http://www.nintendo-europe.com/NOE/en/GB/corporate/index.jsp)

In general speaking, the subcontracting is capable of satisfying traders and producers, as it can offer the need of specialisation and low cost of production. Moreover it might offer an improvement of a small producers. In particular for home based producers. Such as disabled or aged people and married women. These could be seen as the solid base for the supply of subcontractors. There are lots of merits using subcontracting.

For Nintendos, using the subcontractors has given them several definite merits. Large companies in Japan had great difficulties in cutting labour cost. This was due to the fact that they employ employees for under a lifetime employment system. Moreover, the sharp rise of YenЃfs value had forced them to cut down the cost on its own firm and get rid of the burden. Therefore, they had passed it onto subcontractors, which caused them to have lower labour costs. It also enabled them to lay off the labour when necessary. Moreover, it enabled large firms to cut back orders with subcontractors when JapanЃfs economic condition was not good and it also enabled them to ask subcontractors to reduce the price of parts, components and materials in order to keep dollar price high when large firms deal with appreciate Yen.

Subcontracting has also enabled Nintendo to save costs to search and select for new suppliers. As it is time consuming and costs a lot for Nintendo to look for new suppliers. Nintendo could also have successful quality enhancement and cost reduction cooperating with subcontractors. Subcontracting also offered Nintendo a efficient risk sharing mechanism and keeping a good relationship with its contractors by having a certain amount of share holding (this is not restricted to suppliers counterparts)