DePaul University ACRJ Why Giants Change Their Minds Case Study 2 There are 3 groups of questions: Introductory, Decision-Forcing, and Challenge. Introduct

DePaul University ACRJ Why Giants Change Their Minds Case Study 2 There are 3 groups of questions: Introductory, Decision-Forcing, and Challenge.
Introductory Questions help you understand the case. If you can answer all of them, you are ready to take further analysis of this case. DO NOT answer them in your case report.
Decision Forcing Questions help you analyze Matsushita’s and Sony’s problems and solutions. You MUST answer these questions in your case report.
Challenge Questions help you evaluate Matsushita’s and Sony’s different supply chain management strategies. You MUST answer these questions in your case report.

Introductory Questions
What bad news had Mr. Yukio Shohtoku (managing director of Matsushita) been hearing?
What is the “eradicating and creating” strategy of Matsushita?
Why does Mr. Yoshihiro Taya (vice president of Sony MECS) worry about the “cycle time” of Sony’s digital camera and camcorder products?
How did Sony reengineer its supply chain to reduce the lead-time of its digital camera and camcorder production?
Decision Forcing Questions
What are the differences between Matsushita and Sony’s products?
What are the differences between Matsushita and Sony’s supply priorities?
Why did Matsushita and Sony’s former supply chains mismatch their product characteristics with their supply priorities?
What are the advantages of manufacturing in China? What are the disadvantages of manufacturing in China?
Challenge Questions
Whose supply chain reengineering strategy is a short-term solution and whose is a long-term solution?
What are the pros and cons of these strategies?

The report should be at least two pages, single space, 1 inch margins, and #12 fond. ASIAN CASE RESEARCH JOURNAL, VOL. 8, ISSUE 1, 37– 56 (2004)
ACRJ
Why Giants Change Their Minds
This case was prepared by
Dr Bin Jiang and William
Willette of The University
of Texas at Arlington, as a
basis for classroom discussion
rather than to illustrate either
effective or ineffective handling of an administrative or
business situation.
Please address all correspondence to: Dr Bin Jiang,
Department of Information
Systems and Operations
Management, The University of Texas at Arlington,
Box 19437, 535 Business
Building, Arlington, Texas
76019-0437, USA. E-mail:
binjiang@marshall.usc.edu
BACKGROUND INFORMATION
Ten years ago China’s endless supply of cheap labor produced an endless supply of cheap (and often shoddy)
products, primarily toys and textiles. China still makes those
plus much more. It is now the world’s fourth-largest industrial producer behind the U.S., Japan and Germany. China
produces more than 50% of the world’s cameras, 45% of its
microwave ovens, 30% of its air-conditioners and televisions,
25% of its washing machines and nearly 20% of all refrigerators. Now China is emerging as the workshop of the world.
The ability to make nearly anything in China with high
quality at a very reasonable cost, then sell it to customers
both near and far, is having a big impact on multinational
companies.
Most large, multinational, manufacturing firms, ranging from consumer personal care companies such as Johnson
& Johnson and Unilever to auto manufacturers such as General Motors and Volkswagen and high tech manufacturers
such as Intel and Dell, have developed production and
export bases in China. Sino-international joint ventures are
even more numerous. How to integrate China into their global supply chain systems is becoming a popular topic for
multinational companies (MNCs).
According to A.T. Kearney’s “2002 FDI Confidence
Index”, the United States lost its lead in the foreign direct
investment (FDI) attractiveness race to China. For the first
time in five years, the United States was knocked out of the
top spot as the number one foreign investment destination
© 2004 by World Scientific Publishing Co.
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Table 1. The FDI Confidence Index
Rank
2002
2001
2000
1999
1998
1
China
U.S.
U.S.
U.S.
U.S.
2
U.S.
China
U.K.
China
Brazil
3
U.K.
Brazil
China
U.K.
China
4
Germany
U.K.
Brazil
Brazil
U.K.
5
France
Mexico
Poland
Mexico
Germany
Source: A.T. Kearney, “FDI Confidence Index”, September 2002.
for global investors from the world’s largest 1,000 corporations (Table 1). Nearly one-third of senior executives from the
world’s largest 1000 MNCs are looking to China for first-time
investments over the next three years, three times more than
those interested in entering the United States. For foreign investors with operations throughout the world, China’s entry
into the WTO (World Trade Organization) is a good opportunity to shift production bases from their home countries and
other Asian countries to China. Further to China’s benefit,
the anti-terrorism campaign and security concerns in countries such as Malaysia, Indonesia and the Philippines may
further lessen their attractiveness to MNCs’ executives.
In China, most FDI inflows go into building manufacturing facilities for foreign-invested enterprises (FIEs) rather
than into financial assets like stocks, bonds or other service
industries. There are more than 400,000 FIEs in China, and
most of them concentrate on manufacturing industries. Foreign investors are finding that using China as a manufacturing and export base is often more profitable — and almost
always far easier — than selling goods inside the country.
The result is that China, once viewed by wide-eyed executives as the market of future riches, has instead become the
world’s factory floor. Today, FIEs contribute more than half
of all China’s exports. Table 2 shows the significant role of
FIEs in China’s exports. This means that China’s emergence
as a reliable, stable producer of high-value, technologicallysophisticated products is rewriting the economics of a wide
range of global manufacturing industries and their global
WHY GIANTS CHANGE THEIR MINDS
39
Table 2. FDI Flows, Total China’s Exports, FIEs’ Exports Performance (1980–September 2002)
FDI
(billions of US$)
China’s Exports
(billions of US$)
FIEs Exports
(billions of US$)
FIEs’ Share of
China’s Exports
1980
na
18.12
0.01
0.0%
1981
na
22.01
0.03
0.1%
1982
na
22.32
0.05
0.2%
1983
1.80
22.23
0.33
1.5%
1984
1.26
26.14
0.07
0.3%
1985
1.66
27.35
0.30
1.1%
1986
1.87
30.94
0.58
1.9%
1987
2.31
39.44
1.21
3.1%
1988
3.19
47.52
2.46
5.2%
1989
3.39
52.54
4.91
9.4%
1990
3.49
62.09
7.81
12.6%
1991
4.37
71.91
12.05
16.8%
1992
11.01
84.94
17.36
20.4%
1993
27.52
91.74
25.24
27.5%
1994
33.77
121.01
34.71
28.7%
1995
37.52
148.77
46.88
31.5%
1996
41.73
151.07
61.51
40.7%
1997
45.26
182.70
74.90
41.0%
1998
45.46
183.76
80.96
44.1%
1999
40.39
194.93
88.63
45.5%
2000
42.09
249.21
119.44
47.9%
2001
46.90
266.16
135.45
50.9%
2002
55.01
325.57
166.94
51.3%
Source: China Statistical Yearbook 2001. The data for 2001 and 2002 are taken from the official website of National Bureau
of Statistics of China.
supply chain systems, not just in industries that are labor
intensive.
Matsushita and Sony, the two largest consumer electronics makers in Japan and in the world, inevitably
stretched their supply chains to their low-cost manufacturing
neighbor, China, to reduce costs. Among Matsushita’s 144
overseas manufacturing subsidiaries, 49 of them are scattered
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in China; six of Sony’s 35 factories abroad are located in
China. However, in 2002 when Matsushita was accelerating
its pace on stretching the supply chain in China, Sony unexpectedly decided to shift some of its manufacturing business
in China back to Japan.
ERADICATING AND CREATING: MATSUSHITA’S
SUPPLY CHAIN REBUILDING STRATEGY
Matsushita’s Embarrassing Loss
Since 1993 Matsushita Electric Industrial Co., Ltd, the largest
home appliances and household equipment (HAHE) producer in the world, has competed with low-priced Chinese
counterparts in the international market. The managing director Yukio Shohtoku, who is responsible for Matsushita’s
overseas business, continuously hears bad news from
overseas branches: Chinese producers keep grabbing
Matsushita’s market shares by working as OEMs (original
equipment manufacturer). Because the Chinese price is becoming the world price, Matsushita must continue cutting its
profit margin to follow its Chinese competitors’ low price,
otherwise it will lose more market share in the world.
Table 3 shows the influence of some low-priced Chinese
commodities on the U.S. market:
Table 3. The Impact of Chinese Products
Commodities
Price ($)
(without Chinese imports)
Price ($)
(with Chinese imports)
Decrease (%)
DVD
491(in 1997)
165 (in 2001)
66.4
Fax Machine
314 (in 1997)
136 (in 2001)
56.7
VHS
157 (in 1997)
70 (in 2001)
55.4
19 (in 1997)
12 (in 2001)
36.8
27.41/sqm (in 1997)
18.5/sqm (in 2000)
32.5
Telephone
Glass Windshields
Source: Nikkei BP Network, National Automotive Glass Consultants.
WHY GIANTS CHANGE THEIR MINDS
41
However, in these endless price wars, Matsushita has a
fatal weakness — high cost; Chinese labor costs are only onetwentieth of the Japanese and Chinese land prices are only
one-thirtieth of the Japanese. Four decades ago, when Japanese manufacturers began to beat their U.S. counterparts, the
Japanese labor cost was one-fifth of the American. Recalling
this experience, Matsushita is very worried about its HAHE
segment which is experiencing huge pressure from cheap
Chinese substitutes.
To maintain its leadership in the HAHE market,
Matsushita believed that the combination of Japanese advanced techniques/parts and Chinese low-cost labor will enhance its competitive advantage in the world. So it gradually
established some assembly lines in China. For example, in
1994 Matsushita established Shanghai Panasonic Microwave
Oven Company that was able to produce 500,000 units annually. Since 1987 Matsushita has established 49 subsidiaries or
joint ventures in China. All of them import most of their necessary parts or materials from Japan and assemble the final
products with Chinese workers. Matsushita believed that
this operation model could maintain the traditional advantage of Japanese products — high quality, and also make use
of China’s traditional competitive advantage — low cost labor and land. This model greatly helped Matsushita cut its
products’ prices. The Shanghai subsidiary’s “Panasonic” microwave oven was thirty percent cheaper than its counterpart
made in Japan. Matsushita dreamed that this operation
model would eliminate or at least alleviate the impact of
low-priced Chinese products.
However, Matsushita’s dream did not come true. The
Shanghai subsidiary only produced 120,000 units per year
and had to stop producing one month in 1998 to lay off
many employees. By the end of 2000, the Shanghai subsidiary was facing bankruptcy. At the same time, Guangdong
Galanz Enterprise Group Co., Ltd, Matsushita’s largest competitor of microwave ovens in China and in the world, was
producing 12 million units per year and beating the
Matsushita’s microwave ovens in every individual market
around the world. For other HAHE products, such as DVDs,
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TVs, and refrigerators, Matsushita is facing similar stories: it
keeps losing its market share to Chinese counterparts.
The fundamental reason for Matsushita’s loss is high
price. The Nikkei BP Network reports, for example, that in
the U.S.market, a “Panasonic” iron is $29, but a Chinese famous brand “Haire” iron is only $9.90; a “National” DVD
player is $169.99, but a Chinese OEM product under the
American brand “APEX” is only $99.99. In China, the cheapest “Galanz” microwave oven was RMB299 ($36) in 2000, but
the cheapest Shanghai subsidiary’s “Panasonic” microwave
oven was RMB630 ($76).
Matsushita possesses world-class brand names, cutting-edge techniques, perception of high quality, powerful
promotion campaigns, and affluent capital, as well as the
low-cost Chinese labor in production processes, but it still
lost so painfully. The embarrassing loss forced the
Matsushita management to think hard about the reasons
why it could not organize its valuable resources effectively
and efficiently along its supply chain.
At last, Mr. Kunio Nakamura, the CEO of Matsushita,
believed that the current supply chain was obstructing the
development of Matsushita. He decided to initiate a supply
chain revolution in Matsushita, and named his strategy as
“Eradicating and Creating.”
Rebuilding the Matsushita’s Supply Chain in China
Managing director Yukio Shohtoku was in charge of this
“Eradicating and Creating” supply-chain rebuilding project.
Before becoming the managing director of overseas business,
Mr. Shohtoku worked as the president of Matsushita Electric
(China) for six years. His motto is: “Once you are beaten in
China, you will also be beaten consequently elsewhere in the
world by the winner in China.” He believed that Matsushita
would be in an unassailable position in China and in the
world as long as its new supply chain could make full use of
China’s competitive advantages.
Under Mr. Shohtoku’s supervision and direction,
Matsushita began its supply-chain rebuilding project in 2001.
WHY GIANTS CHANGE THEIR MINDS
43
Compared to its former supply chain, there are four fundamental changes in Matsushita’s new supply chain:
Move manufacturing activities to China
Matsushita closed its fax machine factory in Germany by the
end of 2000, and closed its microwave oven subsidiary and
air-compressor factory in the U.S. in 2001. Matsushita is now
asking more than 10,000 Japanese employees in its manufacturing sector to retire early. All of these closed businesses
and cancelled job positions were or are being moved to
China. By 2005, Matsushita will transfer its one-third of its
manufacturing business from Japan and the rest of the world
to China.
Establish the new “brain” in China
Although Matsushita entered China twenty years ago, there
are only around 1000 technicians in China compared to its
total Chinese employees of over 30,000. In Matsushita’s
former supply chain model, all important parts were designed and produced in Japan. China’s subsidiaries only
handled the pure assembly tasks. However, the Japanese designed the products based on their understanding of Japanese manufacturers. For example, Japanese designers would
like to increase equipment costs rather than increase labor
costs. But in China the labor cost is much lower than in
Japan. So the original Japanese design only increases costs in
China’s factories. On the other hand, Japanese designers
do not know Chinese customers’ demands very well. For
example, Japanese customers want the microwave oven with
the barbecue function, but Chinese customers rarely taste
barbecue.
In February 2001, Mr. Yoichi Morishita, the Chairman
of Matsushita, arrived in China just to announce that
Matsushita decided to establish a new “brain” — Matsushita
Electric R&D Center (China) in Beijing. This center would
be the second largest one among Matsushita’s sixteen R&D
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centers around the world (the largest one is in Matsushita’s
headquarters). He said that it was too difficult to explain
everything about China to Japanese designers; to really make
use of China’s special competitive advantages and to really
meet Chinese customers’ demands, Matsushita decided to
hand over its China-related development and research issues
to local researchers and engineers. “We have definitely made
up our mind to rebuild our supply chain in China from the
very beginning point — the design paper,” Mr. Morishita said.
Localize material supplies
After carefully studying China’s logistics industry,
Matsushita surprisingly found that not only could it access
all its longtime Japanese suppliers in China, but also the
Japanese suppliers’ prices in China were twenty to thirty
percent cheaper than in Japan. Polystyrene, a common material in the home appliance industry, is a typical example that
explains this unbelievable result.
Because China’s undeveloped infrastructure and regional fragment distribution channels make it impossible for
polystyrene suppliers to reach as many potential customers
as possible and vice versa, the Chinese government established a national polystyrene distribution and trade center in
Zhejiang province. In this center, a customer can meet more
than 700 polystyrene suppliers from China and other major
polystyrene producing countries. After investigating each
supplier’s price, the center will publish the average prices of
different products everyday. Armed with this pricing information, the customer can save a lot of negotiation cost and
the individual supplier cannot increase the price arbitrarily.
The competition among these suppliers not only decreases
the price level, but also increases the customer supply chain’s
flexibility. Supported by several hundred suppliers, a customer can easily build up a highly agile polystyrene supply
link.
Matsushita has a few fixed longtime polystyrene
suppliers in Japan and their prices are negotiated at the
beginning of a year. Even though the fixed suppliers can
WHY GIANTS CHANGE THEIR MINDS
45

decrease Matsushita’s supply chain risk, the fixed prices are
generally much higher than the flexible prices. Adding the
transportation costs from Japan to China, the polystyrene in
Matsushita’s former supply chain in China is more expensive
than in Japan.
There are many other material distribution and trade
centers in China providing steel, paint, hardware, and so on.
All of them function with a similar mechanism as the polystyrene distribution and trade center. After investigating
relevant distribution centers and its Chinese competitors’
suppliers. Matsushita decided to use as many Chinese suppliers as possible for its operations in China.
Stretch the distribution link
In 2000, when Matsushita’s Shanghai subsidiary produced
140,000 microwave ovens annually, its Chinese competitor
Galanz produced 12,000,000 units in the mean time. The obvious reason for such a huge sale difference is the price gap.
The cheapest “Panasonic” microwave oven was sold at
RMB630 ($76), but Galanz’s lowest price was only RMB299
($36). Beyond the price reason, however, the distribution link
also contributed to the huge sale gap.
Low-cost labor and large economy of scale are two
competitive aces in the Chinese producers’ hands. Foreign
companies can make use of the first one quickly and easily,
but they usually cannot enjoy the second one even if they
have been in China for a long time. Generally, foreign companies concentrate in China’s coastal cities where markets
will mature, but the rural and inland markets, in which 70
percent of Chinese customers live, rarely offer foreign companies’ HAHE products. On the contrary, powerful Chinese
firms (such as Galanz, Haire and TCL) continue working
hard to increase their sales in rural and inland markets. The
huge demand of the one billion rural and inland customers
encourage Chinese firms to keep improving their economy of
scale and cut their costs further.
With undeveloped infrastructure and low-income
levels, however, the rural and inland markets have too many
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special requirements for delivery, services, and credit management. So Matsushita selected TCL, the largest TV producer in China, as its strategic partner to stretch its supply
chain to Chinese rural and inland markets. TCL has 32 regional distribution subsidiaries, 174 distribution centers, and
4000 sales agents. Its products can reach nearly 20,000 retailers in China.
According to the agreement between Matsushita and
TCL, Matsushita can use TCL’s established distribution networks to sell its products in China’s rural and inland market.
In return, Matsushita provides its latest patents for DVDs,
digital TVs and air-conditioners to TCL.
Exciting Dawn of Success
By the end of 2001, Matsushita’s new supply chain promoted
its first product — NN-MX20WF microwave oven. From the
design paper to the final product, NN-MX20WF passed the
following phases along this new supply chain:
Design: Chinese engineers dominated the design of NNMX20WF. These low-cost Chinese talents only took RMB3000
($362) salary per month, but they creatively reduced the cost
of parts by thirty percent. They overthrew Matsushita’s design mode by devoting themselves to applying local materials or parts and to exploiting Chinese factories’ competitive
advantages to the fullest.
Purchase: Based on the new product design, Panasonic
(Shanghai) used local supplies for polystyrene and electronic
components. Only the sheet iron was imported from Japan
because the oversupply of sheet iron in Japan lowered its
price even cheaper than in China.
Produce: After closing its microwave oven factory in the
U.S., Matsushita also stopped producing low-end microwave
ovens in Japan. All these production capacities were moved
to the Shanghai subsidiary, raising its capacity from 500,000
units to 2 million units. Such a scale dramatically cut this
subsidiary’s operation cost.
WHY GIANTS CHANGE THEIR MINDS
47
Marketing: By the end of 2001, Matsushita simultaneously
promoted the NN-MX20WF oven in China, Japan, and the
U.S. The prices were RMB398 ($48), ¥9980 ($82), and $69 in
these three markets, respectively. The average price cut was
over thirty-seven percent. Even though these prices were not
the lowest in the three markets, the combination of reasonable low price and high brand/quality perception of
Matsushita still deeply touched customers’ hearts.
From November 2001 to January 2002, Matsushita sold
nearly 40,…
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