ACRJ 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 han- dling of an administrative or business situation. Please address all correspon- dence to: Dr Bin Jiang, Department of Information Systems and Operations Management, The Univer- sity of Texas at Arlington, Box 19437, 535 Business Building, Arlington, Texas 76019-0437, USA. E-mail: [email protected] ASIAN CASE RESEARCH JOURNAL, VOL. 8, ISSUE 1, 37– 56 (2004) © 2004 by World Scientific Publishing Co. Why Giants Change Their Minds BACKGROUND INFORMATION Ten years ago China�s endless supply of cheap labor pro- duced 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 indus- trial 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 refrigera- tors. 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, rang- ing from consumer personal care companies such as Johnson & Johnson and Unilever to auto manufacturers such as Gen- eral 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 glo- bal 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 38 ACRJ for global investors from the world�s largest 1,000 corpora- tions (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 in- vestors with operations throughout the world, China�s entry into the WTO (World Trade Organization) is a good opportu- nity 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 coun- tries such as Malaysia, Indonesia and the Philippines may further lessen their attractiveness to MNCs� executives. In China, most FDI inflows go into building manufac- turing facilities for foreign-invested enter.

1. ACRJ
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 han-
dling of an administrative or
business situation.
Please address all correspon-
dence to: Dr Bin Jiang,
Department of Information
Systems and Operations
Management, The Univer-
sity of Texas at Arlington,
Box 19437, 535 Business
Building, Arlington, Texas
76019-0437, USA. E-mail:
[email protected]
ASIAN CASE RESEARCH JOURNAL, VOL. 8, ISSUE 1, 37–
56 (2004)
© 2004 by World Scientific Publishing Co.
Why Giants Change Their Minds
BACKGROUND INFORMATION
Ten years ago China�s endless supply of cheap labor pro-

2. duced 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 indus-
trial 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 refrigera-
tors. 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, rang-
ing from consumer personal care companies such as Johnson
& Johnson and Unilever to auto manufacturers such as Gen-
eral 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 glo-
bal 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
38 ACRJ
for global investors from the world�s largest 1,000 corpora-
tions (Table 1). Nearly one-third of senior executives from the
world�s largest 1000 MNCs are looking to China for first-time

3. investments over the next three years, three times more than
those interested in entering the United States. For foreign in-
vestors with operations throughout the world, China�s entry
into the WTO (World Trade Organization) is a good opportu-
nity 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 coun-
tries such as Malaysia, Indonesia and the Philippines may
further lessen their attractiveness to MNCs� executives.
In China, most FDI inflows go into building manufac-
turing 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. For-
eign investors are finding that using China as a manufac-
turing 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 execu-
tives 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, technologically-
sophisticated products is rewriting the economics of a wide
range of global manufacturing industries and their global
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

4. Table 1. The FDI Confidence Index
Source: A.T. Kearney, �FDI Confidence Index�, September
2002.
WHY GIANTS CHANGE THEIR MINDS 39
supply chain systems, not just in industries that are labor
intensive.
Matsushita and Sony, the two largest consumer elec-
tronics 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
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%

5. 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

6. 2002 are taken from the official website of National Bureau
of Statistics of China.
40 ACRJ
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 unex-
pectedly 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) pro-
ducer in the world, has competed with low-priced Chinese
counterparts in the international market. The managing di-
rector 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 be-
coming 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
Price ($) Price ($)Commodities

7. (without Chinese imports) (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
Telephone 19 (in 1997) 12 (in 2001) 36.8
Glass Windshields 27.41/sqm (in 1997) 18.5/sqm (in 2000) 32.5
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 one-
twentieth of the Japanese and Chinese land prices are only
one-thirtieth of the Japanese. Four decades ago, when Japa-
nese 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 ad-
vanced techniques/parts and Chinese low-cost labor will en-
hance its competitive advantage in the world. So it gradually
established some assembly lines in China. For example, in

8. 1994 Matsushita established Shanghai Panasonic Microwave
Oven Company that was able to produce 500,000 units annu-
ally. Since 1987 Matsushita has established 49 subsidiaries or
joint ventures in China. All of them import most of their nec-
essary parts or materials from Japan and assemble the final
products with Chinese workers. Matsushita believed that
this operation model could maintain the traditional advan-
tage of Japanese products — high quality, and also make use
of China�s traditional competitive advantage — low cost la-
bor and land. This model greatly helped Matsushita cut its
products� prices. The Shanghai subsidiary�s �Panasonic� mi-
crowave 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 subsid-
iary was facing bankruptcy. At the same time, Guangdong
Galanz Enterprise Group Co., Ltd, Matsushita�s largest com-
petitor 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,
42 ACRJ
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

9. the U.S.market, a �Panasonic� iron is $29, but a Chinese fa-
mous 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 cheap-
est �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, cut-
ting-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.

10. 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 funda-
mental 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 manufac-
turing 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 de-
signed and produced in Japan. China�s subsidiaries only
handled the pure assembly tasks. However, the Japanese de-
signed the products based on their understanding of Japa-
nese 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

11. 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
44 ACRJ
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 mate-
rial in the home appliance industry, is a typical example that
explains this unbelievable result.
Because China�s undeveloped infrastructure and re-

12. gional fragment distribution channels make it impossible for
polystyrene suppliers to reach as many potential customers
as possible and vice versa, the Chinese government estab-
lished 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 infor-
mation, 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 cus-
tomer 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 poly-
styrene distribution and trade center. After investigating
relevant distribution centers and its Chinese competitors�

13. suppliers. Matsushita decided to use as many Chinese sup-
pliers 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 ob-
vious 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 com-
panies 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 com-
panies� 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
46 ACRJ

14. special requirements for delivery, services, and credit man-
agement. So Matsushita selected TCL, the largest TV pro-
ducer in China, as its strategic partner to stretch its supply
chain to Chinese rural and inland markets. TCL has 32 re-
gional distribution subsidiaries, 174 distribution centers, and
4000 sales agents. Its products can reach nearly 20,000 retail-
ers in China.
According to the agreement between Matsushita and
TCL, Matsushita can use TCL�s established distribution net-
works 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 NN-
MX20WF. 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 de-
sign mode by devoting themselves to applying local materi-
als 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

15. 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 reason-
able low price and high brand/quality perception of
Matsushita still deeply touched customers� hearts.
From November 2001 to January 2002, Matsushita sold
nearly 40,000 units of the NN-MX20WF in China, 50,000
units in Japan, and almost 120,000 units in the U.S. The
three-month sales of microwave ovens in the three countries
almost equaled Matsushita�s total microwave oven sales in
the global market in 2001. Even though the Shanghai subsid-
iary ran to capacity, its outputs still could not meet the in-
creasing demand. Its monthly market share in China rapidly
rose to second place. After promoting the NN-MX20WF
microwave oven, Matsushita�s new supply chain continued
promoting DVD players at RMB730 ($88), automatic washers
at RMB800 ($96), and 29-inch TVs at RMB 3400 ($411) in
China. Because all of them sold out quickly, Matsushita
(China) had to apologize to its wholesalers for delivery lag.
The exciting success of NN-MX20WF aroused
Matsushita�s enthusiasm for rebuilding its global supply

16. chain by using more of China�s competitive advantages. Mr.
Shohtoku, the supply-chain rebuilding project leader, or-
dered all branch directors and all subsidiary presidents to
describe how to use China�s competitive advantages to im-
prove Matsushita operations in their 2002 business plans. He
warned: �I will refuse your plans bluntly if you do not con-
sider China or do not provide detailed action steps in
China.�
GOING AGAINST THE TIDE: SONY�S SUPPLY CHAIN
REBUILDING STRATEGY
While Matsushita was increasing its supply chain presence
in China, Sony in July of 2002 unexpectedly decided to shift
48 ACRJ
production of its camcorders and digital cameras from China
back to Japan. The reason behind this shift was tied less to
China�s manufacturing capabilities and more to the unique
supply chain requirements associated with these innovative,
leading-edge products. Sony�s story demonstrates that differ-
ent products demand different types of supply chains. There
is a message here that extends beyond any one company or
any one region of the globe: When designing a supply chain,
a company needs to look beyond cost and consider such fac-
tors as the characteristics of the product and market, the
company�s core competencies, and overall profitability.
Sony�s Innovative Products
Within the dynamic environment of the consumer electronics
market, Sony established an important source of competitive
advantage by developing new technology and products.

17. While other companies such as Matsushita and Sanyo con-
centrated on being customer intimate, Sony has differenti-
ated itself by focusing on product leadership. Sony has
consistently been successful at commercializing new tech-
nologies into innovative products such as the transistor ra-
dio, tape recorder, Beta-Max video recorder, CD, Walkman,
minidisk, DVD, and recently the digital camera and
camcorder. During the 1980s and 1990s, Sony created 572 dif-
ferent innovative products — more than Aiwa, Toshiba,
Sanyo, and Matsushita combined.
This strategy of innovation and product leadership has
enabled Sony to achieve high profit margins. Yet, the very
newness of these innovative products also makes the com-
pany more vulnerable to unpredictable demand. At the same
time, Sony must deal with the fact that product life cycles for
innovative products have become increasingly shorter. As
imitators erode the competitive advantage that innovative
products enjoy, Sony is forced to introduce a steady stream of
ever-newer products. The short life cycles and the great vari-
ety which are typical of these products further increase the
unpredictability of the supply chain.
WHY GIANTS CHANGE THEIR MINDS 49
Coping with this unpredictability has become a grow-
ing challenge for Sony�s digital camera and camcorder sup-
ply chain. When digital cameras first appeared on the market
in the early 1990s, Sony only had a few competitors, such as
Canon and Olympus. At that time, digital cameras were very
expensive and companies gained a competitive advantage by
reducing prices. To become the leader in the market, Sony
placed its digital camera and camcorder production into
China in an effort to reduce the product�s assembly and

18. manufacturing costs.
During the late 1990s, however, more competitors en-
tered the digital camera market. At the same time, advances
in technology and manufacturing techniques significantly re-
duced production costs. Under these new market conditions,
companies gained market share not just from price but also
by introducing the latest, most technologically advanced
product. In essence, digital cameras now started to assume
the characteristics of a high-fashion product.
These new market characteristics set the stage for
Sony�s decision to pull production of digital cameras and
camcorders out of China. In making this decision, Sony acted
counter to most other multinational companies — such as
Matsushita, Intel, Dell, and Motorola — that continue to
move aggressively into China as they build up their global
supply chains. Even other digital camera and camcorder
companies, like Canon and Olympus, decided to keep their
production facilities in China. For these companies, cost is
still a significant competitive advantage. They are not inter-
ested in competing with Sony on product leadership and are
content to follow Sony�s lead in technology. Instead, they
compete by quickly following any new release from Sony
with a similar imitation product at a lower price.
Cycle Time as the Driver
For Sony, however, there is one core activity that takes prece-
dence over lowering manufacturing costs: reducing cycle
time. As Yoshihiro Taya, the vice president in charge of
50 ACRJ

19. Sony�s move, said: �For high value-added products, such as
camcorders, minimizing the cycle time is much more impor-
tant than focusing on manufacturing costs only.�
Cycle time is the total elapsed time required to com-
plete a business process from receiving the order to deliver-
ing the final product. It includes the design, engineering,
manufacturing, logistics, and customer service processes. The
shorter the cycle time, the more flexible the supply chain,
and the quicker it can react to changes in demand. Quicker
responsiveness, in turn, lowers a company�s vulnerability to
demand uncertainty. For high value-added or innovative
products, minimizing the cycle-time contributes more to the
firm�s competitive competencies than minimizing physical
costs.
Sony�s camcorders and digital cameras fall into the cat-
egory of high value-added but time-sensitive (short product
life cycle) products. Table 4 displays the weekly ranking of
digital camera sales on the Japanese market during June
2002. This chart shows that the life cycle for a bestseller is
never longer than three months. In such an intensely com-
petitive, fast-moving market, if the delivery of a new product
were delayed by even one week, Sony would suffer huge
losses in sales and profits.
According to Taya, only a few years ago the product
life cycle for Sony�s main products was generally ten months
to one year. The life cycle for these products has now
dropped dramatically to two or three months. Therefore, to
realize the maximum profit in such a short product life cycle,
Sony has to minimize each product�s cycle time, otherwise,
the company will miss fleeting market opportunities. Be-
cause transportation times of the finished product to custom-
ers are already about as fast as they can physically be,
shorter cycle times must come from design or manufac-

20. turing, the parts of the supply chain that precede the final
shipment to the customer. But if we list all potential pos-
sible candidates for cycle-time reduction along the supply
chain (see Table 5), we will find that manufacturing in China
will not help Sony reduce the cycle times of its camcorders
and digital cameras. For example, the lack of real-time com-
munications between the marketing department in Japan
WHY GIANTS CHANGE THEIR MINDS 51
Ranking Producer Bestsellers First Time on the
Market
Total Time on the
Market (in days)
(June 3–9)
1 Sony DSC-P2 June 8 2
2 Canon IXYDIGITAL200a May 25 15
3 Olympus C-720ZOOM May 8 31
4 Sony DSC-P7 May 29 11
5 Olympus C-2ZOOM April 28 42
(June 10–16)
1 Sony DSC-P2 June 8 9
2 Canon IXYDIGITAL200a May 25 22
3 Olympus C-2ZOOM April 28 49
4 Olympus C-300ZOOM June 8 9
5 Sony DSC-P7 May 29 18

21. (June 17–23)
1 Sony DSC-P2 June 8 16
2 Fuji Film FinePix F401 June 19 5
3 Casio EX-S1 June 21 3
4 Canon IXYDIGITAL200a May 25 29
5 Olympus C-300ZOOM June 8 16
(June 24–30)
1 Fuji Film FinePix F401 June 19 12
2 Sony DSC-P2 June 8 23
3 Sony DSC-P9 April 19 73
4 Casio EX-S1 June 21 10
5 Canon IXYDIGITAL200a May 25 36
Table 4. Top 5 Bestselling Digital Camera Products in Japan
Market in June 2002
Source: BP GFK SalesWeek3200.
52 ACRJ
and the manufacturing base in China creates a longer
purchasing-order cycle and customer-order processing cycle.
Additionally, the natural complications that arise from sup-
plying a foreign manufacturing base with domestic-made re-
sources or parts increase the cycle time for material receipt/
inspection, material review activities, warehousing opera-

22. tions, and transportation and logistics. For example, bad
weather or administrative procedures at China�s Customs
office may delay transportation of supplies or parts from
Japan.
The rapidly changing market reaction to digital
cameras and camcorders also increases Sony�s risk from
shortages or excess supplies. Because early sales for next-
generation digital cameras are crucial in establishing market
share and high profit margins, the cost of experiencing short-
ages of these products are far more costly than shortages of
more mature products. The shorter product life cycle of digi-
tal camera also increases Sony�s risk of obsolescence and,
therefore, the cost of being caught with excess supplies.
Recognizing that it needed to reduce cycle time and
risk, Sony decided to re-evaluate its decision to manufac-
ture digital cameras and camcorders in China. �We produce
commodities in China because we can purchase materials
Possible Candidates for Cycle-Time
Reduction
Can Be Improved
in Japan?
Can Be Improved
in China?
Materials planning and scheduling Yes No
Purchase order cycle Yes No
Inbound transportation Yes No
Material receipt/inspection Yes No
Material review activities Yes No

23. Manufacturing processes Yes No
Customer order processing Yes No
Warehousing operations Yes No
Outbound transportation Yes No
Return materials/reverse logistics Yes No
Table 5. Opportunities for Cycle-Time Reduction
WHY GIANTS CHANGE THEIR MINDS 53
locally,� says Yoshihiro Taya, vice president of Sony MECS.
�But in the case of camcorders, we could not buy the neces-
sary materials locally. In the past, we sent these materials
from Japan to China for final assembly of the camcorders in
order to minimize our manufacturing costs. At the same
time, we have lots of engineers in Japan developing the next
generation products by tracking the market responses. Time
is important. For example, we use two shifts of engineers to
accelerate our R&D speed. And we request that the process
from design to engineering to manufacturing to marketing
be seamlessly connected. Today, when we carefully compare
the saved manufacturing costs with the total process costs,
we find that manufacturing camcorders in Japan has more
merits.�
Purchasing and Production Flexibility Perspectives
In addition to reducing cycle time, Sony�s decision to move
its digital camera and camcorder production from China to
Japan needs to be understood from two other important
perspectives — purchasing and production flexibility.

24. Purchasing: closer to suppliers
Many MNCs find that they can easily purchase supplies in
China for commodity or low-end products. In fact, these sup-
plies are often cheaper in China than they are in Japan. Un-
like commodities such as polystyrene, however, many of the
special high-tech parts found in camcorders and digital cam-
eras are not produced in China. These include crucial parts
such as full-color LCD screens, precision optical machinery
parts, digital camera memory, the charge-coupled device (the
eye of a digital camera), and some unique semiconductor
chips. Today Japanese digital cameras hold almost 90 percent
of the global market share because only Japanese manufac-
turers possess this advanced technology. These special high-
tech parts are a core competency for these Japanese
manufacturers. They, therefore, do not want to produce these
54 ACRJ
knowledge-intensive products in other countries out of con-
cern that manufacturers in the host country will learn the
technology.
There is good reason for their concern. The govern-
ment of China requires all foreign companies seeking to
manufacture in the country to train their local partners in the
advanced technology. As a result, over the past decade, many
Chinese manufacturers have dramatically improved their
product quality by applying what they have learned from
participating in joint ventures with Japanese companies. In
many cases, they have quickly beaten Japanese products on
the global market by combining this new higher quality with
their low cost advantage. In turn, this has driven down the

25. overall price of these goods around the globe.
At the same time, the shorter product life cycle for
camcorders and digital cameras forces Sony to purchase its
necessary materials more frequently, more quickly, and more
agilely. Such a frequent purchasing pattern reduces the quan-
tity of each individual order. This means that if Sony had
continued to assemble its camcorders and digital cameras in
China, its inbound transportation costs for these materials
would have increased dramatically because of the more
frequent deliveries.
More flexible production
Because camcorders and digital cameras are innovative prod-
ucts, their production and supply chain requirements are
more easily met in Japan than in China. Innovative products
tend to have high profit margins, but also volatile demand
and short product life cycles. Sony�s camcorders and digital
cameras obviously belong to this category. There are two co-
ordinated supply chain strategies that Sony could have pur-
sued to reduce the risk of uncertainty for innovative
products: (1) reduce uncertainty by developing better sup-
ply-chain wide forecasting systems or, (2) avoid uncertainty
by cutting lead times and increasing supply chain flexibility
so that it can quickly produce what is needed when it is
needed.
WHY GIANTS CHANGE THEIR MINDS 55
Using either strategy to continue production in China
would have been ineffectual for the following reasons:
• The latest digital camera on the Chinese market is

26. typically six months behind products in the primary
markets — Japan and the United States. Therefore, by pro-
ducing these items in China, the manufacturer cannot
gain any useful information for the supply chain-wide
forecasting system.
• Sony�s research and development center, critical suppliers,
and customer service are concentrated in Japan. As Mr.
Taya explained, it is important for these resources to be
located close to a target customer base because high-end
digital cameras and camcorders only have a three-month
product life cycle,. Sony�s R&D center, for example needs
to be able to quickly gain feedback from customers and
incorporate that feedback into the next round of product
design. When the manufacturing function is located in
China, it is removed from these upstream and down-
stream links and is unable to cooperate with them
seamlessly in real time. Furthermore, Chinese manufac-
turers have less experience fixing highly technical, inno-
vative product problems through collaboration with
innovation-producing companies such as Sony; Chinese
manufacturers typically have experience with functional
rather than innovative products. For these reasons, locat-
ing in China increases the lead time and decreases the
flexibility of Sony�s supply chain.
Considering all of these factors, Sony made the deci-
sion that seemed to defy conventional wisdom, but made
ultimate supply chain sense. In July of 2002, the company
moved all of its production facilities for digital cameras and
camcorders to Japan.
FURTHER READING
Possible background readings include:

27. 1. �What is the right supply chain for your product?�, by
Fisher,
L. M., Harvard Business Review, March–April 1997, pp 105–
116.
56 ACRJ
2. �Aligning supply chain strategies with product
uncertainties�,
by Lee, L. H., California Management Review, Vol. 44, No. 3,
2002,
pp 105–119.
3. �China shock: it�s all made in China now�, by Powell, B.,
For-
tune, March 4, 2002.
4. �Burying the competition�, by Leggett, K. and Wonacott,
P., Far
Eastern Economic Review, Volume 165, Issue 41, 2002.
5. �What pulled Sony out of China?�, by Jiang, B., Supply
Chain
Management Review, January/February 2003.
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