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1. 3 Value Chain Dynamics and Local Suppliers’ Capability Building: An Analysis of the Vietnamese Motorcycle Industry Mai Fujita 3.1. Introduction The Vietnamese motorcycle industry has experienced remarkable growth since the mid-1990s. Being a latecomer to the motorcycle indus- try in the Asian region, motorcycle production in Vietnam started in the mid-1990s with a very small market, heavy protection, and a nascent local supply base. The few Japanese firms with local production manufactured high-quality, expensive models that relied on imported components and were beyond the reach of ordinary Vietnamese cus- tomers. However, in less than ten years the country emerged as the world’s fourth largest market for and producer of motorcycles after China, India, and Indonesia.1This remarkable transformation was trig- gered by the arrival of Chinese models that were assembled by local Vietnamese firms, often with the assistance of Chinese firms. Fierce com- petition between the Japanese industry leaders and local assemblers of Chinese motorcycles led to lower prices, increased local content, and rapid expansion of the market (The Motorbike Joint Working Group 2007; Fujita 2008). This chapter explores whether or not the growth of the Vietnamese motorcycle industry has been accompanied by the formation of a viable local component supply base. While it had long been argued that the Vietnamese supply base was seriously underdeveloped, recent research has shown that Japanese motorcycle manufacturers have started to source components from an increasing number of local suppliers, both at the first tier (Ohno 2005: 48) and at the second and third tiers (Nguyen Duc Tiep 2006). 68 M. Kawakami et al. (eds.), The Dynamics of Local Learning in Global Value Chains © Institute of Developing Economies (IDE), Jetro 2011

2. 69 Mai Fujita Changes in the sourcing strategies of Japanese producers, however, tell only part of the story. After 2002 the development of the local supply base was also stimulated by the emergence of local Vietnamese motor- cycle assemblers (Ha Huy Thanh et al. 2003). The sourcing strategies of Japanese motorcycle manufacturers and Vietnamese assemblers changed over time as they competed with each other and adapted to the chang- ing market and policy environment in Vietnam. The key question is if and how local Vietnamese supplier firms developed firm-level capa- bilities through their supply relationships with Japanese and/or local assemblers in the context of rapid market growth and intense compe- tition. This chapter examines this question by integrating the global value chain (GVC) approach, which seeks to characterize and explain the nature and dynamics of inter-firm relationships, and the techno- logical capability (TC) approach, which is designed to characterize and explain the development of firm-level capabilities.2 The remainder of the chapter is organized as follows. Section 3.2 presents the analytical framework. Section 3.3 presents the global, regional, and local context of the industry. Sections 3.4 and 3.5 present the empirical analysis of local suppliers’ capability formation in the Vietnamese motorcycle industry. As the first step, Section 3.4 discusses how the changes in Japanese and Chinese motorcycle value chains since the late 1990s opened up new opportunities for local motorcycle com- ponent suppliers in Vietnam. As the second step, Section 3.5 analyzes how local suppliers exploited these opportunities to build their own capabilities. The concluding section provides a summary of findings and discusses the implications of the case study for the GVC and TC approaches. 3.2. Analytical framework The analytical framework used in this chapter combines two distinct yet closely related approaches: the GVC and TC approaches. The first ele- ment of the framework draws on the GVC approach. Using the notion of “chains” to refer to the sequence of value-adding activities required to bring products or services to market, this approach highlights the character of inter-firm linkages, especially those that extend across bor- ders.3Gereffi et al. (2005) present a simple framework, independent of industries and geographical, historical, or social contexts, to analyze the patterns by which inter-firm relationships are coordinated. They have extracted three fundamental variables that shape patterns of inter-firm coordination: (1) complexity of information exchanged in transactions,

3. 70 Value Chain Dynamics and Local Capability Building in Vietnam (2) codifiability of the information exchanged, and (3) suppliers’ capa- bility levels relative to the requirements of transactions. Gereffi et al. (2005) argue that different combinations of these vari- ables result in five basic types of inter-firm coordination, with markets and hierarchy (vertical integration) at the two opposite ends of the spectrum, and three intermediate forms of coordination (modular, rela- tional, and captive) falling between, each with ascending requirements for explicit coordination. Of the three intermediate forms, captive and relational chains play important roles in the case study presented in this chapter. In captive chains, smaller suppliers are transactionally dependent on larger customers. Captive chains emerge when product specifications are complex but can be codified in the form of detailed instructions, and low supplier competence calls for a great deal of inter- vention and control on the part of the customer. Relational chains, by contrast, involve complex interactions between customers and highly competent suppliers, which create mutual dependence between the two parties. This form of coordination emerges when complex prod- uct specifications that cannot be codified force firms to exchange tacit knowledge, and when the supplier is able to provide complementary competencies to the customer (Gereffi et al. 2005). The second element of the framework is based on the TC approach (Lall 1992; Bell and Pavitt 1997). Following Bell and Pavitt (1997: 89), this chapter defines “firm-level capabilities” as “resources needed to gen- erate and manage technical change, including skills, knowledge and experience, and institutional structure and linkages.” A key insight of the TC approach is that accumulating firm-level capabilities is a complex and specialized process that requires the firms’ deliberate efforts such as explicit intra-firm training and managed experience accumulation (Bell and Pavitt 1997). This chapter analyzes capabilities in two dimensions: their functions and levels. The analytical approach pioneered by Lall (1992) and adapted by Ariffin (2000), Figueiredo (2008), and others has been tailored to the attributes of the motorcycle industry. One of the original contri- butions of this framework is to integrate the GVC perspective with the classification of functional categories. By mapping the functions to several key functions in the motorcycle value chain, this framework seeks to highlight how the division of labor between the lead firm and the supplier affects the functional scope of capabilities acquired by the suppliers. Specifically, the key functions in the motorcycle value chains are classified into (product) planning, production, and marketing. Production capability is further divided into equipment-related capabil- ity, which directly deals with the operation, maintenance, design, and

4. 71 Mai Fujita manufacture of machinery and equipment (i.e., the “hard” aspects of production), and production management capability, which is concerned with effective management of the various elements of production including equipment, materials and components, human resources, and information (i.e., the “soft” aspects of production).4This results in four functional categories of capabilities: 1) Planning capability: The capability to conduct market research, develop product concept, develop and design a new product accord- ing to the needs of the market. 2) Equipment-related capability: The capability to operate, maintain, design, and manufacture equipment, dies and molds, jigs and tools. 3) Production management capability: The capability to organize and manage the various elements of production. 4) Marketing capability: The capability to market products so as to strengthen the relationship with customers, develop own brand, and explore markets. The levels of capabilities are designed to reflect the process of capability building as experienced by developing country firms. Typically, these firms first import mature, standardized technology and then adopt more advanced technologies over time. Simple as this might seem, it gener- ally takes a great deal of time and tedious effort for developing country firms to master imported technology and maintain stable operations on their own (Kim 1997, 2004). With time, firms can gradually start to adapt technology to their needs in the domestic market, improve on it, and finally create new technology of their own (Lall 1992; Bell and Pavitt 1997). Accordingly, the framework sets the following four levels of capabilities: 1) Operational level: Operating the existing technology. 2) Assimilative level: Mastering the existing technology and maintaining the operation over time. 3) Adaptive level: Making original improvements to the existing tech- nology prevailing among local producers in the country concerned. 4) Innovative level: Creating something new with significant elements of originality and novelty compared to the existing technology prevailing in the world. The above classification of functions and levels of capabilities generates a two-dimensional Capability Matrix (Sato and Fujita 2009). Table 3.1 presents the matrix adapted to the capability building steps typical of

5. 72 Adopting and stably marketing methods/ managing improved methods/activities. Post-production Routine marketing Marketing activities. Production management production management management required in the domestic market. Routine production required by foreign Maintaining stable fulfilling the levels customers. Production Capability Matrix for analyzing motorcycle components suppliers the level required in the equipment, dies, molds, equipment, dies, molds, maintenance and repair Processing components process components to Equipment-related and manufacturing foreign customers; Basic operation of of machinery and domestic market. level required by jigs, and tools to and tools to the dies, molds, jigs machinery and jigs, and tools. by recreating the design in the domestic market existing/given product international-standard Replication of existing products by recreating the design drawings. Pre-production Replication of an Planning drawings. Assimilative Operational Table 3.1

6. 73 significant elements abroad; establishing marketing methods recognized brands. developing brands novelty to explore prevailing among of originality and recognized in the domestic market. improvements to Making original local producers; New marketing internationally methods with new markets management system so as production management. production management Establishing production among local producers. to achieve the world’s practices prevailing improvements in topmost level in Making original existing machinery and existing machinery and among local producers. originality and novelty significant elements of equipment prevailing equipment prevailing improvements to the compared to the equipment with Making original developing new machinery and Designing and in the world. Planning and designing prevailing in the world. originality and novelty prevailing among local significant elements of of new products with improvements to the existing products existing products compared to the Making original producers. Source: Sato and Fujita (2009). Innovative Adaptive

7. 74 Value Chain Dynamics and Local Capability Building in Vietnam motorcycle component suppliers. In this chapter, this matrix will be used to analyze how capability levels of local suppliers for different functional value chain categories have changed over time. 3.3. Industry settings This section presents the global, regional, and local Vietnamese context of the low-displacement motorcycle industry. 3.3.1. Global and regional context Low-displacement motorcycles often serve as an important means of daily transportation in developing countries, particularly in Asia. The presence of substantial market potential for motorcycles, combined with the opportunity to stimulate the development of component industries, has led governments in developing countries to implement import-substitution policies and local content rules. At the global level, production is highly concentrated in the hands of four large Japanese motorcycle manufacturers: Honda, Yamaha, Suzuki, and Kawasaki. After firmly establishing their positions in Japan, these four companies expanded overseas operations via exports and later, because of growing barriers to trade, foreign direct investment (FDI). By the mid-1980s these four firms had captured roughly half of the global market.5This highly concentrated market structure is closely related to the nature of motorcycle technology. Since Honda’s launch of the highly successful “Super Cub” in 1958, there have been few if any radical product innovations. Fifty years on, the basic technol- ogy remains the same and the integrated nature of product design is unchanged. Thus, the focus of innovation has been incremental process improvements (Abernathy and Utterback 1978: 44) and the continuous improvement of “quality, costs, and delivery” (QCD) has become crit- ical in achieving a competitive advantage. The leadership of Japanese motorcycle manufacturers has been sustained primarily by the superior QCD performance of their internal operations and in closely aligned component suppliers. In Southeast Asia the market leadership of Japanese motorcycle man- ufacturers has been firmly in place since the 1960s. Local content rules in each country led them to undertake significant FDI for production within each country. While most core components sourced in the host country are from subsidiaries of Japanese suppliers which have also engaged in FDI, Japanese motorcycle manufacturers have also nurtured local suppliers. Since basic designs for the models produced in Southeast Asia are developed in Japan and Thailand,6the majority of suppliers

8. 75 Mai Fujita in the Southeast Asian region, with the exception of a limited num- ber of Japanese suppliers in Thailand that participate in co-design of components, are assigned the task of manufacturing components in accordance with the detailed drawings and QCD requirements provided by the motorcycle manufacturers, who closely monitor and control the suppliers’ performance. The supplier, in turn, dedicates most of its out- put to the motorcycle manufacturer. In the terminology of the GVC approach, linkages of this sort are typical examples of “captive chains,” whereas linkages between the Japanese motorcycle manufacturers and a limited number of core component suppliers that have proprietary technology and participate in co-design of components in Japan are characterized as “relational chains.” Since the late 1990s Japanese motorcycle manufacturers have been challenged by the rise of indigenous motorcycle manufacturers from the emerging economies. The rise of Chinese firms has been particularly threatening because these firms dominate their huge domestic market and base their competitiveness on a set of capabilities different from that of Japanese firms. Chinese indigenous motorcycle manufacturers produce low-priced imitations of Japanese base models, sometimes with minor improvements. In a market where intellectual property rights are weakly protected, several very popular base models including the Honda Cub mentioned earlier, which had been introduced to Chinese state-owned motorcycle manufacturers in the 1980s under formalized technological transfer agreement and came to be copied by numerous private motorcycle manufacturers in the 1990s, have become industry- wide de facto standard designs (Ohara 2001: 32).7Competition among these largely undifferentiated, homogenous products is based primarily on price. The emergence of Japanese base models as a de facto standard in the industry enabled firms to operate with weak forms of coordina- tion. De facto standardization of the motorcycle and its component parts allows motorcycle manufacturers and suppliers to engage in arm’s- length transactions with little coordination, even though these designs remain integral and proprietary. This apparent puzzle—the emergence of arm’s-length transactions where the product design is integral and proprietary—is explained by the standardization of components used to produce de facto standard models. It is also enabled by the low product quality requirements in the Chinese market, which significantly lessens the need for coordination between assemblers and suppliers.8Follow- ing the GVC approach, the low complexity of information exchanged in transactions involving standardized products enables market-based value chains to prevail in China.

9. 76 Value Chain Dynamics and Local Capability Building in Vietnam The challenge to the Japanese industry leaders posed by the Chinese firms began in China in the 1990s and then spread overseas. The first major external market where the Chinese motorcycle manufacturers established a strong presence was Vietnam. 3.3.2. The development of the motorcycle industry in Vietnam The history of the Vietnamese motorcycle industry has passed through three stages.9The first, from the middle to the end of the 1990s, was the start-up stage. Vietnam promoted the domestic production of motorcy- cles by erecting barriers to imports and incentives for foreign motorcycle manufacturers to invest in the country. By the late 1990s one Taiwanese and three Japanese motorcycle manufacturers (Sanyang, Suzuki, Honda, and Yamaha) had invested in Vietnam. However, sales failed to expand because the prices of their motorcycles were very high when compared with the average income level of the population (Figure 3.1). This situation was completely transformed in the second stage (2000– 2004). During the years 2000 and 2001, massive numbers of low-priced motorcycles were imported from China, a time referred to by incumbent producers as the “China shock.” Because the Vietnamese government had prohibited the import of assembled vehicles since 1998, Chinese 25 3000 2500 Registered motorcycles/ 20 Sales (thousand units) population (%) 2000 15 1500 10 1000 5 500 0 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sales (mopeds) Sales (scooters) Registered motorcycles/ population Growth of Vietnam’s motorcycle market Figure 3.1 Source: Honda Motor Co., Ltd., various years.

10. 77 Mai Fujita imports arrived in the form of “knockdown” component kits. Soon, more than 50 local firms were engaged in the assembly of Chinese motorcycle component kits (hereafter referred to as “local assemblers”) that were, in essence, imitations or slightly modified versions of the older Japanese base models already mentioned. With prices as low as one-third to one-fourth of Japanese-brand models, “Chinese motorcy- cles”10quickly penetrated medium- and low-income consumer markets in urban and rural areas that had remained unexploited by Japanese firms. This led to a rapid expansion of the market. By 2001 local assem- blers of Chinese motorcycles held an 80% share in the expanded market in Vietnam (Figure 3.2). The China shock provoked a series of reactions from incumbent producers and policymakers. The Japanese motorcycle manufacturers, 2500 2000 Sales (thousand units) 1500 1000 500 0 1998 1999 2000 2001 2002 2003 2004 2005 Local assemblers & others Imported scooters VMEP (a wholly-invested subsidiary of Taiwan’s Sanyang Motor) Vietnam Suzuki Yamaha Vietnam Honda (imported) Honda Vietnam Sales of motorcycles by manufacturers Figure 3.2 Source: The Motorbike Joint Working Group (2007).

11. 78 Value Chain Dynamics and Local Capability Building in Vietnam perceiving Vietnam as a symbol of an expanded Chinese threat that had already become apparent in the Chinese market, initiated company- wide efforts to regain market shares. In 2002 Honda Vietnam (HVN) launched a new model, the “Wave Alpha,” priced at approximately one-third of its previous models. In the policy arena, the Vietnamese government reacted by engaging key policy changes to restore order and to promote sound development of the industry, such as stepping up the enforcement of local content rules and import tariffs, which had been circumvented by local assemblers, and introducing product quality and environmental standards. In a desperate attempt to prevent an uncontrolled proliferation of motorcycles on Vietnam’s streets, the government also resorted to more direct interventions including quan- titative restrictions on the number of motorcycle components imported and a ban on the registration of motorcycles in certain localities. The fact that many of these interventions were implemented in an arbitrary manner, often going against the commitments previously announced by the government, severely affected business confidence.11Moreover, for- eign motorcycle manufacturers suffered, in particular, because they were prevented from investing in additional production capacity beyond the original plans granted by the Vietnamese authorities upon receiv- ing FDI license.12As a result, although the newly launched “Wave Alpha” rapidly gained popularity in the Vietnamese market, the sales of Japanese motorcycle manufacturers did not expand rapidly during this period (Figure 3.2). The third stage (2005–2008) was a period of FDI-led development. As Vietnam stepped up efforts to enter the World Trade Organiza- tion (WTO) and implemented its tariff reduction commitments under the ASEAN Free Trade Agreement, it dismantled its prohibition of motorcycle imports,13abolished local content rules, and reduced tar- iffs on components. At the same time, the government abolished the restrictive rules on motorcycle registration and investment in motorcycle production that had been introduced during the previ- ous period. This move, combined with the country’s economic boom, significantly enhanced domestic motorcycle sales, which climbed to 2.8 million units in 2007, far exceeding the figures during the China shock. Even though import restrictions were relaxed under WTO rules and AFTA commitments, Japanese firms chose to satisfy the grow- ing market in Vietnam via FDI for local production, following their conventional approach to localize production in countries with large demand for their products. However, local Vietnamese assemblers, despite the challenge posed by the radical price reductions intro- duced by Japanese motorcycle manufacturers and changes in the

12. 79 Mai Fujita policy environment, still held roughly one-third of the market as of 2006. 3.4. Value chain dynamics in the Vietnamese motorcycle industry This section examines the inter-firm dynamics in the industry. The analysis focuses on two sets of value chains: (1) those coordinated by Japanese motorcycle manufacturers, which will hereafter be called “Japanese chains” (and which are represented most significantly by the captive value chains driven and coordinated by the dominant Japanese firm, HVN), and (2) the market-based value chains coordinated by local assemblers often in cooperation with Chinese firms, which will be referred to as “Vietnamese–Chinese chains.” 3.4.1. Japanese chains: emergence and consolidation of HVN’s captive chains As discussed in Section 3.3.1, the “captive” nature of the Japanese chains was fundamentally shaped by the integrated nature of product design and the global and regional configuration that compartmentalized rela- tional assembler–supplier interactions in countries outside of Vietnam. Since the operations of the Vietnamese subsidiaries of Japanese firms focused on production and distribution, not product development or design, suppliers in Vietnam were assigned a narrow range of compo- nents manufacturing activities and operated under the strict control of powerful industry leaders. It took time for HVN to establish captive chains in Vietnam. Dur- ing the industry’s start-up stage in the 1990s, Japanese firms engaged in very low levels of local sourcing as a result of their small produc- tion scale and Vietnam’s limited industrial capabilities. By the end of the 1990s, HVN’s local content ratio had risen to slightly over 50%, but this was largely achieved through in-house component production and the arrival of a few Japanese suppliers. However, at the time when it launched its Vietnamese operations, HVN selected a set of local firms as suppliers, none with prior experience in supplying Japanese companies. Since HVN was not under severe competitive pressure at the time, sup- pliers were given ample time to study HVN’s requirements and endeavor to meet them. In the second stage (2000–2004), new opportunities opened up for local firms to be selected as suppliers to HVN. A major impetus was Honda’s company-wide drive to fight the competition from “Chinese motorcycles” by launching the Wave Alpha in 2002, and to abide with

13. 80 Value Chain Dynamics and Local Capability Building in Vietnam the local content rules that had been implemented by the Vietnamese government around 2000. With the development of the Wave Alpha, incumbent suppliers were notified that HVN would buy components from suppliers of any nationality as long as the components reached the required QCD levels. Apart from sourcing some components from suppliers in China, Honda launched an extensive search for suppliers in Vietnam by dispatching experts from Japan and started to source components from a greater number of suppliers in Vietnam. Many non-Japanese firms, especially Taiwanese, Korean, and Vietnamese com- panies, became HVN’s suppliers at this stage (Figure 3.3). As discussed in Section 3.3.2, although the Wave Alpha rapidly gained popularity, HVN was held back from making investments in production capacity expan- sion at this stage. For this reason, the volume of HVN’s orders stagnated and the suppliers’ dependence on HVN remained low. The development of the Wave Alpha, combined with the local content rules, also brought about an increase in the number of second-tier sup- pliers. As first-tier suppliers came under pressure to reduce costs, they attempted to replace imported components with locally sourced ones, and components sourced from Japanese suppliers with ones sourced from Taiwanese or Vietnamese suppliers. The author interviewed six suppliers in Vietnam from Japan, Taiwan, and Korea in 2004 and 2005. They used a total of 162 second-tier suppliers, at least 106 of which were Vietnamese firms.14 During the third stage, restructuring and consolidation of Japanese value chains took place alongside the remarkable expansion of HVN’s production scale in Vietnam, from roughly 400,000 units per year in 2002–2003 to over 1 million units in 2007 (Honda Motor Co., Ltd. 2008). The number of Japanese suppliers increased rapidly with a new wave of FDI, while the persistent need for cost reduction also pushed HVN to look for more local and other non-Japanese suppliers. As com- petition among suppliers intensified, less competitive suppliers faced decreasing orders from HVN.15Scale expansion and intensified compe- tition meant that suppliers faced greater pressure to increase volumes, while meeting tighter delivery requirements, lowering prices, and main- taining (or even improving) quality levels. Because orders increased, first-tier suppliers’ dependence on HVN increased dramatically. Scale expansion also compelled first-tier suppliers to outsource a part of their production to meet their production plans without excessive invest- ment in their own factories. Overall, while more opportunities opened up for local second-tier suppliers at this stage, requirements on first-tier suppliers became increasingly demanding. Competition intensified at all levels.

14. 81 (1) Local content ratio and number of suppliers 70 100 90 60 80 Local content ratio (%) Number of suppliers 50 70 60 40 50 30 40 30 20 20 10 10 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Number of suppliers in Vietnam Local content ratio (2) Number of suppliers in Vietnam by nationality 70 60 Number of suppliers 50 40 30 20 10 0 2001 2004 2007 Vietnamese Taiwanese/Korean Japanese HVN’s local sourcing Figure 3.3 Source: Prepared by the author based on the author’s interviews and presentation material on “Requirements of Japanese Companies in Parts and Components Procurement from Local Companies” at the seminar on Vietnam-Japan SI Business Promotion held in Hanoi on January 22, 2007.

15. 82 Value Chain Dynamics and Local Capability Building in Vietnam 3.4.2. The Vietnamese–Chinese chains: evolving market-based relationships In 2000, 51 local assemblers assembled 1.37 million motorcycles in Vietnam.16The majority operated on a small scale, producing fewer than 40,000 units per year (Figure 3.4). Although most of these assem- blers began by assembling component kits imported from China, they increased local component sourcing because: (1) Chinese kits often had missing or defective components,17and (2) the Vietnamese government introduced local content rules, even though these were weakly enforced until 2002. Furthermore, the proliferation of Chinese motorcycles cre- ated a huge demand for replacement components. In all, the demand for standardized motorcycle components without high precision or quality 3000 2500 Production (thousand units) 2000 1500 1000 500 0 2001 2002 2003 2004 2005 2006 Local assemblers producing less than 10,000 units/per year (27 firms in 2005) Foreign motorcycle manufacturers Local assemblers producing 10,000–20,000 units/per year (14 firms in 2005) Local assemblers producing 20,000–40,000 units/per year (10 firms in 2005) Local assemblers producing over 40,000 units/per year (6 firms in 2005) Production of motorcycles by size of production Figure 3.4 Source: The Motorbike Joint Working Group (2007).

16. 83 Mai Fujita requirements created an impetus for numerous Vietnamese and foreign firms to produce motorcycle components. The bulk of the motorcycle components used in the emerging Vietnamese–Chinese value chains fol- lowed designs of a few older Japanese base models.18As in the Chinese motorcycle industry, the de facto standardization of these base models and low quality requirements enabled many assemblers and suppliers to engage in arm’s-length market transactions. Switching of suppliers frequently took place, mainly on the basis of price. After 2002 local assemblers were confronted with a number of chal- lenges. On the market front, HVN fought back and rapidly recovered its market share. On the policy front, the government stepped up enforce- ment of local content rules and introduced new regulations requiring motorcycle assemblers and manufacturers to invest in in-house produc- tion of key components. While many local assemblers either abandoned or significantly reduced production, some invested in in-house pro- duction of components and promoted local sourcing with the aim of becoming fully fledged motorcycle producers, rather than assemblers of Chinese kits. From 2005 onwards, local content rules were abandoned and replaced with import tariffs on components, which alleviated the pressure for local sourcing to some extent. Competition with foreign assemblers, however, intensified further. These market and policy changes triggered the consolidation of local assemblers and their suppliers. By 2006 several large-scale firms had cap- tured the bulk of the market share for local assemblers (Figure 3.4). In fact, four local assemblers produced more than 100,000 units per year in 2005 (Institute for Industry Policy and Strategy 2007: 36). The author’s fieldwork in 2004 and 2007–2008 found that firms with the most impressive growth records focused on the low-end segment of the market, selling models priced at roughly 40% of HVN’s Wave Alpha, incorporating minor improvements that affected only the exter- nal appearance of products (e.g., plastic side covers, frames, and engine covers).19 On the suppliers’ side, too, consolidation was taking place. A small number of very large suppliers emerged, producing components in large quantities and selling them to many local assemblers. The majority of 18 Vietnamese, Taiwanese, and Chinese suppliers to local assemblers inter- viewed by the author during three rounds of fieldwork in 2007–2008 had lost orders from local assemblers by 2007. However, five (one Vietnamese-owned and four Chinese-owned) had started to supply com- ponents to local assemblers on a relatively large scale. In particular, those supplying plastic covers, frames, and silencers conducted their own

17. 84 Value Chain Dynamics and Local Capability Building in Vietnam market research and made external modifications to the standardized component design. One Chinese supplier sold 860,000 plastic covers and frames per year to 43 local assemblers.20These figures are equivalent to 74% of the total number of motorcycles produced by local assemblers and 84% of operating local assemblers as of 2006. The consolidation of the Vietnamese–Chinese chains during this period was the result of assemblers’ and suppliers’ strategies. Exploit- ing the de facto standardization of the Japanese base models to sell components to many assemblers was an attractive strategy for suppliers because the small and (initially) fragmented market structure meant that pooling orders from many assemblers was the only way to achieve suf- ficient economies of scale. For local assemblers who lacked component design capabilities, it made economic sense to rely on large and highly efficient suppliers. The largest assemblers wanted to use large suppliers to help them achieve the mass production of low-priced motorcycles with regular modifications to meet rapidly changing market demand. In a pattern similar to that found by Imai and Shiu in the case of local mobile phone handset producers in China, local Vietnamese assem- blers succeeded by targeting low-income consumers in the rural market, which the foreign motorcycle manufacturers had not been able to pen- etrate. For suppliers, however, the design and production capabilities needed were not easy to acquire, as will be discussed in the following section. 3.5. The buildup of firm-level capabilities in local suppliers This section turns the focus to the local Vietnamese component suppli- ers. It will examine how they exploited the opportunities created by the value chain dynamics discussed in the previous section for accumulating their firm-level capabilities. 3.5.1. Research methodology This section presents an in-depth case study of 17 local motorcycle component suppliers. Since this research explores how local suppliers accumulated their capabilities as they participated in different value chains, the cases were selected to include suppliers that participated in Japanese and/or Vietnamese–Chinese chains at different points in time.21In an effort to ensure the quality and accuracy of retrospective data (i.e., late 1990s–2008), priority was placed on those suppliers that had been previously interviewed or surveyed by the author in the period 2003–2005.22To enable comparison, the cases were limited to suppliers

18. 85 Mai Fujita specialized in production of a small set of components and production processes: 1) suppliers of metal or plastic components, 2) firms that spe- cialized in specific production processes such as plating, and 3) suppliers of dies and molds. Profiles of all 17 firms are presented in Table 3.2. Data on the 17 suppliers were collected via interviews carried out by the author in September and/or November 2008. The interviews consisted of two parts. The first focused on the overall business perfor- mance, product and customer structure, and relationships with main customers since the late 1990s. The second focused on “tracking” the capability-building trajectories of the firms using the following two-stage procedure. 1) Interviews began by identifying the status of the firms’ capabilities at the “point of departure,” that is, just before they started to produce motorcycle components in either Japanese or Vietnamese–Chinese chains. Questions were asked about how each of the four value chain functions in the Capability Matrix (Table 3.1) was conducted at this stage. 2) Having identified the point of departure, questions were then asked about how the ways in which the four functions were conducted changed over time. An important aim of this line of questioning was to identify major “learning events,” which are defined as events that involved either progress from a certain level to a higher level of capa- bility or substantial progress within a given level of capability. For example, an event may have been associated with the launch of a new product or technology, or company-wide initiatives to substan- tially increase QCD levels in response to customer demands. Some events may have been short term, while others may have extended over years. In many cases, a particular event involved changes in the levels of capabilities in more than one function. Although the goal was to identify three key learning events per firm, the research revealed two to four events per firm, depending on its growth path. 3.5.2. Respondent firms’ value chain participation Figure 3.5 shows the patterns of value chain participation by respon- dent firms during 1996–2008, as well as the relative importance of the firms’ major products/customers as a percentage of total sales in 2008. As of the mid-1990s, only 3 of the 17 firms (A, B, and E) participated in motorcycle value chains. As opportunities for local firms in motor- cycle value chains increased in the period 1996–2008, some suppliers (K, L, M, and N) participated in both Japanese and Vietnamese–Chinese

19. 86 Aluminum diecast components Metal components (silencers) Crankshafts (forging process Clutches, Aluminum diecast Metal engine components Metal engine components Types of components Plastic components Plastic components Metal components Metal components Metal components Metal components Silencers, wheels Wire harnesses components Plating Plating Molds only) Note: Type of motorcycle value chains: “J” denotes Japanese chains, and “V-C” denotes Vietnamese–Chinese chains. Revenue (2007, n.a. 32 374 248 297 48 254 130 40 88 156 24 150 30 101 >10 350 (2008) bil. Dongs) Number of employees 450 1,350 1,000 1,000 182 200 170 500 550 81 150 850 600 150 400 150 1,100 Ownership Private Private Private Private Private Private Private Private Private Private State State State State State State State (start of business) Profile of respondent suppliers (1987) 1995 1974 1972 1974 1994 1980 1960 (1986) 2001 (1959) 1997 (1996) 1999 1994 1980 2004 1969 (1988) 2002 2001 (1981) 2000 Establishment Source: Prepared by the author. V-C→J (2nd tier) V-C→J (2nd tier) V-C→J (2nd tier) V-C→J (1st tier) value chains Motorcycle J (2nd tier) J (2nd tier) J (2nd tier) J (2nd tier) J (1st-tier) J (1st-tier) J (1st-tier) J (1st-tier) J (1st-tier) J (1st tier) V-C V-C V-C Table 3.2 M O Q G H N D C A K B E P L F I J

20. 87 Share in total revenue (2007) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Replacement components for bicycles 0% 90% 20% 80% 30% 70% 20% 60% 20% 50% 50% 100% 30% 33% 45% 45% 90% 10% 90% 10% 20% 0% 80% 0% 60% 40% A HVN (1st & 2nd tier) Stainless steel products for export HVN, Yamaha Vietnam (1st & 2nd tier) Agricultural machinery & components for domestic market HVN, Yamaha Vietnam (1st & 2nd tier) Wire harnesses for export B C D HVN (1st tier) Wire harnesses for electronic & auto makers in Vietnam HVN, Yamaha Vietnam (1st & 2nd tier) components for electronic products, construction products E Household products HVN (2nd & 1st tier) F Diesel engines, machinery components on OEM basis (domestic market exports) G HVN (2nd tier) Yamaha Vietnam (ceased after 2004), HVN, Vietnam Suzuki (2nd tier) H Replacement components Consumer electronics (ODM) Machinery components for mainly Japanese customers Plastic containers and household products I HVN &Yamaha Vietnam (2nd tier) Metal furniture (domestic market exports) J HVN & Yamaha Vietnam (2nd tier) Bearings K Local assemblers HVN (1st & 2nd tier) Local assemblers L HVN (2nd tier) Replacement components, etc. Other foreign (VMEP) Other foreign (VMEP) 20% HVN (2nd tier) M Local assemblers 50% 30% 10% 20% 20% 30% 95% 5% 0% 30% Replacement components Bicycle components Replacement components N Local assemblers HVN (2nd tier) Replacement components Local assemblers Local assemblers O Bicycle Compo nents Other foreign (VMEP) P Machinery & components (domestic market & exports) 70% Local assemblers 10% 85% Q Other foreign (VMEP, Lifan) Note: (1) Not all chains are included (i.e., the total does not necessarily equal 100%). (2) Shaded cells denote the types of chains as follows. Japanese motorcycle manufacturers Local assemblers Other foreign motorcycle assemblers Other Industries Chain participation of respondent suppliers Figure 3.5 Source: Author’s fieldwork.

21. 88 Value Chain Dynamics and Local Capability Building in Vietnam chains (either simultaneously or shifting from the latter to the former). All the suppliers, except for F, did not specialize in motorcycle compo- nents; they also produced products such as agricultural machinery or household products. A number of observations can be made about the suppliers’ participa- tion in Japanese and Vietnamese–Chinese value chains. Regarding the first-tier suppliers to HVN, there were two main periods when chain par- ticipation began. For suppliers A, B, and E it was the mid-1990s, when HVN started its operations in Vietnam. For suppliers C, D, G, and K, it was the period 2000–2004, within a few years of HVN’s launch of the Wave Alpha in 2002. For all of these suppliers, once a relationship was established with HVN, it lasted for a long time. As HVN’s produc- tion expanded rapidly after 2005, most of the first-tier suppliers became highly dependent on them. A, B, and K depended on HVN for as much as 80% of their total sales in 2008. The story was slightly different for HVN’s second-tier suppliers. The majority (F, G, H, I, J, L, and M) joined HVN’s chains between 2000 and 2004. Whereas all the first-tier suppliers except D and F were large state- owned enterprises with the machinery and human resources to produce metal parts, the majority of second-tier suppliers were smaller private firms engaged mainly in the production of replacement components, bicycle components, or other small metal or plastic products. Unlike the first-tier suppliers, the second-tier suppliers’ dependence on HVN remained low. Suppliers K–Q joined Vietnamese–Chinese chains between 1996 and 2002, when local assemblers emerged and expanded their market shares. These firms were smaller private firms in related industries. Although they expanded the production of motorcycle components in the period 2000–2002, by 2008 most of these suppliers had either stopped supplying components to local assemblers or signifi- cantly reduced the volume of transactions. As they faced diminishing orders from the local assemblers, some suppliers in the Vietnamese– Chinese chains entered the Japanese chains as either first-tier (K) or second-tier (L, M, and N) suppliers. Others either shifted back to tra- ditional markets or explored new markets in other industries. The only exception was supplier M. Like the Chinese supplier discussed in Section 3.4.3, supplier M was able to sustain a relationship with local assemblers because it took its own initiatives to conduct mar- ket research and make modifications to the standardized component design. These modifications were neither requested nor specified by the local assemblers.

22. 89 Mai Fujita Overall, the value chain dynamics at first created new opportunities for an increasing number of local firms, including small firms with- out abundant capital or technological and human resources, but these opportunities soon diminished for all but a handful of suppliers. 3.5.3. Local suppliers’ capability building 3.5.3.1. Status of firm-level capabilities in 2008 A “snapshot” of respondent suppliers’ capabilities as of 2008 is provided in Figure 3.6. For virtually all the suppliers interviewed, the point of departure was the pre-operational or operational level, since they either had not started business or were producing only simple items such as household products or bicycle components for the domestic market. Given this basic starting point, the attainment of capabilities shown in Figure 3.6 is a remarkable achievement. While none of the respon- dent firms reached the innovative level in any of the four functions, many reached the assimilative or even adaptive level for one or more functions. At the same time, the figure reveals diversity of functions in Production management Motorcycle value chain participation Planning Equipment Marketing Firm Op As Ad In Op As Ad In Op As Ad In Op As Ad In J (1st tier) J (1st tier) J (1st tier) J (1st tier) J (1st tier) J (1st tier) J (2nd tier) J (2nd tier) J (2nd tier) J (2nd tier) V-C→J (1st tier) V-C→J (2nd tier) V-C→J (2nd tier) V-C→J (2nd tier) V-C V-C V-C A B C D E F G H I J K L M N O P Q n.a. n.a. Levels of capabilities reached by respondent firms in 2008 Figure 3.6 Notes: (1) Levels of capabilities are as follows: Op: Operational; As: Assimilative; Ad: Adaptive, In: Innovative. (2) Dark-shaded cells denote full mastery of the respective level of capabilities, while light- shaded cells denote incomplete mastery of the respective level of capabilities. Source: Author’s fieldwork.

23. 90 Value Chain Dynamics and Local Capability Building in Vietnam which capabilities were acquired, as well as in the levels reached, even among the suppliers that participated in the same value chains. In order to look more closely at the learning process that enabled respondent firms to reach the capability levels they did, I analyze the “learning events” they experienced between 1996 and 2008. For 17 respondent firms, 50 learning events were identified. Table 3.3 presents the features of the learning events classified according to the value chains in which the events took place. 3.5.3.2. Learning in Japanese chains Table 3.3 shows that learning in Japanese chains was concentrated in two functions: equipment and production management. This is closely related to the nature of HVN’s requirements, which are most often transferred to suppliers in the form of detailed drawings, prod- uct specifications, and target QCD levels. In response to the stringent QCD requirements imposed on by the lead firms, suppliers improved their QCD levels by improving equipment-related and/or production management capabilities. Given the lack of opportunities for product development and design, which was undertaken in-house by R&D head- quarters in Thailand and Japan, none of the learning events in the Japanese chains involved the product planning function. For first-tier suppliers in the Japanese-led chains, capability building was a cumulative process. During the 1990s, when production scale was small and HVN faced little competitive pressure, learning in the Japanese chains was slow. In the 2000s, suppliers were required to achieve continuous improvements in capability levels as HVN intro- duced progressively higher QCD requirements. Most suppliers expe- rienced particularly intensive learning during the 2000–2002 period, corresponding with the launching of the Wave Alpha, and during 2005–2008, when HVN rapidly expanded its production volume. During these periods HVN’s supplier requirements increased significantly. While HVN’s more stringent requirements acted as a broad driver of supplier learning, QCD improvements were achieved through a variety of approaches. Supplier D’s learning, for example, consistently focused on production management in its factory and management of suppliers of sub-components, rather than in-house equipment-related activities. Instead of investing in in-house manufacturing capacity, the firm focused on improving the quality and delivery performance of its suppliers, which provided the numerous sub-components required for its products. Supplier D sought to improve its suppliers’ qual- ity by providing training on quality control schemes, inspecting

24. 91 Assimilative Assimilative Maximum Adaptive reached Marketing level — — events # of 5 0 1 1 0 Assimilative Assimilative Assimilative Operational Maximum Production management Adaptive reached level Classification by functions events 10 15 7 3 3 # of Classification of learning events by functions of capabilities acquired Assimilative Operational Equipment-related Maximum Adaptive Adaptive Adaptive reached level events 18 15 7 3 3 # of Maximum Adaptive Adaptive reached Planning level — — — events 12 0 0 4 0 # of events 7 5 3 15 20 50 # of Source: Author’s fieldwork. Other motorcycle Japanese chains Japanese chains Other chains Vietnamese– (2nd tier) Table 3.3 (1st tier) Chinese chains chains Total

25. 92 Value Chain Dynamics and Local Capability Building in Vietnam sub-components, and regularly monitoring the suppliers’ factories. On the other hand, supplier A made substantial progress in in-house equipment-related improvements. Starting by supplying a few simple components (e.g., chain cases) in the late 1990s, supplier A gradually learned to design production processes, manufacture dies and molds, and process increasingly complex and high-precision components by investing in computer numerical controlled (CNC) machine tools. By placing process design engineers in each factory, the company also consistently improved production processes, achieving incremen- tal cost reduction and quality improvements. Serious attempts at improving production management, however, only started around 2006 and were still ongoing as of the time of the interview. The company’s manager admitted that the company was still weak in this area.23 Levels of attainment also differed across suppliers. While some suppli- ers only partially mastered the assimilative level of equipment-related or production management capabilities, a few managed to go beyond the assimilative level by making their own original improvements to widely adopted production management practices or imported machin- ery, which is equivalent to the adaptive level. For instance, supplier E obtained ISO9001 certification without assistance from external con- sultants, as is often the case with local suppliers. The general director organized a company-wide initiative by which the top managers and the managers of individual departments constructed a comprehen- sive quality management system. By mobilizing the managers and staff of various departments, and engaging in repeated discussions, the initiative improved the coordination between different depart- ments and raised the quality consciousness of the managers and workers. Second-tier suppliers’ capability building also focused on production- related activities, but the levels attained diverged even more widely than for the first-tier suppliers. Most second-tier suppliers were assigned simple processing activities using dies and molds provided by the first- tier suppliers, which limited their progress in improving equipment- related capability. For instance, suppliers J, L, M, and N were unable to completely achieve the assimilative level for equipment-related and/or production management capabilities. Nevertheless, some second-tier suppliers were engaged in the processing of core components, such as engine components, that were subject to stringent requirements. This is why supplier K was closely assisted not only by its direct cus- tomers, Japanese and Taiwanese first-tier suppliers, but also by Yamaha

26. 93 Mai Fujita Vietnam. Supplier K substantially decreased defect ratios by introduc- ing a new quality control system a few years after it began to sup- ply Japanese motorcycle manufacturers. In order to fulfill the stricter environmental standards imposed by its customers and to diversify its products, supplier K also mastered new plating technologies such as trivalent chromium plating and plating on plastics. 3.5.3.3. Learning in Vietnamese–Chinese chains Unlike HVN and Yamaha Vietnam, local assemblers did not provide design drawings or detailed specifications to suppliers. For most com- ponents, suppliers were required to replicate samples provided by the assemblers and re-create design drawings on their own. Since partici- pating in Vietnamese–Chinese chains required suppliers to possess an operational capability level for all the value chain functions, learning in the Vietnamese–Chinese chains tended to be wider in functional scope than it was in the Japanese chains. Unlike suppliers in the Japanese chains, the majority of suppliers in the Vietnamese–Chinese chains did not experience cumulative learn- ing toward progressively higher-level capabilities. Many of the 51 local assemblers that operated in the early 2000s eventually reduced or phased out their motorcycle assembly operations. Those that survived did not ask suppliers for further capability level improvements. Instead, they came to depend on the handful of large suppliers that could pro- vide cost competitiveness and conduct component design work. Most of the respondent suppliers had stopped supplying components to local assemblers by 2008. Supplier M, however, was an exception. In 2002 this supplier established an R&D department and invested in design equipment, software, and measuring and testing devices. The engineers in the R&D department cooperated closely with the marketing depart- ment, which undertook in-depth market research via frequent visits to local assemblers and motorcycle dealers. Through these activities, rarely observed among other suppliers in Vietnamese–Chinese chains, sup- plier M was able to reach the adaptive level of planning and marketing capabilities. Supplier M continued to maintain relationships with local assemblers, because it took its own initiative to conduct market research and make modifications to the existing product designs on their own. 3.5.3.4. Learning in other chains With the exception of supplier G, virtually all of the 17 respondent suppliers were engaged in activities outside the motorcycle industry.

27. 94 Value Chain Dynamics and Local Capability Building in Vietnam Apart from the few first-tier suppliers that became increasingly depen- dent on HVN, suppliers’ dependence on specific customers was low. Even some of HVN’s first-tier suppliers actively attempted to diversify their customer base by leveraging the production capabilities they had acquired by serving HVN. Since the mid-1990s supplier E consistently sought to enhance its capabilities to produce higher precision products and design and manufacture molds with the aim of supplying plastic products to foreign buyers in various sectors. While HVN had been a major customer since 1997, supplier E also won orders for a different cus- tomer, for telecommunication equipment components, and participated in joint product design with this customer. This enabled the company to acquire planning capabilities that it could not through its relationship with HVN. Faced with unstable and declining orders from local assemblers after 2003, some suppliers in Vietnamese–Chinese chains shifted to other customers and markets, such as Taiwanese and Chinese motorcycle assemblers based in Vietnam and selling in the domestic market for replacement components. Supplier O reached the adaptive level for planning capability, but this was achieved in the realm of improv- ing the designs of replacement components for sale in the domestic market. 3.6. Conclusions This chapter has shown that the dramatic growth of the Vietnamese motorcycle industry since the late 1990s has been accompanied signif- icant, if uneven improvement in the local supply base. The analysis was conducted in two steps. The first focused on value chain dynam- ics in the Vietnamese motorcycle industry. The analysis showed that competition and adaptation within two value chains with contrasting GVC governance patterns structured the opportunities for local suppli- ers’ growth and capability formation. The second step looked at how the suppliers exploited those new opportunities. While the opportuni- ties and limits provided by the two value chains were very different, so too were local firms’ capacity to exploit them. While most suppliers in captive value chains coordinated by Japanese motorcycle manufacturers improved equipment-related and production management capabilities, the areas of focus and the levels of attainment diverged across suppli- ers. Suppliers in market-based chains of local assemblers engaged in a wider range of activities but their capability levels, with the exception of one supplier, remained low. Some suppliers also leveraged participation

28. 95 Mai Fujita in other value chains to help them acquire new capabilities, includ- ing capabilities not nurtured in the Japanese or Vietnamese–Chinese chains. Two implications can be drawn from this study for GVC and TC theory. First, the study contributes to a better understanding of the fac- tors shaping the patterns of inter-firm coordination. Previous studies have emphasized the importance of industry standards and changes in product design architecture (e.g., modularization) in driving shifts from highly integrated value chains to more loosely coordinated modular and market value chains (Sturgeon 2002; Gereffi et al. 2005). By con- trast, the case of Vietnam’s motorcycle industry shows the possibility of such a shift occurring in the absence of institutionalized standards enforced by lead firms or other global actors (Nadvi and Waltring 2004; Ponte and Gibbon 2005), or of changes in product design architecture. The Japanese base motorcycle models became de facto standards in the Vietnamese market through an endogenous and bottom-up process that emerged out of the actions taken by numerous Chinese and Vietnamese firms under weak protection of intellectual property rights and low prod- uct quality requirements. The case raises the possibility that inter-firm coordination can be structured by the emergence of local/regional stan- dards that arise under the market and institutional conditions specific to developing countries. Second, while the research presented here supports previous GVC research that has found that the mode of chain “governance” is a major determinant of local firms’ upgrading (Humphrey and Schmitz 2004), my research shows that firm-level capability-building trajectories significantly reflect the firm’s learning approaches as well. In short, sup- plier strategies matter. The diversity of capability-building achievement, even among suppliers in the same value chain, suggests that supplier upgrading is shaped not only by value chain governance but also by suppliers’ strategy and determination to succeed. While this chapter has emphasized differences in supplier learning approaches, capabil- ity achievement was also influenced by the suppliers’ initial stock of capabilities, their overall business and/or learning strategies, and their capacity to mobilize financial and human resources. By taking a firm-level approach to the analysis of capability build- ing, this chapter has highlighted the strategic, intentional moves some suppliers made to leverage their participation in multiple chains. While captive chains were found to promote acquisition of production capa- bilities, as argued by Humphrey and Schmitz (2001), many of HVN’s suppliers were not as subordinate to the customer’s control as previous

29. 96 Value Chain Dynamics and Local Capability Building in Vietnam research has suggested. Some suppliers tried to take advantage of the production capabilities they had acquired in the HVN’s chains to diver- sify their products and customers. Analyzing local firms’ upgrading or capability building, therefore, requires a holistic view of the markets suppliers serve, or might potentially serve, including those outside the main value chain, industry, or country under investigation. This can be achieved by combining GVC and TC approaches. Notes This research was partially supported by Grant-in-Aid for Scientific Research (C) on “Assembler-Supplier Relationship and the Growth of Local Component Suppliers in the Vietnamese Motorcycle Industry” (Project No. 20510243) of the Japan Society for Scientific Research. 1. Based on the motorcycle production and sales figures in the respective countries in 2006 (Honda Motor Co., Ltd. 2008). 2. The need to combine the GVC and TC approaches has been argued by Morrison, Pietrobelli, and Rabelotti (2008), though they did not discuss how this can be put into practice. 3. While the conventional version of GVC approach focused on the value chains that extend across international borders, the approach has been applied to chains serving the domestic markets of developing countries (Bazan and Navas-Alemán 2004). With regard to the GVC framework adopted in this chapter (Gereffi et al. 2005), Sturgeon (2008) argues that it operates equally well at regional, national, and local levels. 4. For the background behind this distinction between “hard” and “soft” aspects of production, see Suehiro (2008). 5. This figure includes production in Japan as well as exports of vehicles and knockdown components from Japan that are assembled overseas (Honda Motor Co., Ltd. 1986: 4). If production by firms outside Japan that received technology transfer from the four companies is included, the four Japanese firms exercised control over 70% of the world’s production of motorcycles in 1996 (Otahara 2000). 6. Honda has a regional R&D headquarters in Thailand, where basic designs developed in Japan are modified to meet the market requirements of each country in Southeast Asia. 7. To be precise, most of the chinese motorcycle manufacturers do not simply copy the standard models; they instead use these models to experiment vari- eties of minor improvements for revamping product performance, making functional or cosmetic changes, or reducing costs (Ohara 2001: 10–11). 8. Of course, the reality is more complex than this. The level of inter-firm coordination differed across firms and has changed over time. Ohara (2006) notes the shift toward closer assembler–supplier cooperation for product development in the 2000s. 9. For further details of the development of the industry, see Fujita (2006, 2008).

30. 97 Mai Fujita 10. This chapter refers to the motorcycles assembled by local Vietnamese firms using Chinese component kits as “Chinese motorcycles,” as they are called in Vietnam. 11. As a typical example, in September 2002 the Vietnamese government sud- denly announced that it would limit the import of motorcycle components to 1.5 million units for the year and allocated the quota to individual motorcycle manufacturers. As HVN and Yamaha Vietnam used up the quota initially allocated to them, they had to suspend production of motorcy- cles until additional quota was granted (“Deputy PM Dung feeds hungry motorbike makers more imports,” Viet Nam News, November 4, 2002). 12. The Vietnamese government required foreign motorcycle manufacturers to operate according to the feasibility studies they submitted to the authorities when they applied for investment licenses. This prevented the foreign motorcycle manufacturers from investing in the rapid expan- sion of production capacity, which had not been envisaged in late 1990s. 13. High tariffs on imported motorcycles remain as of 2008. 14. It is possible that some suppliers were counted more than once. 15. The author’s fieldwork in 2007. 16. Based on data from the Ministry of Industry. 17. Based on the author’s interview in 2005 with a state-owned enterprise which had been engaged in motorcycle assembly in the early 2000s. 18. HVN’s “Dream” and “Wave,” both of which are derivative models based on the old Super Cub, are the two most widely imitated base models in Vietnam. 19. Four of the five assemblers surveyed were included in the top ten local assemblers in terms of the value of turnover in 2006. 20. The author’s interview in November 2007. 21. Since there are no readily available databases of Vietnamese motorcycle com- ponent firms classified according to the types of value chains, the cases were selected from the database prepared by the author on the basis of pub- lished and unpublished data sources including the lists of firms complied by Japanese government-related and international organizations, newspa- pers and magazines, company directories, and interviews with Japanese motorcycle manufacturers. 22. While the previous interviews and surveys did not explicitly address the issues of capability building, information on the suppliers’ activities, prod- ucts, customers, machinery and equipment, and technology included in their results served as a basis to develop questions for the interviews in 2008 and to conduct consistency checks. 23. Interview with the deputy director of the Administrative Department of Supplier A (September 2008). References Abernathy, William J. and James M. Utterback. 1978. “Patterns of Industrial Innovation.” Technology Review 80(7) June/July: 40–47. Ariffin, Norlela. 2000. The Internationalisation of Innovative Capabilities: The Malaysian Electronics Industry. Ph.D. Thesis. Brighton: SPRU, University of Sussex.

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