The Machine that Changed the World

What is Lean Production?

The best way to describe this innovative production system is to contrast it with craft production and mass production. Craft production uses highly skilled workers and simple but flexible tools to make exactly what the consumer asks for, one item at a time.

The mass producer uses narrowly skilled professionals, designed products made by unskilled or semi skilled workers tending expensive single purpose machines.

The lean producer combines the advantages of craft and mass production, while avoiding the high cost of the former and the rigidity of the latter. Lean producers employ teams of multi-skilled workers at all levels of the organisation and use highly flexible increasingly computerised machines to produce volumes of products in enormous variety.

Lean production is lean because it uses less of everything compared with mass production, half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product, in half the time. It also requires keeping far less than half the needed inventory on site, results in many fewer defects and produces a greater and ever growing variety of products. Lean producers set their sights on perfection, continually declining costs, zero defects, zero inventories and endless product variety.

WHow was it develop?

In 1950 a young Japanese engineer Eiji Toyoda visited the Ford plant in Detroit to study mass production methods. Toyoda and his Production Manager, Taiichi Ohno, concluded that mass production could never work in Japan and they developed the Toyota Production System and ultimately lean production.

One of the key problems that Ohno faced was small volume. The traditional method of having dedicated press lines would not work for Toyota and so Ohno developed a solution where quick and simple die change techniques were used by production workers to enable change overs to occur every two or three hours instead of two to three months. In the process of doing this he made an unexpected discovery, it actually cost less per part to make small batches of stampings, than to run off enormous lots. Ohno began to experiment and put his workers into teams with a team leader rather than a foreman.

He gave the Team the job of housekeeping, minor tool repair and quality checking and then set aside time periodically for the team to suggest ways collectively to improve the process. This continuous incremental improvement process, Kaizen in Japanese, took place in collaboration with the industrial engineers who still existed, but in much smaller numbers.

When it came to rework, Ohnos thinking was truly inspired, he reasoned that the mass production practice of passing on errors to keep the line running caused errors to multiply endlessly. Ohno instituted a system of problem solving called the “Five Whys”. Production workers were taught to trace systematically every error back to its ultimate cause and then devise a fix so that it would never happen again.

In the 1950s Toyoda began to establish a new lean production approach to component supply. The first step was to organise suppliers into functional tiers, different responsibilities were assigned to firms in each tier, the first tier suppliers were responsible for working as an integral part of the product development team in developing a new product.

Toyoda told them to develop, for example, steering, breaking, electrical system that would work in harmony with the other systems. Each first tier supplier formed a second tier of suppliers under itself. Toyota shared personnel with its supply group firms in two ways. It would lend them personnel to deal with work load surges and it would transfer senior managers not in line for top positions at Toyota to senior positions in the supplier firms.

Ohno developed a new way to coordinate the flow of parts within the supply system on a day to day basis, the famous Just in Time system called “Kanban” at Toyota.

Supply chain issues

All the variety available from lean production is worthless if the lean producer could not build what the customer wanted. In the case of the mass producer the car market fluctuated wildly and the assembler tended to use the dealer as a shock absorber to cushion the factory from the need to increase and reduce production continually. Relationships between the factory and the dealer were distant and usually strained as the factory tried to force cars on dealers to smooth production. Relations between the dealer and the customer were equally strained because dealers continually adjusted prices, made deals, to adjust demand in line with supply whilst maximising profits.

Conversely Toyota built up a network of distributors, some wholly owned and some in which Toyota held a small equity stake, who had a shared destiny with Toyota. The dealer became part of the production system as Toyota gradually stopped building cars in advance for unknown buyers and converted to a build to order system which the dealer was the first step in the Kanban system sending orders for pre-sold cars to the factory for delivery to specific customers in two to three weeks.

Toyota sales staff did not wait in the show room for orders, instead they went directly to customers by making house calls. When demand began to drop they worked more hours and when demand shifted they concentrated on households they knew were likely to want the type of car the factory could build.

The latter was possible because of a second feature of their aggressive selling, a massive data base on households and their buying preferences, that Toyota gradually built up on every household that ever showed interest in a Toyota product.

Toyota had fully worked out the principles of lean production by the early 1960s. the other Japanese auto firms adopted most of them as well, although this took many years.

the elements of lean production

To properly understand lean production, we must look at every step in the process beginning with product design and engineering and then go far beyond the factory to the customer who relies on the automobile for daily living. It is critical to understand the mechanism of coordination necessary to bring all these steps into harmony and on a global scale, a mechanism we call the lean enterprise.

Running the factory

Two factories were reviewed and the performance of each is summarised below:

 

Surveys of factories throughout the world found that the productivity in American based factories using the Japanese lean manufacturing technique was comparable to the average Japanese plant in terms of quality, but lags about 25% in terms of productivity.

These difference are partly due to the fact that the transplanted operations in America are still at an early point in the learning curve with respect to lean production. It is interesting to note that the best performing companies in Japan run the best performing transplants in North America, suggesting that most of the variation observed is due to differences in management.

The study found that the best American owned plants in North America have demonstrated that lean production can be implemented fully by Western companies and the best plants in the developing countries such as Mexico and South America, show that lean production can be introduced anywhere in the world.

Productivity & Quality
The survey also found that there was an important relationship between productivity and quality.

The Japanese concept that quality should be free, proved to be correct as those organisations using lean manufacturing demonstrated the best quality performance whereas the mass production type factories struggled in achieving their quality targets. Mass producers found that quality is very expensive when it can be achieved at all.

Ease of manufacture is another benefit of a lean design process. A survey of all car manufacturers which asks them to rank each other in terms of manufacturer ability of products produced the following results.

 

The truly lean plant has two key organisational features. It transfers the maximum number of tasks and responsibilities to those workers actually adding value to the car on the line and it has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause.

This means team work among line workers, and a simple but comprehensive information display system that makes it possible for everyone in the plant to respond quickly to problems and to understand the plants overall situation. In a lean plant, all information, daily production targets, cars produced so far that day, equipment breakdowns, personnel shortages, overtime requirements and so forth are displayed on electronic displays that are visible from every work station.

Every time something goes wrong anywhere in the plant, any employee who knows how to help runs to lend a hand. It is the dynamic work team that emerges as the heart of the lean factory.

Building these efficient teams is not simple. Firstly workers need to be taught a wide variety of skills and then need to acquire many additional skills, simple machine repair, quality checking, house keeping, and materials ordering. They need encouragement to think actively, indeed proactively so that they can devise solutions before problems become serious.

The study found that workers respond only when there exists some sense of reciprocal obligation, a sense that management actually values skilled workers, will make sacrifices to retain them and is willing to delegate responsibility to the team.

Merely changing the organisation chart to show teams and introducing quality circles to find ways to improve production processes are unlikely to make much difference.

designing the car

All large automobile companies, mass production or lean, face the same basic problem in developing a new product. A number of functional departments, marketing, engineering, body engineering, chassis engineering, process engineering and factory operations must collaborate intensively over an extended period of time to develop the new car successfully. The question is how.

A good example of lean product development is Honda’s use of project teams in the Honda Accord. The fourth generation Accord was launched in 1989. Honda’s product development process is quite different from the Western manufacturers such as General Motors.

A Large Project Leader (LPL) is appointed and given powers sufficient to carry out all tasks. A matrix structure is used in which each project member is on loan from a functional department. On completion of the project, they returned to their functional departments or were assigned to a new product development project such as the next generation Accord set for introduction in late 1993.

A study of product development around the world found that a totally new Japanese car required 1.7 million hours of engineering effort and took 46 months from the first design to customer deliveries. By contrast the average US and European projects of comparable complexity took 3 million engineering hours and consumed 60 months. The differences fell into four areas, leadership, teamwork, communication and simultaneous development.

coordinating the supply chain

In the mass production system the by word is cost comes first, so quoting low prices per part is essential for a component manufacturer to achieve a winning bid. The suppliers however, are also aware that follow on business for a new model can often extend for ten years. Then there is the market for replacement parts which may be considerably longer, so should they be tempted into bidding below cost knowing that they may be able to negotiate up annual cost adjustments for follow on contracts?

The temptation to buy the business is almost irresistible. The assembly plant in an attempt to ensure they are getting the best price brings other suppliers in to the bidding process. At the end of the selection process the assembler usually ends up with a single supplier for the most complex and technologically advanced component such as engine computers. For commodity parts such as tyres, three or four suppliers are often put under contract.

Once the new model reaches the market, a lengthy process of debugging begins entailing intense integration between the assembler and its suppliers. Issues such as operation, manufacturability and quality targets come into play. It is considered the suppliers responsibility to find whatever the problem is and correct it.

Most suppliers believe strongly that “:what goes on in my factory is my own business”. Assembler meddling in supply production problems is distinctly unwelcome because it could uncover valuable data on the suppliers operation and costs, information that the assembler could use to bargain down prices for follow on contracts.

The supplier assembler relationship can remain conflicted even once the new model is fully debugged. If competition is unexpectedly stiff, for example, production may never reach the planned volume so costs increase even as pressure grows to cut prices. The assembler may be tempted to look for sources a lower costs even outside the companies already under contract.

Suppliers who have just tooled up and who are in fact, selling below cost may then be dumped for a lower bidder, this step no doubt cuts costs in the short term but reconfirms all suppliers, including the new winners in the belief that information must be guarded from the assembler, that any trust placed in a long term relationship is trust misplaced. As if these hurdles weren’t enough, there is the problem of fluctuating volume.

The major automotive markets of the mass producers within North America tend to be highly cyclical, there may also be rapid shifts in the mix of products that consumers demand. The mass production assembler takes the position that these shifts are unpredictable and the parts ordered may have to be canceled on sudden notice. Any over supply of parts they may result is the suppliers problem.

At best the typical mass production supply system can succeed in keeping the suppliers profits very low. The assemblers purchasing department may cite this fact as the primary evidence of its success.

there is a better way

In lean production the assembler selects a smaller number of necessary suppliers. The main selection criteria is not the basis of bids, but rather on the basis of past relationships and a proven record of performance. A third to an eighth as many suppliers are involved compared with a mass production company because lean producers assign a whole component to what they call a first tier supplier. This supplier is in charge of delivering complete components to the assembly plant.

For example Nissan has only one seating supplier for its new Infinity Q45 model, while GM in many cases is still dealing with 25 suppliers providing the 25 needed parts to the seat building department of its assembly plants. The first tier supplier typically has a team of second tier suppliers, independent companies that are manufacturing specialists. These companies may in turn engage helpers in a third or even fourth tier of supply pyramid.

At the heart of lean supply lies a different system of establishing prices and jointly analysing costs. First the lean assembler establishes a target price for the car or truck and then with suppliers works backwards, figuring how the vehicle can be made for this price, while allowing a reasonable profit for both the assembler and the suppliers, in other words it is a market price minus system, rather than a supplier cost plus system. Once the part is in lean production, a technique called value analysis is used to achieve further cost reductions.

Value analysis which continues the entire time the part is being produced is a technique for analysing the costs of each production step in detail so that cost critical setups can be identified and targeted for further work to reduce cost still further. These savings may be achieved by incremental improvement or Kaizen, the introduction of new tooling or the redesign of the part.

For the lean approach to work, the supplier must share a substantial part of its proprietary information about costs and production techniques. The assembler and the supplier go over every detail of the suppliers production process looking for ways to cut costs and improvement quality. In return the assembler must respect the suppliers needs to make a reasonable profit.

Agreements between the assembler and the supplier ensuring profit gives suppliers the incentive to improve the production process because it guarantees that the supplier keeps all the profits derived from its own cost saving innovations and Kaizen activities.

A second feature of lean supply is continually declining prices over the life of a model. While mass producers assume that bidders are actually selling below cost at the outset of the contract and would expect to recoup their investment by raising prices year by year, the lean producers know that the price for the first years production is a reasonable estimate of the supplier actual cost plus profit.

The assemblers are also well aware of the learning curve that exists for producing practically any item so they realise that cost should fall in subsequent years even though raw material costs and wages increase somewhat. Improvements in lean production companies should in fact become much faster, that is learning curves should be much steeper than in mass production companies because of Kaizen.

Another important difference in lean supply is the way components are delivered to the assembler, it is now almost universally the practice in the best lean production companies to deliver components directly to the assembly line, often hourly, certainly several times a day with no inspection at all of incoming parts. To make just in time work at all another innovation of lean production is essential, production smoothing.

The final feature of lean supply is the supplier associations. Toyota, for example has three regional supply association, with 62, 136 and 25 first tier suppliers respectively. Nissan has two with 58 and 105 suppliers. Most of the other Japanese assemblers have supplier associations as well. Most of the remaining suppliers belong to these associations which have been extremely important for disseminating such new concepts as statistical process control (SPC) and total quality control (TQC), in the late 1950s and early 1960s, value analysis (VA) and value engineering (VE) later in the 1960s and computer aided design (CAD) in the 1980s.

The way suppliers are handled is different in a lean supply relationship. When a supplier falls short on quality or reliability the assembler does not dismiss the company, instead the assembler shifts a fraction of its business from that supplier to its other source for that part for a given time as a penalty. Lean producers do occasionally fire suppliers but not capriciously, suppliers are never kept in the dark about their performance, far from it in fact, all the Japanese manufacturers maintain relatively simple supplier grading systems.

The suppliers receive scores based primarily on the number of defective parts found on the assembly line, the percentage of on time deliveries in proper quantities and sequence and performance in reducing costs. The scoring system is not simply a statistical exercise. It also assesses the suppliers attitude and willingness to improve. Only if there is no sign of improvement will the supplier in the end be fired.

These then are the elements of lean supply. Rather than price, determined by the relative bargaining power of the two sides, as the main link with outside suppliers and bureaucracy as the chief link with in house supply divisions, the lean assembler substitutes a long term agreement that establishes a rational framework for analysing costs, establishing prices and sharing profits.

dealing with customers

The method which mass producers use to link their products and their customer has changed little over the years. Some move towards mega dealers, where a more entrepreneurial approach is taken to marketing, using multi franchises. Each car company has a extensive marketing division which coordinates the placement of orders by dealers to the car company. The coordination between the sales division and the product planners in the big mass production companies is poor.

While the product planners conduct endless focus groups and clinics at the beginning of the product development process to gauge consumer reaction to their proposed new models they havent found a way to incorporate continuous feedback from the sales division and the dealers. In fact the dealers have almost no link with the sales and marketing divisions which are responsible for moving the metal. The dealers skills lie in persuasion and negotiation, not in feeding back information to the product planners.

Its sobering to remember that no one employed by a car company has to buy a car from a dealer (they buy in house through the company instead, or receive a free car as part of their compensation package) thus they have no direct link to either the buying experience or the customer. Moreover a dealer has little incentive to share any information on customers with the manufacturer. The dealers attitude is “what happens in my show room is my business”.

The assemblers sales divisions have grown into enormous bureaucracies that cannot effectively communicate market demand back to product planners. Moreover they antagonise the dealers with whom they should have a collaborative relationship.

Whats more, the bizarre tradition of car selling where the customer and the dealer try to out wit each other on price is still firmly in place at dealerships even though more and more buyers report, in surveys, that they thoroughly dislike it. Sales people aren’t really interested in the customers needs or desires, they want to close a deal as soon as possible and present only selected bits of information about the product to achieve that end. Once the deal is signed the sales person has no further interest in that customer, the entire selling and negotiating system is based on giving the customer as little real information as possible.

This is the same principle on which the relationships between the dealer and the manufacturers is based.

To see lean distribution for what it should be, we cant begin from a narrow cost cutting perspective, the normal western approach in which factors such as the number of sales made by each salesperson per month is used as a way to measure success. Rather we must view it as an essential component of the entire lean production system.

What Is Lean Production the sales process & lean production

Lets begin by visiting a typical car dealer in almost any western country, the premises consist effectively of a large parking lot on which sits a vast array of new cars gathering grime and running up interest costs. The sales personnel who work on individual commissions live on a fixed proportion of every sale plus a small base wage. Most are professional sellers not product specialists, that is they have received their training sales techniques, particularly how to drive an effective bargain, rather than the special features of what they have been selling.

Once a deal is struck, after some intense haggling the customer, the buyer, is turned over to the financial staff to arrange payment, then to the service staff to arrange delivery. The service department is in charge of taking care of any subsequent problems. Three months after the sale, the buyer usually receives a questionnaire from the assembler “were you satisfied with the car and with the dealer?” the company wants to know. For some years after the sales, the buyer is likely to receive a monthly or quarterly magazine from the assembler with a few general interesting articles and information on new products.

How does this scenario we just sketched contrast with the sales practices of the lean Japanese producers? Toyota, as an example, has five distribution channels in Japan. Taking the Corolla channel, it is directly tied into the product development process. During the entire period that new cars destined for sale through the channel are being developed, staff members from the channel are on loan to development teams.

These channel representatives are in a position to make an invaluable contribution to product development. The sales staff in each dealership is organised into teams of seven or eight, an organisation very similar in fact to the work teams in the assembly plants. Just like those in the factory, these teams are multi skilled, all members are trained in all aspects of sales, product information, ordertaking, financing insurance and data collection.

They are also trained to systematically solve owners problems as they arise. Each work team begins and ends the day with a team meeting, during the bulk of the day team members disperse to sell cars door to door with the exception of one team that staffs the information desk in the dealership. Each month the entire team takes a day to solve, systematically, any problems that have cropped up using the “Five Whys” and other problem solving techniques. Selling of cars door to door is unique to Japan and is uniformly bewildering to foreign observers. Here’s how it works.

Team members draw up a profile on every household within the geographic areas around the dealership, then periodically visits each one, after first calling to make an appointment.

During their visits the sales representatives update the household profile, how many cars of what age does each family have?, what is the make and specification?, how much parking space is available?, how many children in the household and what use does the family make of its cars?, when does the family think it will need to replace its cars?

In Japan cars are custom built to specific orders and this assists in the determination of the price, because the customer is buying a tailor made car, the haggling that western car buyers find so distasteful is almost eliminated. The sales person doesn’t need to discount the product in order to get rid of a car that the customer would rather not have, moreover the prime objective of Japanese dealers is to keep the customer thinking that he or she is part of the dealers family. Dealers want customers to think they have been treated well and have paid a fair price.

A typical modern Corolla dealership may look similar to western dealerships in one respect, its showroom, but everything else is different. For starters no vast parking areas exist, in fact you will see few cars on the premises, other than three or four demonstration models. Since most cars are manufactured to order there is no expanse of finished vehicles to buy off the lot and no 60 or 70 days stock of cars running up interest costs. In Japan the stock of finished cars in the system averages only 21 days.

Second a sales person doesn’t descend on the hapless shopper Since the team is paid a group commission the seven or eight team members in the show room have no incentive to grab the customer before the next sales person does or suggest that he or she can provide a better deal, instead members of the team all join in the discussion, once the customer approaches them to ask a specific question.

The heart of any Japanese dealership is its service areas. The area’s primary purpose isnt to rectify problems or carry out routine service as in the case of western dealerships, rather its reason for existence is to prepare vehicles for ministry of transport inspection, a task that provides a major source of revenue.

Once a new car is delivered the owners become part of the Corolla family. This means frequent calls from the person selling the car, who henceforth becomes the owners personal sales agent. The representative will make sure the car is working properly and ferret out any problems that the owner may be having to relay back to the factory. The sales agent also sends the owner a birthday card or a condolence card in the case of death in the family and will call to ask if sons or daughters will need a car as they leave for college or their first jobs. It is often said in Japan that the only way to escape the sales agent from whom you once bought a car is to leave the country.

managing the lean enterprise

In recent years there has been a stronger emphasis towards developing a global enterprise. This includes protection from trade barriers and currency shifts and the creation of a top to bottom manufacturing system in each of the worlds major markets. Other advantages include product diversity, increased international sophistication of managers and protection against the regional cycles of the motor vehicle market.

diffusing lean production

There are only two ways for lean production to diffuse across the world. The Japanese lean producers can spread it by building plants and taking over companies abroad, or the American and European mass producers can adopt it on their own. Which of these methods proves dominant will have profound implications for the world economy in the next decade.

Japan’s move off shore began as a trickle in the 1960s, its first major initiative was Nissans engine and assembly plant in Mexico in 1966. Not much else happened for a long time unless you count extremely low volume assembly plants generally run by licensees rather than the Japanese company itself in protected developing country markets.

For example in 1966 when the Brazilian government prohibited further imports of complete vehicles, Toyota licensed a local Brazilian company to assemble kits of parts for its land cruiser utility vehicle. Once one company was firmly committed offshore, all the Japanese companies rushed to follow the lead into North America.

The assembly plants came first followed by engine plants and now a wide variety of parts plants, Honda, Nissan and Toyota have announced plans to design and engineer complete vehicles in North America by the late 1990s, with that step they will complete the process constructing a top to bottom manufacturing system. The other Japanese companies are sure to follow.

Ford and Other American manufacturers have found ways to equal the productivity of the transplants. The Americans have begun to rationalise their supplier system. The number of suppliers to each company has been reduced dramatically and the attitude towards quality fundamentally transformed. The study also found clear signs of the intent to move towards leanness in the areas of product development. The transition to lean production is proceeding with remarkable speed and smoothness, the transplants have shown that lean production can thrive in North America and some of the American companies show signs of mastering the new system as well. Still many problems must be overcome, these include the following:

The cyclical pattern of US and Canadian owned companies that many regard as national institutions is likely to prove too much for politicians and the general public to accept. Wide spread adoption of lean production may dampen both inflation and the business cycle.
If mass production is ideally suited to the survival of big companies through deep cycles in demand, it may also be cycle enhancing. That is its penchant for massive inventories both in process parts and finished units would seem to exacerbate the cycle.
As inflation builds, stocks are built up against the expectations of yet higher prices, this move pushes prices up further. Then when the economy suddenly falters, the built up stocks are worked off deepening the slump up stream in the production system.

completing the transition

It took more than 50 years for mass production to spread across the world. Can lean production spread faster? In North America the full implementation of lean production can eliminate the massive trade deficit in motor vehicles. We are certain that when there is no longer any difference between the North American and Japanese motor industries in productivity, product quality and responsiveness to changing market demand, trade will more or less naturally come into balance.

In Europe, the home today of classic mass production, lean production can quickly triple the productivity of the motor vehicle industry while providing more fulfilling jobs for factory workers, engineers and middle managers. It can balance Europe’s motor vehicle trade as well.

In many of the developing countries lean production is a means for rapidly developing world class manufacturing skills without massive capital investments. These countries will need only to find markets for their new industrial capabilities.

The greatest obstacle in the path of the lean world is easy to identify: the resistance of the massive mass production corporations that are left over from the previous era of world industry. These companies, General Motors, Renault, Volkswagen, Fiat are so large and prominent in the industrial landscape of North America and Western Europe that no government can allow them to fail suddenly. We think that it is neither practical nor desirable for these massive western enterprises to be swept aside by Japanese lean producers, but they need more creative solutions than the kinds that are being conventionally proposed. Solutions must take several forms:

Every mass producer needs a lean competitor located right across the road.
Mass producers in the west need a better system of industrial finance, one that demands they do better while supplying the large sums that will be needed to turn these large companies around.
Most mass producers will need a crises, what we have called a creative crises, to truly change.
Many observers expected that Japan would find it would no longer compete in the export of small vans and trucks because of the strengthening of the yen and its effect on Japanese wages. They thought that Korea, Taiwan, Thailand and Malaysia, the next tier of countries with low wages and an educated, industrious workforce, would collectively become the next Japan.

We never subscribed to this view because we knew that lean production is more than a match for low wage, mass production. First, lean production dramatically raises a threshold of acceptable quality to a level that mass production, particularly in low wage countries cannot easily match.

Second, lean production offers every expanding product, variety and rapid responses to changing consumer tastes something low wage, mass production, find hard to counter except through ever lower prices. Continually dropping prices is unlikely to work, because a third advantage of lean production is that it dramatically lowers the amount of high wage effort needed to produce a product of a given description and keeps reducing it through continuous incremental improvement.

Finally lean production can fully utilise automation in ways mass production cannot, further reducing the advantage of low wages. By the late 1980s it had become apparent that there would be no next Japan, even if a developing country created a lean production industry that would match the product quality and labour productivity of the best lean producers. Japans success had so sensitised the world trading system to massive inflows of industrial products from one region to another that no country could realistically hope to pick up where Japan left off.

what does this mean for the world economy?

Firstly the economy in a short period has changed in remarkable ways. The triumph of lean production has created new thresholds for product quality that no producer can hope to offset merely through low prices, based on low wages. As a result producers in the next tier of developing countries must become lean producers as well. Even those developing countries mastering lean production will need to think about the market for their products. Partly they should look at home because the productivity gains with lean production should bring motor vehicles within the reach a much larger fraction of domestic consumers.

The developing countries should also look for regional markets. The most striking feature of the world economy in the past few years is the sudden reorientation of the trading in manufactured goods from cross regional across the great oceans to intra regional with the great regions North America, Europe and East Asia. Exports from Japan to Europe are stable, while Japanese and European exports to North America are falling dramatically and European exports to Japan are growing dramatically from a very small base.

What we expect by the end of the decade is a much lower volume of total export between regions, a greater balance in the remaining trade flows and a focus for the remaining cross regional trade on niche type specialty products. In the great regions the flow of products among countries should increase dramatically. For example, in North America, the United States and Canada began to integrate their auto industries in 1965. For the participating assembler companies, the US big three, this meant that cars and trucks could be made in one country and shipped to the other for sale without paying tariffs as long as the assemblers met modest Canadian requirements to keep Canadian production roughly proportional to Canadian sales.

East Asia is itself the third emerging region. Although behind North America and Europe in its development only a few years ago, the individual economies of Japan, Korea and Taiwan were struggling to boost the exports of finished manufactured goods to the Northern American and European markets. They seemed almost oblivious of each other and were highly resistant to accepting manufactured goods imported from their neighbours.

The logic of motor vehicle industry development in East Asia is similar to North America and Europe. We expect more basic vehicles to be made into top to bottom manufacturing complexes in the developing countries of the region for sales in all countries of the region.

We also expect the manufacture of more complex and expensive vehicles to be focused in Japan for export to other markets in the region. The anomaly in East Asia of course is China, until spring 1989 it seemed to be moving towards a more open stance regarding its economy and the world and might logically have entered into a regional East Asian market, at least on a limited basis.

For the moment the Chinese industry is still focused inward pursuing a combination of extremely rigid mass production and its two volume production complexes, and inefficient low quality craft production in about a 100 additional vehicle manufacturing facilities spread throughout China. This disastrous combination gives China the distinction of having the worlds largest motor vehicle industry in terms of employment (more than 1.6 million workers) and one of the smallest in terms of out put (a projected 600,000 units in 1990).

Australia presents perhaps the most difficult instance of a country with a small and highly developed motor vehicle industry, but with an insufficient domestic market, and thus far, a lack of regional outlook. The Australian Government decided in the 1960s that it would develop a top to bottom auto industry to replace both imported vehicles and the kit assembly parts produced in Europe and North America. By the end of the 1960s it had done so but with all the disadvantages of mass production in a low volume, highly protected market.

Despite Australia’s efforts in the 1980s to consolidate the five producers into three more viable production systems, and the presences of several Japanese producers our surveys found productivity and quality levels far off the standards set by lean producers in Japan and North America.

The logical path for Australia would be reorient its industry towards the oceanic regional market including Indonesia, Singapore and the Philippines. Each country within this region might balance its motor vehicle trade by permitting cross shipment of finished units and parts that could gain the scale needed to reduce costs and let lean production flourish. Australia, as the most advanced country in the region presumably would concentrate its own production on complex luxury vehicles while Indonesia at the other extreme would make cheap entry level products.

Unfortunately, nothing of this sort has happened. Australia sees itself as part of the developed world and thinks naturally of exporting to North America, Europe and even Japan, while Indonesia thinks of itself as part of the developing world of the Asian countries and focuses on developing trades with Malaysia, the Philippines and Thailand. Thus the oceanic countries of the Southern Hemisphere consist of a region still unfocused in terms of their place in the global economy.

This book review was completed by Chris Mason, CEO of MindShop International.