by Rene T. Domingo (email comments to rtd@aim.edu)

Economic progress often been associated with the contributions of big business to employment, exports, technology, and taxes. In fact, they have become symbols of industrialized countries. Japan is known for its sogo shosha’s (former zaibatsu’s) - Mitsui, Mitsubishi, Marubeni, and large manufacturers like Toyota, Matsushita, and Sony. The “Made in Germany” mark conjures the images of Mercedes Benz, BMW, BASF, Siemens, and other giant firms. A former executive of General Motors once said that what is good for GM is good for America. A country is “Americanized” when its population starts drinking Coke and eating McDonalds hamburgers. Year after year, we read with awe about big business as they dislodge one another in the Fortune 500 list. All these stereotypes about “big is better” dangerously leads developing countries in Asia striving to be another Japan into thinking that the creation of large firms is the passport to progress. While it is true that big businesses contribute the largest to the GNP of any economy, we should not forget that propping them up are the thousands of small and medium enterprises (SME’s). These unsung heroes feed the giant firms with their essential supplies of material, labor, and services. True economic progress cannot happen until and unless the SME’s of any country are strong, stable, and amplysupported by their big clients and by the government. Japan, Inc. is not about big business. Its economic backbone is its SME’s. 99.5% of the 800,000 manufacturing firms in Japan are SME’s which also account for 41% of employment and 53% of sales. The average number of employees of the SME’s is 9 while the large firms is 1360. The average for the whole manufacturing industry is 15 employees. About 60% of the SME’s are registered as single proprietorships. 66% of the SME’s in Japan are subcontractors - defined as firms in which more than 80% of their capacity are devoted to a few contractors. Often, a Japanese subcontractor caters only to one customer which is usually a big firm.

The transportation machinery industry, which includes car making, has the highest percentage of firms doing subcontracting work, about 88%. Strictly speaking, Toyota Motors Corp. is not a manufacturer, but a mammoth assembler of cars and trucks. Practically out of the 10,000 parts of a vehicle, the only one it makes is the engine. All the other parts - electrical, metal, plastic, rubber, and fabric - are manufactured by its tiers of ancillary subcontractors - subsidiaries, affiliates, and independent suppliers. The first tier consists of about a dozen wholly-owned subsidiaries, foremost of which are Nippon Denso which supplies electrical parts and air conditioners and Aisin Seiki which makes brakes and transmissions. This first level of subcontractors employs about 100,000 workers. The second tiers and third tiers consist of hundreds of smaller enterprises employing thousands. And there are fourth and even fifth tiers of subcontractors - micro enterprises of households and housewives. Thus a bolt of the Corolla could be partly processed in the backyard of some Japanese house using high-tech automated equipment provided by a contractor. With this network, the Toyota Group probably provides the biggest employment in and around Aichi Prefecture where it is located. This subcontracting network is successful because Toyota does not apply traditional thinking in managing it. Traditionally managed companies pits one supplier or subcontractor against each other in an effort to get the lowest price. This practice often backfires and results in bad products, late deliveries, and ruinous competition among subcontractors which affects their viability. Toyota, on the other hand, partners with its suppliers and subcontractors and works with them on a long-term - if not lifetime basis. They are selected not purely on the basis of price, but more on quality, stability, and reliability of products, production, and management in the long run. To develop these long-term relationships, Toyota limits its number of first tier subcontractors, and likewise encourages these subcontractors to choose only a few subcontractors to serve them. It is not unusual to see in the Toyota network one contractor having only one subcontractor to supply a specific part, and vice-versa, one subcontractor having only one contractor or customer. This mutual interdependence develops a spirit of trust and cooperation between the two parties - i.e., between the big and small firms. The Japanese subcontracting network can be visualized as a lean triangle, with the big primary firm at the apex and with the lowest tiers of micro enterprises representing the base. The Western model would be a flatter and fatter triangle with a wide base representing a larger number of subcontractors serving each tier. Western companies usually maintain a large of number of suppliers and subcontractors. Just in case somebody fails to deliver, there is always a back-up. The relationship is often short-term and does not lead to mutual help. Economic progress means healthy layers of big, medium, and small enterprises helping one another in a spirit of long-term partnership.