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This article was downloaded by: [Universite De Paris 1]On: 29 August 2013, At: 00:54Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK
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Building External Manufacturing Capability in EmergingMarkets: Honda's Knowledge Transfer and the Role ofLocal Suppliers' ResponsivenessNguyen Duc Tiep PhD a ba Faculty of Economics, Hanoi University of Industry, Vietnamb Graduate School of Economics, Kyoto University, Yoshida-honmachi, Sakyo-ku, 606-8501,Japan E-mail:Published online: 25 Sep 2008.
To cite this article: Nguyen Duc Tiep PhD (2007) Building External Manufacturing Capability in Emerging Markets: Honda'sKnowledge Transfer and the Role of Local Suppliers' Responsiveness, Journal of Asia-Pacific Business, 7:4, 77-95, DOI:10.1300/J098v07n04_05
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Building External Manufacturing Capabilityin Emerging Markets:
Honda’s Knowledge Transfer and the Roleof Local Suppliers’ Responsiveness
Nguyen Duc Tiep
ABSTRACT. This study explores Honda’s knowledge transfer to localsuppliers in Vietnam. It argues that local suppliers’ responsiveness canbe a supplementary condition to absorptive capacity when consideringbuyer-supplier relation of knowledge transfer. In Vietnam where localsuppliers were less capable or limited, Honda has exploited the supplierresponsiveness to develop external manufacturing capabilities which con-tributed to Honda Vietnam’s performance. Responsiveness enabled Hondato use a hands-on approach as an effective mechanism to transfer key prin-ciples and tacit technical knowledge to local suppliers in the initial stagesof establishing a relationship. As a result, Honda is both beneficial fromsuppliers’ specific absorptive capacity and continuous responsiveness.doi:10.1300/J098v07n04_05 [Article copies available for a fee from TheHaworth Document Delivery Service: 1-800-HAWORTH. E-mail address:<[email protected]> Website: <http://www.HaworthPress.com>© 2006 by The Haworth Press, Inc. All rights reserved.]
Nguyen Duc Tiep is a Lecturer, Faculty of Economics, Hanoi University of Indus-try, Vietnam; and PhD candidate, Graduate School of Economics, Kyoto University,Yoshida-honmachi, Sakyo-ku, 606-8501 Japan (E-mail: [email protected]).
The author is particularly grateful to Professors Yasuo Sugiyama and HiromiYamamoto of Kyoto University for their helpful comments and suggestions. Specialthanks are also extended to Japan International Cooperation Agency (JICA) for provid-ing financial support for the doctoral program at the university. The author is, of course,responsible for all remaining errors in this study.
Journal of Asia-Pacific Business, Vol. 7(4) 2006Available online at http://japb.haworthpress.com
© 2006 by The Haworth Press, Inc. All rights reserved.doi:10.1300/J098v07n04_05 77
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KEYWORDS. Knowledge transfer, responsiveness, motorcycle, Honda,Vietnam, local supplier, JEL classification: M10, L62, F23
INTRODUCTION
Knowledge has emerged as the most strategically significant re-source of the firm.1 Many studies centered on role of knowledge on firmcompetitive advantage; it can be used to explain boundary and evolu-tionary of firms (Kogut and Zander, 1993).
There are many aspects related to knowledge. An essential aspect ofknowledge management is the process of knowledge transfer betweenbusiness units, especially in international settings (Bresman et al., 1999)where there are clear occurrences associated with geographical and cul-tural issues. The value of knowledge transfer in international firms canbe particularly high because foreign markets often provide access tonew ideas and stimuli that can be subsequently applied in other coun-tries (Bartlett and Ghoshal, 1998). Furthermore, knowledge transfer tolocal suppliers matters because it contributes to multinational corpora-tion (MNC) objectives such as improved quality, reduced cost, im-proved services in the local markets (Dunning, 1993).
When examining knowledge transfer between recipient firm and pro-vider firm, one common thing is that most previous studies have paidmore attention to the recipient firm’s absorptive capacity as a key factordetermining effectiveness of transfer process. Researchers have little,or not explicitly, considered the value of the recipient firm’s respon-siveness so far. Therefore, we know little about what the role of respon-siveness is and how it works in the absence of absorptive capacity.
The purpose of this paper is to explicitly take into account the recipi-ent responsiveness by examining Honda’s knowledge transfer throughthe supply chain in order to build its external manufacturing capabilityin Vietnamese motorcycle market. In scope, it focuses on inter-firmtransfer of knowledge, and is considered under the context of specificlocal market which may require the MNC subsidiary to take someparticular activities.
Recently in Vietnam there was an emergence of motorcycle market,but with unequal pace between upstream and downstream industries.Local suppliers were still less capable as compared with the demand ofassemblers. Chinese motorcycle penetration was seen as the main factorthat triggered the competition and struggles between competitors over
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the value chain from suppliers to final consumers’ demand. Just a fewyears after establishing operation, Honda had to face with the penetra-tion of huge number of Chinese motorcycles into Vietnamese market.Local demand for low-price products increased rapidly in size whilesupporting industry was underdeveloped. Building manufacturing ca-pability became critical for firms, at least in the short-run business.
For Honda, different sources of suppliers posed different problems.Existing local suppliers, who had potential to supply low-price parts,strongly lobbied by the local government, wanted to establish a rela-tionship with Honda but they were technologically backward and unfa-miliar with high reliability in quality and delivery by Honda. Newlyemerging suppliers had more sophisticated technology and superiorproduction expertise but they served other competitors who may havedifferent requirements as compared with those of Honda; so Hondaneeded to struggle to get them to be responsive to specific demand. Asmatter of fact, because Honda’s performances are partially determinedby the suppliers, only if Honda efficiently conveys appropriate and suf-ficient knowledge to suppliers would the company achieve expectedoutcomes. So far in the motorcycle business, Honda has made manyefforts to transfer knowledge to develop local suppliers, especially veryearly on.
Under these circumstances, this study seeks answers to the followingquestions: What was the main condition affecting Honda’s knowledgetransfer to local suppliers in Vietnam? How did Honda transfer knowl-edge to local suppliers in order to build its manufacturing capability?Specifically, some sub-questions include the following: What decidedthe condition to become important?–refer to what extent, this determinantplayed a more important role than alternative ones; How did Honda valuelocal suppliers? If the main determinant was identified, what was theappropriate mechanism used to transfer knowledge to local suppliers?–focus on the assembler, ways to communicate and exchange knowledgewith these suppliers; and, What were the problems emerging from theselected mechanism, how were they solved?
Honda and some selected suppliers were interviewed and their re-sponses were used to construct the case study (Yin, 1994). The authorhas made three field trips to Vietnam and held four interviews with theHonda subsidiary, five with local suppliers, of which one was a tele-phonic interview. Other general information about domestic motorcy-cle industry was gathered from Ministry of Industry, Ministry of Trade,etc. The reports of the field trips were presented at Vietnam Develop-ment Forum (VDF)–Hanoi.
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LITERATURE REVIEW
Knowledge transfer is a broad concept and attracts many researchersin both economics and business. In economic literature, economic de-velopment, particularly the issue of knowledge transfer between foreignsubsidiaries and local suppliers through FDI, has been of great interest.Once MNCs invest in the host countries, they would establish relation-ships with local suppliers to some extent. Economic scholars view it as abackward linkage and examine the impact of MNCs’ spillover effects(i.e., knowledge) on local suppliers’ performance and competitiveness.They mainly focus on input (MNCs’ transferred knowledge) and output(local suppliers’ performance), or cause (determinants) and effect (trans-fer may or may not take place) relationship (Tan, 1990; Blomstrom andKokko, 1998; Giroud, 2000; Crone and Roper, 2001; Lim and Fong,1982). Economists know little about the mechanism of internationaltransfer of knowledge.
Therefore, they leave the “black-box” and could not answer the ques-tion how knowledge is transferred, when it does take place, and to whatextent the transfer happens. As MNC is characterized as a network, itsknowledge is embodied in many stakeholders and can be transferredthrough various channels. Local supplier capabilities can be formedthrough global production network, which functions as a mediator(Ernst and Kim, 2002). Only by taking into account the role of differentparticipants could we overcome the simple explanation of knowledgetransfer between MNC and local suppliers, and also fully understandthe key determinant and actual mechanism of knowledge transfer.
In business, there has been an upsurge of interest, among scholars, inknowledge management in firms for the last decade. International trans-fer of knowledge between units may occur in a number of modes ofgovernance, from “market” to “hierarchy,” and at different levels of re-lationship. Among hybrid modes in existing literature, there have beenmany studies covering knowledge transfer in alliances, equity-basedjoint ventures, license agreements, and acquisitions (Kogut, 1988; Hamel,1991; Inkpen and Dinur, 1998; Mowery et al., 1996; Simonin, 1999), orknowledge spillover between firms in one industry (Appleyard, 1996).Almost all of them focus on strong relationships between strategic part-ners (Dyer and Nobeoka, 2000) who develop bilateral and multilateralknowledge-sharing routines.
In trying to tap an ignored area, this study focuses on a less popularhybrid mode, say, relationship between foreign subsidiaries and locallysuppliers. It differs from previous research in some ways. First, the
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transfer happened at lower level, that is, between an MNC subsidiaryand new local suppliers in the host country. Second, the recipient firms(the suppliers) are in developing countries where their capabilities arestill low as compared with superior foreign subsidiaries; so it is mainly aone-way transfer.
Basically, all existing studies consider knowledge transfer as result-ing from searching, learning, recombining resources after accessingpartners’ knowledge in order to exploit new capabilities or renew itsown existing capabilities. This study directs more toward the way thatthe knowledge is transferred in order to help partners (local supplierswho can supply competitively low prices) to improve quality and ser-vices of products supplied to the customer (the MNC subsidiary). In otherwords, the foreign assembler builds capability through transferring ap-propriate knowledge to local suppliers. The motivation of learning fromsuch local suppliers or the process of reciprocal knowledge transfer(Bresman et al., 1999) may exist in the future but may not become thekey requirement at current time when replicating capability is more im-portant and imperative.
So far specific issues of knowledge transfer between foreign subsid-iaries and local suppliers in developing countries have been under-re-searched, excluding Giroud (2002, 2003) who has shown remarkableinterest in this subject area. However, his study has its limitations in ex-plaining the existence and degree of knowledge transfer in buyer-sup-plier linkage. Under more management view, MacDuffie and Helper(1997) examined Honda’s supplier support efforts, followed by certaintypes of knowledge to be transferred. That transfer happened in an ad-vanced market, say U.S., where local suppliers were quite capable andthere was little significant shock from other market determinants.
When considering knowledge transfer, the concept of absorptive ca-pacity (Cohen and Levinthal, 1990) has been widely used in previousstudies while responsiveness has not been explicitly taken into account.Many scholars base their studies on accumulated knowledge that existsin the suppliers before the establishment of relationship. This conditioncontributes to efficiency of the transfer between partners (Moweryet al., 1996; Simonin, 1999; Albino et al., 1999; Ernst and Kim, 2002).Following these studies, the recipient firms were implicitly assumed tobe responsive to the provider firms. As a result, their absorptive capac-ity played a key role in directing knowledge transfer process. However,as a matter of fact, when the customers (the provider firm) try to set up arelationship with new suppliers (the recipient firms), already capablesuppliers may not be always available. Beside absorptive capacity, one
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of the characteristics of the knowledge recipient is motivation. The re-luctance of some recipients to accept knowledge from the outside iswell documented (Szulanski, 1996). Responsiveness helps recipientfirms to refrain the “not invented here” syndrome, enables the custom-ers to direct the recipients toward intentional purposes. Responsivenessalso helps the customers to avoid recipients’ lack of incentives, refusal,resistance to change, and lack of commitment. This paper expects to ex-plicitly emphasize on, and find the role of, the recipient responsivenesswith respect to knowledge transfer in the specific context of a localmarket.
CONCEPTS
A subsidiary’s manufacturing capability is defined as the firm’s abil-ity to make its own products locally without much dependence onabroad forces, and thus actively and better serve domestic demands.Manufacturing capability can be built internally inside the plant and/orexternally by independent partners in the local country. To some extent,development of manufacturing capability is close to the concept of sub-sidiary development (Birkinshaw, 1998) or firm evolution (Kogut andZander, 1993).
Within the scope of this study, we focus on knowledge transfer be-tween Honda and local suppliers to develop external manufacturing ca-pability of Honda Vietnam in an emerging motorcycle market. We areconvinced that performance of the assembler is a function of, or reflec-tive of, the performance of a production network which includes vari-ous suppliers (Dyer, 1996). Automobile and motorcycle industries havesome specific characteristics as large number of parts are sourced fromexternal suppliers whose participation is very important and contributeto the assembler’s competence. It is particularly critical in Japanesecompanies, who are known as leaders in developing a strong suppliernetwork following the philosophy of long-term supplier relationship as“we are all in the same boat.”
Since our focal interest is knowledge transfer, it is useful to definewhat we mean by knowledge. Knowledge is an illusive concept that hasbeen classified and defined in a variety of ways. Most scholars divideknowledge into two types, in terms of transferability: explicit knowl-edge, or information, defined as easily codifiable knowledge and itaccumulates more articulatable dimension of knowledge, and tacitknowledge or know-how, defined as the accumulated practical skill or
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expertise (Kogut and Zander, 1992; Bresman et al., 1999; Dyer andNobeoka, 2000). This classification is based on the characteristic ofknowledge and is more suitable to explore the transferability, to find outstickiness or ambiguity in the process of transfer (Szulanski, 1996;Simonin, 1999).
For specific purpose of this study, knowledge is also classified interms of specificity. Specific knowledge is one which is so much part ofthe firm, i.e., specific to a particular assembler. It is not likely to benefitthe supplier’s different businesses or create spillover effects to otherassemblers. On the contrary, general knowledge is one which is appli-cable widely and can be used in various businesses or by many appro-priate suppliers.
The author adds this new dimension of knowledge to the study forsome reasons. First, different suppliers may have different levels of re-lated knowledge that already exists in the suppliers, that is the so-calledabsorptive capacity of the recipient firm in Cohen and Levinthal’s(1990) terms. If a supplier has a higher level of accumulated generalknowledge, which is often available before the establishment of rela-tionship, then it will favor the capacity to absorb new specific knowl-edge transfer from the assembler during the relationship, and, therefore,more knowledge to be transferred, other things being equal.
Second, different suppliers may have different responsiveness to theassembler’s requirements. If the knowledge is specific to the assembler,then suppliers may be less responsive to deploy the transfer from the as-sembler because the suppliers are likely to be vulnerable to a hold-up inwhich the assembler does not assure the suppliers of a return on its spe-cific investments while there is no alternative use of it (Williamson,1979, 1983).2 For given specific knowledge, larger suppliers are oftenless responsive than smaller ones because they have sophisticated tech-nology, superior expertise, and sufficiently diversified customer base;whereas small suppliers are more reliant because of being technologi-cally backward and being unfamiliar with the high reliability in qualityand delivery required by the assembler, and due to their limited custo-mer base.
A paradox may exist: suppliers who have high capacity can better ab-sorb new specific knowledge but are less responsive to deploy resourcesto receive such types of knowledge. On the contrary, small suppliers of-ten have lower absorptive capacity but seem to respond more to the as-sembler’s requirements as they show more willingness to make specificinvestment toward buyer-supplier relationship.
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Therefore, both suppliers’ capabilities and responsiveness must beconcerned by the assembler to transfer knowledge successfully to thelocal suppliers. The assembler may not need to transfer general knowl-edge to high capable suppliers but need to struggle to get them to be re-sponsive to specific demand. For lower capable suppliers, the assemblermay be less worried about their responsiveness but need to transfer evengeneral knowledge to improve their basic capabilities in order to effec-tively absorb specific knowledge.
Under these settings, which mechanism should the assembler use totransfer knowledge to local suppliers to help them make parts and re-spond to specific requirements? Naturally in terms of mode of gover-nance, transaction between assembler and suppliers takes place undermarket mode, that is, inter-firm relation of independent parties. Accord-ingly, knowledge transfer must be affected by this mode of governance.In general, the assembler uses market mechanism to transfer explicit andspecific knowledge, without any involvement in external suppliers’ oper-ation. However, using this mechanism has some risks. First, it may not beapplicable if the suppliers have limited general knowledge, and are notavailable to satisfy the assembler, or if it takes time for suppliers to be ca-pable, where currently, the assembler wants the supplier to be. Second, itmay not favor the transfer process of specific knowledge, which requiresspecific transaction investment by the suppliers. As a result, the assem-bler cannot fully build external manufacturing capabilities.
In this circumstance, the role of suppliers’ absorptive capacity and re-sponsiveness must be identified and it will lead to appropriate mechanismof knowledge transfer by the assembler. By considering the case ofHonda in Vietnam, where there was strong competition between variousassemblers in domestic industry after the emergence of Chinese motorcy-cles, we will understand what Honda valued in the suppliers in this partic-ular context, and how Honda transferred knowledge to them as well ashow problems, which emerged from selected mechanism, were solved.
HONDA AND LOCAL SUPPLIERS IN VIETNAM
General Description
The assembler, Honda Vietnam (HVN), is a joint venture of HondaJapan, Honda Thai, and a Vietnamese company. It is located in VinhPhuc, a Northern province, about 40 km from Hanoi. Established in1997, Honda Vietnam started to produce Super Dream model; Future
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model was added in 1999. Wave Alpha was introduced at the end of2001. The number of employees is over 2,000; expatriates are 14.
When business was initiated in Vietnam, an unparallel pace of devel-opment between upstream and downstream industries placed a chal-lenge on the assemblers, who followed a long-term strategy of “makeour products where we sell our products” and “buy our parts where wemake our products” like Honda. The decision to come to Vietnammainly resulted from domestic demand for motorcycle products and localgovernment policies to attract foreign direct investment, rather than anyadvantage of supporting industry in this country. While many assem-blers had been established, there were few companies that invested inthe supply industry. Almost all assemblers sourced parts from its sup-pliers outside Vietnam.
When operating in Vietnam, Honda had to face some challenges.First, there was limited number of capable suppliers available to supplyHonda in the local country. When Honda Vietnam started its manufac-turing operations, it was initially supported by a core of Japanese sup-pliers already part of Honda keiretsu network, a number of whichestablished satellite plants near HVN site. HVN also tried to identifysome local suppliers nearby to take on certain parts. Many of these sup-pliers were eager to work with Honda but needed considerable assis-tance to meet Honda’s cost, quality, and delivery requirements as theyhad not ever made any motorcycle-related parts. However, pressuresfrom market competition and government requirements did not allowHVN to wait for a larger pool of capable suppliers, so it acted to improvethe capabilities of its existing suppliers.
Second, the penetration of Chinese motorcycles into Vietnam hadconsiderably changed the domestic industry by the emergence of com-petitors and suppliers. These new FDI suppliers have more advancedtechnology and superior expertise in making motorcycle parts but theywere primarily oriented toward their dominant customers, i.e., Chineseor Taiwanese assemblers. They also had the capability to make lower-priced parts, as compared with long-lasting keiretsu members, who didnot follow Honda to Vietnam. Thus, HVN needed to approach thesesuppliers. However, they were typically not as responsive to Honda’srequirements, as other domestic suppliers.
The Four Cases
Honda Vietnam’s supply network includes two groups, internal andexternal. The first group comprises Honda affiliates, keiretsu compa-
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nies, and HVN’s joint ventures. The second group includes domesticand FDI companies. This study mainly focuses on Honda’s transfer ofknowledge to independent local suppliers in the second group as wehave mentioned in the previous section. Therefore, 4 external suppliersare selected, of which three are domestic suppliers and one is a FDIsupplier (see Table 1).
The detailed activities of knowledge transfer between Honda andeach supplier has been described in separate sheets.3 In the next section,we focus on the synthesis of the four cases with regard to the meaningsof actual behaviors performed by all partners.
CASE ANALYSIS
Responsiveness or Absorptive Capacity
The four cases bring different levels of responsiveness and absorp-tive capacity of local suppliers, as presented in Figure 1. In the begin-ning, the first two companies were less capable than the last two ones,but they were more responsive to Honda’s demand.
Company 1 and company 2 had plentiful production resources grantedfrom long-lasting central planned economy, but backward technologyand low management capabilities. These two companies had to reorga-nize their facilities, made more investment to improve basic capacity tobe able to supply Honda Vietnam. They mainly made dedicated specificinvestments when investing in basic machineries, expanding factories inthe early stages. Honda was not the supplier of those machineries and
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TABLE 1. Summary of Case Studies
SUPPLIER Company 1 Company 2 Company 3 Company 4
Nationality Vietnamese Vietnamese Vietnamese Taiwanese
Year of establishment 1959 1969 1995 1994
Location North North North South
Year of relation withHonda
2001 1997 2000 2001
Employment 460 2000 500 1200
Products Welding frameparts
Welding andpressing parts
Plastic parts Functional parts
Ownership State State Private Foreign
Sale to Honda 25% 30% 15% 10%
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equipments but it played an indirect role by asking suppliers to upgradetheir capacity.
Once dedicated investments were made, the first two companiesshowed their willingness to meet specific requirements embodied inspecific knowledge transferred from Honda. Continuous investmentswere human and physical in character.
Company 3 and company 4 seemed to have higher capability butwere less responsive than the first two. Company 3 had high technol-ogy, dynamic employees, and modern management style. Its respon-siveness was moderate. The company was provided with equipments,material information, and just followed Honda’s detailed product speci-fication. Company 4, who supplied to other assemblers, was the mostexperienced and capable one doing business in the motorcycle industry.However, Honda could not convince it to have a dedicated plant, whichwould be used to make parts for Honda only. Rather, Honda had to relyon their available products, which were similar to Honda components,and required them to make modifications to be Honda specific.
Honda has valued local suppliers’ responsiveness as an importantsupplement to absorptive capacity in the case of Vietnam. Fierce com-petition in domestic market created imperatives for Honda to quickly
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FIGURE 1. Characteristic of Local Suppliers
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reduce production cost through supplier network. As such, Honda trans-ferred knowledge to develop local manufacturing capability in order toactively serve domestic demand. Ideally, local suppliers are both capa-ble and responsive to meet Honda standards and requirements. How-ever, as in the cases, absorptive capacity was not much available (ascase 1 and 2), and even when some capable suppliers were availablethey showed less responsiveness to Honda, at least in the early period ofrelationship (as case 4). Thus, on the one hand, absorptive capacitycould facilitate the process of knowledge transfer, while on the otherhand it mitigated the efficiency of transfer between Honda and suppliersunder consideration.
Instead, responsiveness emerged as a critical condition. Basically,when suppliers were much responsive Honda could interfere in externalsuppliers’ operation, encourage them to make specific investments, andthus meet the assembler’s requirements. However, they were often lesscapable, so Honda had to support and assist them to improve capability,absorb new knowledge. This content is discussed further in the follow-ing section.
Honda’s “Hands-On” Approach and Knowledge Transfer
Responsiveness becomes supplementary to absorptive capacity onlyif it facilitates a mechanism which functions similarly as absorptivecapacity does. In other words, responsiveness must help to solve theproblems emerging in the absence of absorptive capacity. In fact, localsuppliers’ responsiveness in Vietnam has enabled Honda to transferspecific knowledge and has also encouraged Honda’s attempts to sup-port them to improve general absorptive capacity, without dealing withproblems of “reliant” suppliers.
The cases showed that Honda has taken an unusual step of workingextensively with its suppliers as if trying to teach them lean production.This level of involvement with internal operation of externally ownedfirms is unprecedented and indicates that supplier-assembler relation-ship of Honda Vietnam fits neither “market” nor “hierarchy” categories.For most cases, Honda sent its experts into the supplier plants for weeksor months to design production layout, technology process, modifyequipments, and establish problem-solving groups. Close communica-tion and exchange allowed Honda to transfer certain tacit knowledge(see Table 2). This knowledge was also general and contributed to theimprovement of suppliers’ capabilities which laid the foundation forcontinuous specific knowledge.
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From the assembler side, Honda has made human specific invest-ments to each company in order to help them develop general skills inproduct analysis, quality assurance, materials and delivery manage-ment. These efforts have been highly valued by all interviewed suppli-ers. Later, when the supplier-assembler relationship became advanced,transferred knowledge converged to being more relation specific. Bothsupplier and assembler were delayed because they were required to sharesimilar specific investments at the same time. It happened in the case ofcompany 2 when Honda tried to transfer manufacturing some partswhich used to be made in Honda’s plant. Some machineries and equip-ment were transferred to the company as well, whereas the companyhad to build a new factory to receive the transfer from, and make partsfor, Honda Vietnam. They also both invested in human assets whenagreeing to set up a joint group to cooperate in changing design andspecification of components of Honda products.
Over time, specific absorptive capacity has been developed in localsuppliers after they established a relationship with Honda. By specificabsorptive capacity, we mean the capacity accumulated after setting upbusiness relations with particular customers. It differs from general ab-sorptive capacity, which is available before the relationship. The firstthree interviewed companies admitted that they had improved their gen-eral capabilities but in “Honda ways.” They could learn, replicate, anddiffuse some general knowledge to other businesses. However, it onlybrought full value toward business relations with Honda Vietnam.
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TABLE 2. Transferred Knowledge Between Honda and Local Suppliers
General Specific
Explicit
Basic equipments, tools Production process requirement
Production layout Product blueprint
Product assessment report New equipments, facilities
Market information Material source information
Tacit
Product analysis skill Product design knowledge
Operation techniques New product test knowledge
Material management R&D management
Quality control techniques Ideology, organizational culture
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Among those companies, company 2 was the noticeable one who hadaccumulated capacity quickly since working with Honda. Moreover,this company increased capabilities to make contracts with other Japa-nese assemblers such as Yamaha and Suzuki, “We get used to workwith Japanese companies rather than domestic ones, we can supply do-mestic assemblers but with less effectiveness,” one local employeeexpressed. Honda Vietnam highly valued this type of suppliers becausethey showed real ability to meet actual demand of Honda. It is consis-tent with Honda’s production philosophy of 3 A’s (actual part, actualplace, and actual situation).
One risk of “hands-on” approach is that the suppliers (the recipientsfirms) may come to rely on the support services from the assembler (theprovider firm) and thereby limit its efforts to upgrade existing resources.Small local suppliers are often highly dependent on the big assembler.Honda may have had to face this problem of reliance when it intensivelysupported local suppliers. However, their responsiveness brought Hondapositive attitudes, including a willingness to take risks, consistent withHonda’s culture; investment in new technologies, investment in humanresource capabilities; and doing everything without explicit contractualcommitments. While specific commitments for future business were notmade, the first three local suppliers could count on receiving at least asmuch business as in the past year and possibly much more.
Responsiveness is also consolidated by the changes in local environ-ment which created a positive impact on suppliers’ behavior to HondaVietnam. The context of domestic motorcycle industry has conferredfavorable conditions to Honda recently. Beside Honda’s handsome per-formance, the decline of Chinese motorcycles has left redundancy of sup-pliers. Almost all available suppliers were eager to work with Honda.Honda was considered as an attractive destination because these localsuppliers get used to copying parts of Honda’s models. In all cases underconsideration, they showed their expectation to keep working with Honda.Thus the possibility of betrayal is reduced. The more willingness to meetHonda’s requirements the more specific investments would be made bythe suppliers, and the easier Honda’s ability to diffuse its lean productionthrough supply chain (MacDuffie and Helper, 1997).
DISCUSSION
Knowledge transfer often takes place under certain conditions. Re-sponsiveness, to some extent, can be effectively supplementary to
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absorptive capacity. As analyzed in the cases in Vietnam where absorp-tive capacity of available suppliers was limited, Honda has exploited thesupplier responsiveness as an alternative condition. It implies that trans-ferring knowledge through developing less capable but high responsivesuppliers was more efficient than attempts to find a capable supplier will-ing to respond to Honda’s specific demand and requirements. Suppliers’attitudes are more important to Honda Vietnam than their technical ex-pertise.
While absorptive capacity is a widely used concept in previous litera-ture, responsiveness has been often implicitly assumed to be availablewhen considering knowledge transfer process between firms. In manystudies, scholars considered recipient firm’s prior capabilities as a keyfactor deciding the efficiency of transfer process. However, this processis really effective only when the recipient firm is relatively responsive tothe provider firm, otherwise no knowledge transfer happens. This studyexplicitly takes into account the supplier responsiveness as supplemen-tary criterion to absorptive capacity under the view of the assembler, i.e.,Honda Vietnam. Honda has tried to build an embedded supplier networkand has followed an integral-closed business architecture (Hoang, 2003)which required local supplier responsiveness and strong responsibilities.
Even though this study focuses much on supplier responsiveness, itdoes not disregard the role of absorptive capacity (Cohen and Levinthal,1990). Rather, it emphasizes on specific absorptive capacity, which is de-veloped by local suppliers after establishing relationship with the assem-bler. In general, the availability of highly capable and much responsivesuppliers is ideal for the assembler. But it is not the case because absorp-tive capacity and responsiveness may have a trade-off relation. Onepossible outcome is that if local suppliers develop specific absorptive ca-pacity, the assembler can still take advantage of their responsiveness. Asin the case of Vietnam, Honda has benefited from increasing capabilitiesof local suppliers over time, with little worry about their responsiveness.Obviously, specificity of absorptive capacity was the key factor which at-tracted these suppliers’ responsiveness toward Honda. Moreover, Hondadid not show much concern about opportunism and spillover effectsbecause once local suppliers become highly capable, other assemblerscan be beneficial, then “it will push Honda to get better”; a manager ex-pressed his view of “rising tide lift all boats.”
Specific absorptive capacity is related to the quality of knowledgetransfer. Honda continues to transfer more sophisticated knowledge tothe company which quickly accumulated knowledge after working withHonda. This fact is consistent with Kotabe, Martin, and Domoto’s find-
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ing that the effect of higher-level technology transfer grows more positiveas the duration of the relationship increases (Kotabe et al., 2003).
As Honda’s top-down production management process was facilitatedby local responsiveness, the network link between Honda and local sup-pliers seemed to be completely vertical in Vietnam. Product design wasdeveloped all by R&D Honda Motor (Kumamoto) and Thai Motor. Thedesign profile includes blueprint, quality requirement, technological pro-cess, and control standards. Almost all local suppliers were provided withthis information, following to apply it in the factory to meet Honda’s cri-teria. The design was so complete that all suppliers, even Honda subsid-iary, could not change any part of it.
As a result, knowledge was transferred directly from Honda to sepa-rated local suppliers. Throughout the cases, there was no channel cre-ated to share knowledge between different suppliers even when theywere making similar parts, for instance company 1 and 2 in weldingparts, or company 3 and one not-interviewed plastic company.4 It im-plies that horizontal flow of knowledge is limited in Honda Vietnam.The absence of knowledge-sharing network between suppliers has putthem into competition environment where they struggled to make low-est-cost parts with satisfied quality. It helped Honda succeed, at least inthe short run, to deal with fierce competition from emergence of low-price Chinese motorcycles.
Nevertheless, one remaining issue is that these local suppliers werecapable mainly in replicating and still less capable in innovating and de-veloping products although Honda has successfully encouraged localsuppliers to be self-reliant and to less rely on Honda’s for assistance.Honda’s knowledge transfer was still limited to develop manufacturingcapability through renewing its competitive advantage over Chinese mo-torcycle emergence. Whether more sophisticated, tacit-specific knowledgewill be transferred to those local suppliers, or more specific investmentswill be made, may depend on Honda’s on-going strategy in automobilebusiness in Vietnam. It is the next step of development in this countryafter the maturation of the motorcycle business in the last few years.
On the specific context of Honda in Vietnam, the existing study maypossess the limitation of generalizing. The analysis brings us results andimplications in a narrower scope of the Honda subsidiary and local sup-pliers in Vietnam. Firm behaviors must be understood in relation withfactors in the local environments. The emergence of Chinese motorcy-cle has (1) dichotomized business architecture into open-modular vs.close-integral model; (2) created agglomeration effects from new sup-pliers who can supplier low-cost parts; and (3) triggered local consumer
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demand for low-price models. These changes may have shaped Honda’sspecific strategy in Vietnam.
In a broader sense, the interest will be about suppliers at all levels andHonda’s global strategy as a whole. Some interesting questions can beraised such as what new sustainable competitive advantages can Hondatransfer back to the corporate parent after getting experiences in Viet-nam? Whether Honda can diffuse new capabilities to other sister sub-sidiaries in the region? And eventually, how can Honda coordinate localand global strategies? This debate requires deeper probing and lies be-yond the scope of this paper. Further studies should be directed to an-swer these questions. The outcomes and contribution to academicliterature will be considerably valuable.
CONCLUSION
Supplier responsiveness can be supplementary to absorptive capacityfor the assembler to transfer knowledge and build manufacturing capabil-ity in the local country. In the absence of absorptive capacity, HondaVietnam has exploited the value of local suppliers’ responsiveness as aneffective condition to develop supplier network, improve quality, reducecost, and improve services in the local market. As a result, Honda Viet-nam was successful in competing with Chinese motorcycle penetration,and has become confident in doing business in Vietnam since then.
Honda Vietnam has taken some unusual steps of working extensivelywith external suppliers in the local country. Knowledge transfer hap-pened remarkably in the initial stages of the establishment of the relation-ship but decreased when the suppliers could be self-reliant, exhibitingsufficient manufacturing capabilities. Local suppliers’ responsiveness fa-cilitated Honda to follow “hands-on” approach to transfer key principlesand basic knowledge to convey Honda’s production system in Vietnam-ese emerging market. It conferred Honda some advantages from specificabsorptive capacity. As a result, Honda has benefitted from both localsuppliers’ higher capabilities and remained relatively responsive.
NOTES
1. See Strategic Management Journal 1996 Special Issue on “Knowledge and theFirms.”
2. Site specificity: the buyer and seller are in a “cheek-by-jowl” relationship withone another so as to economize on inventory and transportation expenses; Physical
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asset specificity: when one or both parties to the transaction make investment in equip-ment and machinery that involves design characteristics specific to the transaction andwhich have lower values in alternative uses; Human asset specificity: arising as a con-sequence of learning-by-doing, investment, and transfer of skills specific to particularrelationship; In addition to these three types, Williamson (1983) extends the scope ofasset specificity to include Dedicated asset specificity: general investment that wouldnot be undertaken but for the prospect of selling a significant amount of product to aspecific customer.
3. Sheets available upon request. Please contact the author by e-mail: [email protected].
4. Information is collected from interview with the company 3’s manager and isconfirmed by a Honda Vietnam’s employee.
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