4

A Flowchart Approach
Akifumi Kuchiki

Introduction

Policy for forming industrial clusters – industrial cluster policy – plays an

important role in the development of any region in East Asia. Such policy is
followed not only in Japan by the Ministry of Economy, Trade and Industry
but also in most countries in the area, such as Malaysia and Singapore.
Silicon Valley in the USA and Bangalore in India are well-known success
stories of development in information technology. Agglomeration theory
and cluster theory explain that an industrial cluster is effective in generating
external economies and reducing transportation costs. But we need to be
clear about what the required conditions are for forming a cluster, particu-
larly when we are discussing the growth strategy for developing countries.
Porter (1998) studied industrial cluster policy as a growth strategy.
According to Fujita and Thisse (2002), the central issues of spatial economics
are to explain the mechanism for forming an agglomeration, and linking an
industrial agglomeration to innovation. Porter (1998) considered the latter
more important than the former, and examined how an industrial cluster
brought innovations by using his diamond approach in cluster theory.
There are two kinds of explanation of the mechanism of the formation of
an agglomeration: one is in terms of the factors involved, while the other is
to discuss which equilibrium point becomes a core industrial agglom-
eration under certain conditions in the case of multiple equilibria. The
latter case of equilibrium theory is mathematically easy to analyse; we can
find the equilibrium analysis of urban agglomeration in Nishikimi and
Hamaguchi (2003).
Many papers, such as that of Sonobe and Kawakami (2001), have explained
industrial agglomeration in a country by econometric methods. Kuchiki
(2003) found that the conditions for forming new clusters in northern
Vietnam were (1) industrial zones, (2) the capacity-building of physical
infrastructure and institutional reforms in investment procedures and
169
A. Kuchiki et al. (eds.), Industrial Clusters in Asia
© Palgrave Macmillan, a division of Macmillan Publishers Limited 2005
170 A Flowchart Approach

(3) anchor firms in the manufacturing industry – showing that industrial

zones together with the combination of infrastructure and institutions
played a crucial role in an industrial agglomeration and that the sogoshosha
(see below) of Japanese trading corporations played an important role in
inviting Japanese manufacturing firms to the industrial zones. The anchor
firm of the cluster, Canon, a Japanese firm, exported its products. This case
was called the Canon effect. This chapter will generalize the typical pattern
of forming industrial agglomerations in East Asia by illustrating another case.
The purpose of this chapter is to build a framework with which to
analyse industrial cluster policy. The framework is a flowchart that can be
applied to the analysis of a region from the view point of industrial cluster
policy. We will make clear which factors are crucial to forming an indus-
trial cluster. We will take into account both the role of governments in
making industrial cluster policy and that of multinational firms, whose
value chain management determines the deployment of plants; industrial
cluster policy should be consistent with value chain management. By
taking a flowchart approach to industrial cluster policy, we will show how
firms are agglomerated.
The approach chosen for this chapter is to study the case of Toyota’s
investment in Tianjin, China. Toyota has adopted cross-dock logistics to
supply components from Shanghai to Tianjin so as to achieve a local content
of 80 per cent; its transportation costs depend on these logistics. We will also
refer to Kuchiki (2003), who discussed the roles of industrial zones in
forming industrial clusters in East Asia after 1986. We propose a simple calcu-
lation method to find the critical factors needed to form an industrial cluster.
We consider the variables in transportation costs, the external effects of
agglomeration, the costs of building a new plant and scale economies.
Having examined Toyota’s cluster in Tianjin, we conclude that the three
factors key to forming industrial clusters in implementing industrial cluster
policy are (1) industrial zones, (2) capacity-building and (3) anchor firms.
Capacity-building functions by combining the facilitation of physical infra-
structure, institutional reform, human resource development and prepara-
tion of living conditions. Institutional reform includes one-stop service and
the deregulation of investment procedures. Toyota’s cluster is not like that
of Canon’s cluster in northern Vietnam in the procuring of components.
The cross-dock logistics of the Toyota just-in-time system contribute to
value chain management to inhibit the formation of an industrial cluster.
We found two factors had positive effects in forming an industrial cluster: a
keiretsu relationship (see below) between an anchor firm and its related
firms, and scale economies.
The two stages in the formation of an industrial cluster are as follows:

I. An anchor firm moves into an industrial zone if conditions on (1) the

industrial zone and (2) capacity-building hold.
 Akifumi Kuchiki 171

II. Its related firms move into the industrial zone, provided the minimum
requirement obtains that the anchor firm attains sufficient production
for the scale economies to apply.

Note that an industrial zone is not enough to attract an anchor firm

without the prospect of capacity-building, and that infrastructure is not
enough to satisfy the condition of capacity without institutional reform.

Figure 4.1 Industrial cluster formed by an anchor firm

Market with saucers

Domestic Export

Export-processing
Industrial zone zone
(1)

(2) Capacity-building
(a) Infrastructure
(b) Institutions
(c) Human resources
(d) Living conditions

(3) Anchor firm

(4) Related firms

Industrial
cluster

Regional economic growth

172 A Flowchart Approach

In Figure 4.1 we summarize this process as a flowchart. Sometimes an

anchor firm and its related firms take their decisions at the same time, and
in these cases we do not need a flowchart. At other times the related firms
do not follow the anchor firm’s decision and there is no agglomeration. In
such cases our flowchart approach is needed to give priority to measures of
industrial cluster policy. The flowchart is crucial to the success of policy
implementation, since budgets are limited. An action plan is needed to
implement the flowchart.
The flowchart approach of Kuchiki (2003) was applied to evaluate a pro-
ject of the Japan Bank for International Cooperation in northern Vietnam
(see JBIC 2004). Our flowchart approach is practical and can be applied to
developing countries as a growth strategy by checking whether conditions
(1) and (2) in Figure 4.1 are present in sufficient strength to invite anchor
firms and their related firms.
The next section of the chapter explains how a firm deploys plants
according to value chain management. The third section presents a flow-
chart approach to the forming of an industrial cluster and examines what
conditions are critical to formation. The fourth section is a case-study of
Toyota’s investment in Tianjin, China. A procurement process is part of
Toyota’s value chain management and cross-dock logistics have a negative
effect on the formation of the industrial cluster. Finally, we focus on
decision-making in a component firm, analysing in detaie the behaviour of
Denso, a keiretsu company related to Toyota.
The remainder of this chapter is a case-study of Toyota’s cluster in
Tianjin and tries to generalize a pattern for forming a cluster. In it we will
build a prototype model of a flowchart approach to industrial cluster
policy, but the prototype model has many variations. Note that to justify
the generalization more cases are needed in order to study various types of
industrial cluster policy; the flowcharts for biotechnology clusters and
information technology clusters for example may well be different from
those for industrial clusters in electronics and automobiles.

Value chain management

This section explains how a firm deploys a plant from the point of view of
value chain management, according to our interpretation of value chain
management as seen in Porter (1998).

Value chain
Under free competition, private companies cannot survive without com-
petitive advantages. Value chain management and the establishment of
core competence can effect such an advantage. We will now explain the
mechanism, using Figures 4.2 to 4.6.
 Akifumi Kuchiki 173

Figure 4.2 Value chain from design planning to marketing

Design and planning Procurement Assembly Marketing

D P A M

Figure 4.3 Efficiency in production only

Procurement A Marketing

Figure 4.4 Optimization for customer satisfaction

Customer
D P A M
satisfaction

Figure 4.5 Measures of value chain management: an example

D P A M

Alliance Outsource Outsource Mergers and acquisitions

Figure 4.6 Core competence (selection and concentration)

D P A M

Core Outsource Outsource Mergers and acquisitions

As shown in Figure 4.2, a value chain is a whole process of research and

development, design, the procurement of parts and components, assembly
and marketing, including aftercare service in order to generate value for
customers.
Production functions in economics focus on assembly and production.
The objective of private companies is to maximize profit on the basis of
production functions. But Figure 4.2 shows that the maximization is based
on the value chain of the whole process of design, procurement, assembly
and marketing. The situation here is different from that of production-only
given in textbook economics and shown in Figure 4.3.
174 A Flowchart Approach

Figure 4.4 makes clear that the optimization of a value chain is to max-
imize competitive advantage for customer satisfaction, as we explain below.
This is different from the Japanese characteristic of product-out, which
means producers think that they can sell their products if the products are
of good quality. Producers are satisfied that their product, made according
to its particular characteristics, is of the best quality. As shown in Figure 4.5,
it is not always the optimal case for one company only to take part in the
whole process. US multinational corporations take strategies of mergers and
acquisitions, alliances, and outsourcing, which is why they enjoy advant-
ages in cost performance over Japanese companies.
A company that has a competitive advantage in the long run must have
a core competence as part of its value chain. It cannot have competitive
advantages over the whole value chain, and must select a core competence
and focus on it.
Examples of value chains in the entertainment industry are games, televi-
sion broadcasting and character goods in the case of sports, and movies,
theme parks and musical shows in the case of Walt Disney. We may sum-
marize the component parts of of a value chain as follows:

Design and plan → Procurement of Parts and Components → Assembly

→ Marketing (logistics and aftercare service).

Strategies for value chain management are as already mentioned: (1) out-
sourcing, (2) M&A (mergers and acquisitions) and (3) alliances. IBM puts an
emphasis on marketing and R&D in its value chain. Ford and GM each
started an internet business for marketing from the main process of assembly
and production (see Figure 4.6). Sony is interested in financial sectors includ-
ing banking and insurance. Nissan (Japan) merged with Renault (France). A
French manager, who changed the Japanese subcontracting system, and its
employment systems, makes important decisions. A merger of Zaibatsu,
between the Sumitomo and Mitsui banks, was announced in 1999.

Competitive advantage
The role of foreign direct investment is crucial for developing countries if
they are to generate employment opportunities. Michael Porter uses the
concept of competitive advantage instead of comparative advantage to
explain this situation. Our understanding of his definition of competitive
advantage is as follows:
VCM denotes value chain management, and independent variables of
competitive advantage are VCM and core competence. Thus:

1. Competitive advantage = f1 (VCM, core competence).

And VCM depends on cost performance, quality and speed, and must
attain the minimum cost. Value chain management by MNCs requires
value chain networking in Pacific basin countries.
 Akifumi Kuchiki 175

2. VCM = f2 (cost performance, quality, speed).

Core competence can be obtained by the generation of a brand name, or
3. Core competence = f3 (brand name).
Brand marketing depends on commercial considerations as well as
culture and tradition:
4. Brand marketing = f4 (commercial, culture and tradition), where brand
marketing (for example televisions, personal computers and mobile
phones) is one of the crucial measures in order to have a competitive
advantage.

A product consists of a function and a brand name. We can illustrate it as

follows. On the one hand a necktie without a brand name costs US$10, and
on the other a designer necktie costs US$200. The difference of US$190 is
generated by the brand name. A personal computer with an Intel component

Figure 4.7 Cost structure

Total cost
Cost

Proportional cost (wages, materials)

Capital equipment

Fixed R&D
cost

Brand marketing

Quantity
0
176 A Flowchart Approach

can be sold well. It is necessary for a company to invest and have strategies in
order to diffuse the brand name, as shown in Figure 4.7. Costs of branding
strategy are fixed costs since investment in branding strategy is the same as
that in capital goods. Figure 4.8 shows that the larger the scale of a company,
the lower the average cost. Figure 4.9 illustrates a case where a company out-
sources its processes of procurement of parts and components, and assembly.
Consumers buy a commodity for function and brand name. That is why
brand marketing is crucial for MNCs to survive in international competition.
We will now explain competitive advantage in terms of cost, using
Figure 4.9. Total cost is equal to proportional cost plus fixed cost. Here
proportional costs are wages, materials, etc. Fixed costs are fixed equip-
ment, design and development, and costs for brand marketing. For a
country, it is also important to obtain a competitive advantage over other
countries. Michael Porter indicates the following four factors in determin-
ing the competitive advantage of a country:

1. resource endowments (natural resources, artificial resources, capital, and

infrastructure),
2. clustering of related industries and local suppliers,
3. hard competition among companies, and

Figure 4.8 Average cost

Average cost

Capital equipment

R&D

Brand marketing

Proportional cost
 Akifumi Kuchiki 177

Figure 4.9 Average cost, brand marketing and R&D

Average cost

R&D

Brand marketing

4. a large-scale domestic market with high-end customers.

This chapter discusses how value chain management can enhance an

industry’s competitive advantage; only some of the items discussed in it
overlap with the items indicated by Porter’s four factors.

Global optimization and regional optimization of multinationals in

the network
We will show a typical case of regional optimization under the conditions
described above under ‘Value chain’ and ‘Competive advantage’. The
examples discussed here are taken from the actual economy. For instance,
Tianjin, China, is regarded as an automobile cluster, and this section exam-
ines the role of Tianjin in the Chinese industry’s network formation. In the
optimization of a value chain network, a process of assembly and manufac-
turing does not exist independently from the processes of design, procure-
ment and marketing. In other words, a value chain must be considered
comprehensively, that is, as is consisting of:

1. research and development,

2. procurement of parts and components,
178 A Flowchart Approach

3. assembly and production and

4. aftercare service.

That is, D, P, A and M in Figure 4.2.

In studying the global optimization of a supply chain as part of value
chain management, the point to be considered is whether the Asian strat-
egy, European strategy and American strategy can each, for the time being,
as a first step, be examined independently.
We will explain why a solution for the global optimization of value chain
management is the same as those for optimization independently by Asia,
America and Europe. One objective of value chain management is to
reduce costs, thus ensuring an ‘international competitive advantage’. The
important factors for cost reduction are the tax system (such as customs
duty), transportation costs (from Asia to Mexico), labour costs and stock
costs (in particular, interest). Customs duty is greatly influenced by (1) the
industrial policies of a country, (2) regional cooperation and (3) interna-
tional economic cooperation. The examples are as follows:

1. preferential tariff rates to introduce foreign direct investment,

2. free-trade agreements that will be activated for regional cooperation in
East Asia, and
3. liberalization policy of the World Trade Organization (WTO).

These elements all had an influence on the determination of the customs

duty by each country and by each region, which also influenced the costs
of firms.
This concept is applicable to East Asia also. The elements are: first,
improvement of laws that positively affect direct investment in each
country, including Thailand and Korea after the Asian currency crisis;
second, as for regional cooperation, early implementation of the reduction
of customs duty within the area by the early realization of the Asian Free
Trade Area (AFTA).
Any firm when forming a globally optimal value chain network in order
to maintain a competitive advantage must consider as a precondition
whether a tariff system is influenced by these factors.
Even when value chain management is global, multinational firms will
be found to optimize regionally where transportation costs are too high to
procure components from another region or regions (the regions in this
context being the Asia-Pacific region, the EU, and America). Then the Asia-
Pacific region is a size to be optimized locally. The objective of value chain
management is to maximize competitive advantage for customer satisfac-
tion in Asia.
We illustrate a value chain network in Figure 4.10. In this example, the
value chain network strategies of M&As, alliances and outsourcing are
 Akifumi Kuchiki 179

Figure 4.10 Toyota’s value chain network in China

D P A M

1 Japan 1 Japan 1 – 1 –

2 – 2 Tianjin 2 Tianjin 2 –

3 – 3 – 3 – 3 China

4 – 4 Shanghai 4 – 4 –

1 = domestic, 2 = M&A, 3 = alliance, 4 = outsourcing (cross-dock logistics)

taken among the Asian countries. The core competence of this company
exists in design and planning. Recently, US companies have focused on a
process of marketing and aftercare service.

Optimal size of a region of value chain management

Here we illustrate an optimization of the value chain network in Asia alone.
CA denotes competitive advantage. An objective function to be maximized
is as follows:

CA = f (Dj,n1, Pk,n2, Al,n3, Mm,n4) where j, k, l, m = 1, 2, 3 or 4

and each of n1, n2, n3 and n4 in Asia represents a name of its location such
as Tianjin, Shanghai or Japan, where 1, 2, 3 or 4 denotes domestic produc-
tion, mergers and acquisitions, alliances and outsourcing, respectively.
Optimization of the value chain network means that we evaluate all
the cases of combination, and choose the highest rate of CA. When multi-
ple solutions are available, a chief executive officer (CEO) of a multina-
tional chooses one of them. A value chain network of Toyota is shown in
Figure 4.10.
The value chain network has two characteristics. First, it is different from
the model of intra-firm trade that is internationally a vertical or horizontal
division of labour of parts and components in Asian-Pacific nations.
Second, due to the first characteristic, outsourcing strategy is a key factor to
reducing cost. Contract manufacturers play important roles, which are also
different from those of subcontractors with close relationships to parent
companies of multinationals. The management system is changing from an
internationally horizontal division of labour by intra-firm trade to a
regional value chain network. As will be shown later, Toyota decided to
180 A Flowchart Approach

build a plant in Tianjin and procure components from Shanghai, Japan and
Tianjin in order to maximize competitive advantage by using the cross-
dock logistics that will be explained below.

A flowchart framework

A typical economic growth model in East Asia consists of the following

factors: (1) industrial zones: port, roads, (2) capacity-building the facilita-
tion of (a) physical infrastructure, (b) institutional reform, (c) human
resource development, and (d) preparation of living conditions (3) anchor
firms, and (4) related firms. These factors form a cluster and enhance
regional economic growth.
Figure 4.1 is a flowchart of industrial cluster policy as generally applied in
East Asia. First, we consider the market for product sales by taking into con-
sideration (1) industrial zones. There are two types of market, domestic and
foreign. The export-processing zone in Kaousing in Taiwan (established in
1965) was the first in Asia. The free-trade zone in Penang, Malaysia, (1971)
and the export-processing zone at Tan Tuan near Ho Chi Minh City,
Vietnam, (1993) have the same anchor firm as in Kaousing. Products in
most developing countries are exported since their populations are small
and incomes are relatively low in the early stages of development. It is
usual for developing countries to have to establish export-processing zones
to attract foreign direct investment.
But industrial zones are not enough to invite anchor firms; to form an
industrial cluster, capacity-building (item (2) above), which as we have
noted, consists of the factors of physical infrastructure, institutions, human
resources and living conditions, is also needed. Kuchiki and Yamada (1997)
showed that 100 per cent ownership of capital and tax reduction or exemp-
tion was crucial to success in inviting foreign direct investment in East Asia
as part of institutional reforms. Cheap labour in the 1980s in East Asia as
an initial condition was also a crucial factor for success as part of human
resource development. Human resources are classified as unskilled labour,
skilled labour or professionals such as accountants and researchers. Living
conditions are facilities like hotels, international schools, banks, shopping,
entertainment and hospitals.
An anchor firm (3) with its related firms (4) forms a cluster. Matsushita’s
Panasonic division is a Japanese electronics firm in Shah Alam in Selangor,
Malaysia, and with its related firms is a typical case of an industrial cluster
in East Asia. Two relevant terms here are sogoshosha,1 Japanese for a trading
firm playing the role of gate-keeper of a closed business circle, and keiretsu,
a firm that plays a key role in inviting Japanese investors into industrial
zones in East Asia (see below, p. 188). Sogoshosha firms that established
industrial zones in Asian countries such as Thailand and Malaysia asked
their keiretsu firms to be tenants, and formed agglomerations of Japanese
firms in the industrial zones.
 Akifumi Kuchiki 181

In summary, industrial zones or export-processing zones (1) and capacity-

building (2) are conditions to invite anchor firms (3) as step I of industrial
cluster policy. Then, as step II, their related firms (4) build plants near the
anchor firm, provided sufficient conditions for the related firms hold. These
steps are shown in Figure 4.1. In the fifth section we will show that in the
case of Toyota’s related firms one of the sufficient conditions is scale
economies.

Step I: Toyota’s cluster in Tianjin

Tianjin city has saucers to accept anchor firms and their related firms (see
Table 4.1). The city is 120,000 km2 in size, has 9.19 million people, the
largest artificial port in China, and is under the direct control of the central
government. Industrialization has been accomplished by establishing
industrial zones all over the city. The GDP growth rate of the city is
12.6 per cent. The value of the contracted amount of foreign direct invest-
ment in Tianjin is US$5.81bn and corresponds to that of Vietnam.
We apply the flowchart of Figure 4.1 to Tianjin Toyota’s case in
Figure 4.11. In the implementation of industrial cluster policy, the three
factors of (1) industrial zones, (2) capacity-building and (3) anchor firms are
the key to forming industrial clusters. There are three special characteristics
as follows. First, Toyota’s market is domestic, not foreign. Second, Tianjin

Table 4.1 Tianjin’s industrial zones

Name Rank Year Planned

area
(km2)

Tianjin New Technology Industrial Park Nation 1988 22

Tianjin Economic Development Area (TEDA) Nation 1984 130

Tianjin Port Tax-Free Zone Nation 1991 7
Tianjin Export-Processing Zone Nation 2000 2
Tianjin Tanggu Ocean Hi-tech Development Zone Nation 1992 24
National Tianjin Beichen Science Park Nation 2002 17
Tianjin Wiquing Hi-tech Development Zone Nation 1991 25
Tianjin Hangu Economic Development Zone City 1992 2
Tianjin Dagang Economic Development Zone City 1992 2
Tianjin Dongli Economic Development Zone City 1992 2
Tianjin Xiqing Economic Development Zone City 1992 8
Tianjin Jinnan Economic Development Zone City 1992 14
Tianjin Baodi Economic Development Zone City 1992 10
Tianjin Ninghe Economic Development Zone City 1992 2
Tianjin Jinghai Economic Development Zone City 1992 14
Tianji Jixian Economic Development Zone City 1992 5

Source: Sato (2003).

182 A Flowchart Approach

Figure 4.11 Toyota’s cluster in Tianjin

Market

Domestic

(1) Industrial zone

(2) Capacity-building
(a) Infrastructure
(b) Institutions
(c) Human resources
(d) Living conditions

Value chain management (3) Anchor firm

Cross-dock logistics (4) Related firms

Cluster Regional economic growth

has a problem of capacity-building in fostering entrepreneurs. Third, cross-

dock logistics as a just-in-time method related to value chain management
affected the formation of an industrial cluster in Tianjin. The Toyotatsusho
Corporation collects components in Shanghai and transports them to
Tianjin. Tianjin Toyota needs to neither buy nor import; nonetheless its
local content of components in China was 80 per cent in 2002.

1. Industrial zones
The city has seven industrial zones which the central government
approved to establish. These are Tianjin New Technology Industrial Park,
Tianjin Economic and Technological Development Area (TEDA) established
in 1984, Tianjin Port Tax-Free Zone, Tianjin Export-Processing Zone,
Tianjin Tanggu Ocean Hi-tech Development Zone, National Tianjin
Beichen Science Park and Tianjin Wiqing Hi-tech Development Zone.
There are many industrial development zones in Tianjin, as Table 4.1
shows. Japanese firms in the rubber, glass, steel, non-ferrous metal, ma-
chinery, electric appliances, transport equipment and precision equipment
industries total 106, and 53 per cent of them have invested in development
zones (see Sososha 2003, for a list of Japanese firms’ investments in China).
The TEDA at the national level is the largest among all of these.2 It is
located in the southeast of the city, about 45/km from downtown and 140
from Beijing. The TEDA enjoys easy access to North China, Northeast
 Akifumi Kuchiki 183

China and Northwest China. The Beijing–Tianjin–Tanggu expressway runs

through the TEDA and divides it into two parts, with the financial, trading
and residential area of 8.5 km2 to the south and an industrial park span-
ning acreage of 24.5 km2 to the north. The TEDA is 130 km2 in size and its
pillar industries are electronics and electricals, food and beverages, pharma-
ceuticals and machinery. The TEDA is the largest saucer in Tianjin to accept
foreign firms.

2. Capacity-building
This sub-section explains (a) infrastructure, (b) institutions and (c) human
resources.

(a) Physical infrastructure

The port is one of the most attractive facilities in Tianjin. Other physical
infrastructures are sufficient to invite foreign firms. As the largest freight
terminal in North China, the harbour has an annual handling capacity of
over 100 million tonnes, and 2 million TEUs (20-foot equivalent units) can
be handled here each year, which will increase to 5 million TEUs by 2010.
The port has freight exchanges with over 300 ports in 160 countries and
regions around the world. With 47 container liner routes and nearly 200
international container liner routes, it is one of the world’s container hubs.
Table 4.2 Infrastructure of Tianjin Economic Development Area

The current water supply capacity of TEDA is 180,000 tonnes per day, and the goal
is 400,000 tonnes per day.
Power supply capacity is 200,000 kV A by double circuit feeding.
TEDA can provide dedicated power supply circuits to big users or those who have
special needs
Sewage treatment capacity is 100,000 tonnes per day.
Gas supply capacity is 87,000 cubic meters per day.
The capacity for treating the electroplating waste liquids is 1,000 tonnes per day.
The liquids can be treated on site or carried away by specialized vehicles.
All specialized companies in the infrastructure have been ISO 9002 certified.
ISDN and IP telephone services are available in TEDA. In 1998, Motorola
successfully had a videophone meeting for five hours. This meeting was made
possible by three dedicated lines of 2B+D ISDN connected with Motorola’s
functional departments around the world. It was also the first meeting of its kind
ever held in China. The 8M-DDN dedicated line provided by China Telecom is
very advanced. Motorola once rented a 6M dedicated line in 2000.
The TEDA ‘Urban Wide-Band Network Project’ was put into implementation in
October of 2000.
1-10M broadband and 10-100M services are available.

Source: [Link]
Table 4.3 Tax system of Tianjin Economic Development Area
184

Productive enterprise

Advanced-technology- Export-oriented Energy, communications

oriented enterprise enterprise and construction project

Tax rate (%) 15 15 15

Enterprise may be Enterprise whose Sino-foreign equity joint venture with

granted a reduction export value an operational period of over 15years
in income tax by half exceeds 70% of in the field of harbor and wharf
for 3 more years(and its output value construction, upon its application as
pays at a tax rate of of the same year well as approval of the taxation
10% if the tax rate pays enterprise authorities of the local province,
after reduction is less income tax at a autonomous region or municipality,
Enterprise income tax Preferential than 10%). See rate of 10% after may be granted 5 years of tax
treatment Note (1). reduction. exemption and another 5 years of 50%
tax reduction, commencing in the year
in which the enterprise begins to make
profits. See Note (2).
Income tax on Tax rate (%) 10 10 10
remittance of
Preferential treatment, Same as left Same as left Same as left
profits gained by
See Note (3).
a foreign investor

Notes:
1. According to state regulation, an enterprise remains advanced-technology-oriented after the exemption reduction period is over.
2. ‘5 years of tax exemption and another 5 years of 50% tax reduction’.
3. A foreign investor without an establishment within China pays withholding tax at an after-reduction rate of 10% on his interest, retails, royalties, or
other earnings from TEDA, except for those exempt from the tax according to law; one who provides funds or equipments under favorable conditions
or transfers advanced technologies may, once approved, receive extra tax deduction or tax exemption treatment.
Source: [Link]
 Akifumi Kuchiki 185

With its 12-m-deep, two-way navigation channels, the port serves North
China, Northeast China and Northwest China as the primary gateway for
imports and exports. The port is used by Toyota to import components and
export products. Table 4.2 illustrates the infrastructure of the TEDA, which
provides a water supply, a power supply, sewage treatment, a gas supply,
communications and so on.

(b) Institutional reform

Preferential treatment such as tax exemption or reduction and streamlined
investment procedures in Tianjin are crucial to inviting foreign investors
and are almost the same as those of other cities in Guangzhou and
Shanghai. Table 4.3 shows the preferential tax treatment of the TEDA’s pro-
ductive enterprises such as advanced-technology-oriented enterprises,
export-oriented enterprises and energy, communications and construction
projects. The rate of enterprise income tax for advanced-technology-
oriented enterprises is 15 per cent. An advanced-technology-oriented enter-
prise may be granted a reduction in income tax by half for 3 more years.
It is intended that investment within the TEDA should be streamlined,
and Figure 4.12 shows the TEDA’s consulting services procedures. The
TEDA Economic Development Bureau (EDB) and Investment Promotion
Centre (IPC) function to accept foreign investors at the point of entry. The
main processes are as follows: to make an on-site trip to the TEDA, to do
feasibility studies, to decide investment, to apply for work permits and
visas, to arrive in the TEDA and to register establishment of the enterprise.
Until 2000 the TEDA had followed a policy of inviting large-scale firms,
but this policy changed and it started inviting small- and medium-scale
firms to provide supporting industry, partly because of Toyota’s involve-
ment in 2002. The TEDA encourages the following automobile component
industries: brake assemblies, driveshaft assemblies, transmissions, diesel
fuel pumps, pistons, bulbs, hydraulic tappets, sliding bearings, aluminum
radiators, bumpers, car air-conditioners, locks, back millers, power win-
dows, unit meters, motors, lights, die-castings for automobile use and so
on. Under this policy component firms are invited to supply components
to assembly firms in Beijing, Tianjin and other cities near Tianjin. The
number of registered foreign firms in the TEDA is more than 3000, but
large-scale firms with more than US$20 million in total investment number
only 200 (see Sato 2003).
The policy of supporting small- and medium-scale firms has gone as fol-
lows since 2000. First, exhibitions are held to give small- and medium-scale
component firms the opportunity to negotiate with large-scale assembly
firms. Second, the TEDA Credit Guarantee Centre was established in 2002 to
provide loans to small- and medium-scale firms. Third, TEDA Venture Capital
provides loans to venture firms. Fourth, a committee was established to help
enhance the productivity of small- and medium-scale firms. Fifth, an indus-
trial area specifically for small- and medium-scale firms will be established.
186 A Flowchart Approach

Figure 4.12 Consulting services procedures in Tianjin

TEDA Economic Development Bureau (EDB)

Investment Promotion Center (IPC)

Introduce TEDA investment environment

Make an on-site
trip to TEDA

EDB/IPC makes
trip arrangements

Do feasibility studies

EDB/IPC provides
related helpful data

Decision is made to invest

Select the Select the residence
residence of the of the proposed
proposed enterprise enterprise
EDB/ICP
assist
Apply for allowances Apply for allowances

Register establishment of the enterprise

EDB/IPC introduces
EDB/IPC provides professional lawyers
suggestions and accounting firms
Apply for work permit and visa to assist

Arrive in TEDA

EDB/ICP Look for an apartment

assist

Accompanied children get in school

Register establishment of the enterprise Fit in the local community

Source: TEDA Administrative Commission.

(c) Human resource development

We consider the three kinds of labour noted above, that is unskilled, skilled
and professionals such as accountants and researchers. Tianjin is attractive
in having many university students and almost unlimited cheap labour.
 Akifumi Kuchiki 187

What Tianjin lacks in the field of human resources is entrepreneurs who

will engage in capacity-building to invite foreign investors. However, there
are 20 universities and colleges in Tianjin, boasting 79,581 students, of
whom 73,630 are undergraduates and 5951 postgraduates. There are 26,150
staff members, of whom 9589 are full-time teachers, including 1093 pro-
fessors, 3142 associated professors, 3674 lecturers, and 1060 assistant
lecturers (1997 figures).

3. Anchor firms
Toyota is an anchor firm agglomerating automobile component firms in
the Tianjin area. In 1980 Japan surpassed the USA for the first time to
become the world’s top auto-producing country. At around that time, the
Chinese authorities become interested in Toyota as an investor and joint
venture partner. However, Toyota continued for the meantime its strategy
of exporting to China, setting up sales networks but refusing to manufac-
ture locally.
According to Water (2003), we may summarize Toyota’s history of manu-
facturing in China as follows. The company took a multi-faceted approach
to establishing a base for passenger car production in China. First, it had set
up an extensive sales network and a considerable number of service facil-
ities in China, and in 1995 it invested US$132m. to set up the Toyota China
Technology Centre in Tianjin. This facility was used to train parts and com-
ponents suppliers, to support dealers and service facilities, and to provide
Toyota motor vehicle repair centers with factory-sponsored technical train-
ing. The second move was to begin a series of targeted investments in
China’s automotive industry. Between 1995 and 1999, Toyota invested
more than US$321m. in a joint venture engine plant with the Tianjin
Automotive Group. The Tianjin Automotive Group was a producer of mini
cars, trucks and buses that also produced the Daihatsu Charade under a
licensing agreement. In addition, Toyota established a facility to produce
150,000 Toyota 1.3-litre engines per year, and three major automotive
component ventures for the production of universal joints, castings and
steering components in Tianjin.
In May 2000 Toyota established the Tianjin Toyota Motor Company in a
joint venture with the Tianjin Automotive Xiali Company, Daihatsu’s joint
venture with a Chinese firm, to produce Toyota’s small-car model, the Vios.
Toyota had been negotiating with Tianjin for several years for a joint
venture and also assisted the Tianjin Automotive Group to increase produc-
tion to 150,000 Charades per year to qualify as a key producer in China’s
automotive sector. Since then, the newly formed Tianjin Toyota Motor
Company has established several ventures with Chinese automotive sup-
pliers and has induced some of its major Japanese suppliers to move opera-
tions to the Tianjin area to more effectively support Toyota’s new small-car
venture.
188 A Flowchart Approach

In February 2002 the FAW Group acquired a majority stake of 51.9 per
cent in the Tianjin Automotive Group. About a year later, in mid-summer
2003, Toyota and the FAW Group agreed to launch four Toyota models by
2005, the Land Cruiser Prado and the Crown. Meanwhile, the joint produc-
tion of the Toyota Vios small-car in Tianjin has been unable to keep up
with demand simply because of inadequate production capacity.
Tianjin Toyota started operating in 2002 as an assembly fi[Link] TEDA is
building capacity for small- and medium-scale firms to supply components
to Toyota. Toyota’s local contents ratio at the Tianjin plant is 80 per cent.3
Tianjin is developing an industrial cluster as a group of many industrial
zones including the TEDA.

Step II: the related firms

A keiretsu,4 already mentioned, is a loose conglomeration of firms organ-

ized around a single bank for their mutual benefit, and playing an import-
ant role in forming an industrial cluster. The firms sometimes, but not
always, own equity in each other. Part of the formation, symbolized by ver-
tical relationships, is the manufacturers’ keiretsu integrating a pyramid of
suppliers and component manufacturers in one structure. The large, hori-
zontal keiretsu spans a wide range of industries, including banking, insur-
ance, steel, trading, manufacturing, electricals, gas and chemicals. The
companies within it, whether they are customers higher up in the pyramid
or subcontractors, behave as one firm: giving loans, technology, develop-
ment costs, long-term supply agreements etc. This is known as the one-set
principle. Agglomeration depends on the behaviour of components indus-
tries and anchor firms. In the case of Tianjin, Toyota took opted for cross-
dock logistics, which is why components firms need not establish
subsidiaries in Tianjin. We will now see how this works. And we will use
the case of Denso, a typical component supply firm in the keiretsu of
Toyota, to see how scale economies were crucial to establishing a plant pro-
ducing components (in this case, air-conditioners) in Tianjin.

Cross-dock logistics
Cross-dock logistics5 allow component firms to avoid establishing plants in
Tianjin by reducing the transportation costs of components from Shanghai
(see Figure 4.13). Toyota uses such means to transfer parts and components
over this route. The Shanghai branch of Toyotatsusho, Toyota’s keiretsu
company, is responsible for the logistics. We may see how the component
industry in Shanghai developed in the 1990s from Tables 4.4 and 4.5.
Table 4.4 shows output value by region of automobiles, engines and com-
ponents in 1993. Jilin, Hubei and Shanghai are in order of output value of
automobiles. Sichuan, Guangxi, Jiangsu, Beijing and Liaoning are in order
of output value of engines. Shanghai, Sichuan, Hubei and Zhejiang are in
 Akifumi Kuchiki 189

Figure 4.13 Cross-docking at work

Shipping

Sorting

Receiving

Source: Gue (2001).

order of output value of components. The situation regarding automobiles

and engines in 1993 is almost the same as that in 2001. It is noteworthy
that Sichuan dropped in the output of automobiles. The most striking
change between 1993 and 2001 is that Shanghai’s output value of compo-
nents rose by five times. It is further clear, by taking Jiangsu and Zhejiang
into consideration, that the Shanghai region has formed an agglomeration
of components. Shanghai, Jiangsu and Zhejiang are in order of output value
of components from the highest in 2001. We can find that Tianjin’s Toyota
has an incentive to reduce the transport costs by collecting components in
Shanghai and transporting the components packed by cross-docking from
Shanghai to Tianjin. It is cheaper for Tianjin’s Toyota to import compon-
ents from Shanghai than to produce them in Tianjin. The cross-dock logis-
tics therefore have a negative effect on cluster forming in Tianjin.
190 A Flowchart Approach

Table 4.4 Total output of the Chinese automobile industry, 1993 (million
Yuan)

Commodities
Province Automobiles Engines Parts & components

Tianjin 5,810 379 1,299

Beijing 6,854 1,120 1,592
Hebei 1,368 136 866
Shanxi 512 30 235
Inner Mongolia 188 0 216

Liaoning 4,662 1,114 1,523

Jilin 16,523 23 820
Heilongjian 656 471 395

Shanghai 10,674 247 4,527

Jiangsu 6,134 1,329 1,776
Zhejiang 1,171 478 2,112
Anhui 974 128 647
Fujian 938 0 392
Jiangxi 3,474 214 656
Shandong 2,403 585 1,298

Henan 787 24 919

Hubei 14,995 22 2,492
Hunan 744 376 1,594
Ghangdong 5,045 26 833
Guangxi 3,199 1,430 476
Hainan 0 0 11

Sichuan 7,189 2,173 3,056

Source: China Automotive Industry Yearbook 1994.

Toyota’s keiretsu firms and other related firms in Tianjin are shown in
Tables 4.6 and 4.7, respectively. They make clear the following three char-
acteristics. First, all of the firms except two Toyota Motor Corporations are
of either joint venture type or technical assistance type. Of the Japanese
firms, 33 per cent are wholly owned and the others are joint ventures with
Chinese firms. It follows that capacity-building by local firms as partners of
joint ventures is key to attracting foreign firms. Tianjin is said to be lacking
in entrepreneurship compared with other regions in China, which is one of
the reasons why it is slow to introduce foreign direct investment compared
with southern China and the Shanghai region (my interview to a staff
member of Marubeni Corporation in Tianjin, 28, August 2002). Second, all
the keiretsu firms and related firms except Daihatsu in Tables 4.6 and 4.7
 Akifumi Kuchiki 191

Table 4.5 Total output of the Chinese automobile industry, 2001 (million
Yuan)

Commodities
Province Automobiles Engines Parts & components

Tianjin 3,841 661 2,053

Beijing 5,065 106 863
Hebei 669 120 2,278
Shanxi 436 159 969
Inner Mongolia 598 0 219

Liaoning 8,627 1,855 6,116

Jinlin 58,242 65 3,639
Heilongjian 4,060 1,859 1,926

Shanghai 43,099 299 22,733

Jiangsu 8,882 454 7,891
Zhejiang 2,204 0 7,676
Anhui 6,466 2 1,766
Fujian 4,668 0 1,777
Jiangxi 8,238 0 680

Shandong 4,503 333 3,543

Henan 2,662 0 2,299
Hubei 47,359 0 5,265
Hunan 3,423 89 2,201
Guangdong 12,480 287 2,820
Guangxi 4,352 1,869 1,315
Hainan 0 0 27

Sichuan 4,492 774 2,272

Source: China Automotive Industry Yearbook 2002.

started operating in and after 1995 (Daihatsu operated in 1985 independ-

ently of Toyota and later merged with Toyota). Third, Toyota’s keiretsu
firms such as Denso and Aishin started operating in 1995, 1996, 1997 and
1998. The three related firms invested in the form of technical assistance.
To take Aishin’s inlet modularity as an example, it set up five components
such as throttle bodies, inlet pipes and variable inlet bulbs. Modularity
increases measurement capacity and transportation costs, letting keiretsu
firms establish a new plant in a cluster.

Conditions sufficient for building a new plant at a cluster

In order to consider whether an anchor firm and its related firms will form
and develop a cluster we take scale economies and external economies of
the anchor firm into consideration.
Table 4.6 Keiretsu companies of Toyota in Tianjin
192

Technical assistance 1985,01 Daihatsu Motor Co. Ltd Technical assistance to Daihatsu
Technical assistance 1994,09 Aishinseiki Co. Ltd Disc calipers
Joint venture 1995,04 Toyotatsusho Corporation Copper plate prints
Technical assistance 1995,10 Denso Corporation Distributor
Joint venture 1995,12 Toyota Motor Corporation Constant-velocity joint
Joint venture 1995,12 Denso Corporation Alternator, scooter
Joint venture 1995,12 Toyota Gosei Co. Ltd Brake hoses
Joint venture 1996,03 Denso Corporation(asumo) Small motors
Joint venture 1996,05 Toyota Motor Corporation Engines
Wholly owned 1997,02 Toyota Motor Corporation Material for casting of c.v. joints
Joint venture 1997,06 Aishinseiki Co. Ltd Clutch parts, brake parts
Joint venture 1997,07 Toyota Motor Corporation Steering, propeller shafts
Joint venture 1997,07 Denso Corporation Electric parts
Joint venture 1997,12 Denso Corporation Car air-conditioners
Wholly owned 1998,02 Toyota Motor Corporation Consulting on car
Joint venture 2000,06 Toyota Motor Corporation New compact car
Joint venture 2000,10 Toyota Gosei Co. Ltd Weather strips
Technical assistance 2001,02 Denso Corporation Air cleaners
Joint venture 2001,02 Tokairika Co. Ltd Switches
Joint venture 2001,05 Aishinseiki Co. Ltd Door locks, window winders, hinges, etc.
Wholly owned 2001,07 Toyota Motor Corporation Support of Toyota’s marketing strategy in China

Source: Toyota’s Activities in China, Toyota, April 2002.

Table 4.7 Japanese companies related to Toyota in Tianjin

Joint venture 1995,10 Araco Corporation Panels, doors, roofs

Joint venture 1995,12 Aisan Industry Co. Ltd Fuel supply devices, throttle bodies, carburettors
Joint venture 1995,12 Tokai Rubber Industries Ltd Engine mountings, water hoses
Joint venture 1995,12 Fujitsu Ten Limited. Audio products
Technical assistance 2000,08 Chuo Spring Co. Ltd Control cables
Technical assistance 2000,08 Futaba Industrial Co. Ltd Exhausts
Technical assistance 2000,09 Chuo Spring Co. Ltd Coil springs
Technical assistance 2001,05 Maruyasu Industries Co. Ltd Brakes, fuel pipes
Joint venture 2002,02 Futaba Industrial Co. Ltd Body parts

Source: Toyota’s Activities in China, Toyota, April 2002.

193
194 A Flowchart Approach

Hypothesis: Development of an industrial cluster depends on demand – the

quantity of production of the anchor firm. If an anchor firm expands pro-
duction because of an expected expansion of sales in China, then its related
firms will establish a new plant in the cluster.
Independent variables of transportation costs are distance, cross-dock
logistics and modularity in the following. That is:

t = f (distance, cross-dock logistics, modularity)

We assume that an increase in transportation costs caused by technological

progress of modularity depends on management and technology:

m = g (management, technology)

It is well known that externality depends on a number of related firms in

a cluster. Notations are as follows:
t = transportation costs per unit,
m = increase in transportation costs per unit caused by technological
progress of modularity,
e = external economies,
s = movement costs for a related firm to establish a new plant, and
q = quantities of production

We assume that cross-dock logistics do not change, that the technology

of modularity does not change, that movement costs are fixed and that the
number of related firms is fixed. Then, we can conclude that the quantities
of production decide the inequality. Related firms’ decisions depend on the
quantities of production of an anchor firm. A related firm compares the
total transportation costs, tq, with the movement costs, s, as follows:

s < tq or s <q
t

The difference between transportation costs and movement costs reduces

the profits of the firm. An increase in transportation costs caused by new
modularity technology is crucial to deciding whether a related firm builds a
new plant at a cluster as follows:

s < mq or s <q
m

Expected gains from external economies, e, in Tianjin can be deducted

from the movement costs, s, and the total costs of not building a new plant
are the transportation costs, tq and mq:

s – e < tq + mq
 Akifumi Kuchiki 195

One of the sufficient conditions for a related firm to build a new plant in a
cluster is in the following:

s – e < q = 150,000
t+m

In the next subsection we illustrate how the quantities of production are

crucial to determining whether a firm builds a new plant. The number of
automobiles was 150,000 and the minimum size of the average costs of
production of a car is decreasing due to technological progress in car
production.6

Denso’s case
This subsection shows how Denso decided to establish a joint venture sub-
sidiary with a Chinese corporation in Tianjin to produce air-conditioners,
partly because of Toyota’s expansion plan for automobile production in
China, which contributed to the development of a cluster in Tianjin. The
company produces air-conditioners for automobiles from two factories in
Japan, one in the city of Kitakyushu in the south and the other in Nishio
in central Japan. The products are supplied to factories located within
400 km of the company’s plants. Denso chose to establish a plant in
Kitakyushu in 1993, first because its anchor firm Toyota had established a
factory there in 1992; and second because living conditions – schools,
shopping centres, hospitals, and so on – there better than those in other
cities.
Toyota however built from the ground up an in-house capability in elec-
tronic components, buying less from Denso and scaling down its depend-
ence on the latter company (Ahmadjian 2000). The case of Denso in fact
reflects the onset of the collapse of the keiretsu system; it sells components
not only to Toyota but also to other firms such as the Mitsubishi
Automobile Company and Matsuda who are not in the keiretsu of Toyota.
Denso divides China into four areas: northern, eastern, southern and
west-southern. It has four firms in Tianjin and one firm in Chongqing, and
plans to have a supplier system for supplying Tianjin’s products with the
other areas’ products by making the Tianjin firm the base and establishing
satellite plants in southern China. The Denso plant located in Yantai,
China, supplies air-conditioners to GM in Yantai and Toyota in Tianjin.
Denso will produce air-conditioners in Tianjin if Toyota increases auto-
mobile production to more than 150,000 per year. Scale economies are
crucial to Denso’s case (interview by the author on 24, August 2002 in
Yantai). Denso’s staff in Yantai have said that Denso planned to establish a
plant in Tianjin if Toyota announced expansion of automobile production.
On 28, August 2002, Toyota announced that a second plant in Tianjin
would produce 30,000 to 50,000 per year of a large model of automobile.
Toyota started to produce compact cars called Corolla in 2004. By 2005,
196 A Flowchart Approach

with various types of automobiles, Tianjin will be a base large enough to

produce 550 000 cars eventually. On 9, October 2003 Denso announced
that it would establish a new plant in Tianjin at the cost of 1.5bn, to start
operating in 2005 as a joint venture with a Chinese corporation (Nikkei
newspaper, 10, October 2003). Denso decided to invest in Tianjin when the
requisite condition of scale economies mentioned in the last section to
attain its minimum average cost was established.

Conclusions

We have built the framework of a flowchart approach to industrial cluster

policy and applied it to Toyota’s cluster in Tianjin. We have proposed that
four factors – (1) market and industrial zones, (2) capacity-building, (3)
anchor firms and (4) related firms – are the key to successful industrial
cluster policy. Capacity-building means the facilitation of physical infra-
structure, institutional reform, human resource development and the pre-
paration of living conditions. Institutional reforms include one-stop service
and deregulation of investment procedures. We have applied a prototype
model of the flowchart approach to Toyota’s cluster in Tianjin. The
sequence was that Toyota first, decided to invest in Tianjin, then second it
asked its related firms to build plants in the region. One of the related
firms, Denso, waited to decide to invest in Tianjin until Toyota announced
it would expand its production to 550,000. We had two lessons from the
case of Toyota’s cluster. First, at step I, the cross-dock logistics of Toyota
deterred its related firms from joining an industrial cluster, since this
procurement process was part of value chain management, a just-in-time
system of efficient logistics that decreased transportation costs from
Shanghai to Tianjin. Second, at step II, Denso, a Japanese keiretsu firm of
Toyota, waited to decide on its investment in Tianjin until Toyota
announced it would expand its production to 550,000 units in China. Scale
economies are a sufficient condition for the related firms to join the anchor
firm’s cluster. The market for the products of an anchor firm can be do-
mestic or foreign. Toyota’s market is domestic, since China has a large
amount of local demand. Governments can apply our flowchart approach
to other regions as growth strategy in Japanese Official Development
Assistance (ODA) by ordering measures of industrial cluster policy.
Table 4.8 and Figure 4.11 summarize this chapter. The first step in
forming an industrial cluster is to find a market for the product. Here scale
economies in China were crucial to forming an industrial cluster in Tianjin.
The market in the case of Tianjin was domestic. The next step depends
upon whether there are saucers for firms to build plants. Tianjin has (1) the
Tianjin Economic Development Area (TEDA) of 130 km2 established in
1984 and other industrial zones established in 1992. Tianjin can offer as an
incentive to firms a good port, physical infrastructure as part of (2) capa-
 Akifumi Kuchiki 197

Table 4.8 Summary of industrial cluster policy, Tianjin and northern Vietnam

Figure 4.11 Tables and Figure 4.1

Tianjin figures Northern Vietnam

(1) Market and saucers EDZ Table 4.1 EPZ

TEDA TLIP, NHIZ
(2) Capacity-building
(a) infrastructure Port, roads, etc. Table 4.6 Route 5 and
Haiphong port
(b) institutions Investment Table 4.7, Investment
procedures Figure 4.13 procedures
(c) human resources Universities 20 universities Cheap labour,
universities
(d) living conditions Shopping etc. Good Hospitals, schools
(3) Anchor firm Cross-dock Toyota Canon
logistics

(4) Related firms Keiretsu Tables 4.4, 4.5 Keiretsu

EDZ= economic development zone; EPZ = export processing zone; NHIZ = Nomura Haiphong
Industrial Zone; TEDA = Tianjin Economic Development Area; TLIP = Thang Long Industrial Park.

city-building. Tianjin port is thus effective in forming an industrial cluster.

Tianjin also offers firms as an incentive in human resources, students
attending 20 universities and colleges, satisfying another condition of
capacity-building. Toyota started to operate in October 2002 as (3) an
anchor firm for a cluster in Tianjin. It merged with Daihatsu and decided to
establish a subsidiary partly due to Daihatsu’s subsidiary located in Tianjin,
though it had several candidate cities to invest in. Japan’s keiretsu system
was effective in attracting (4) companies related to Toyota. Inviting an auto
assembly company as an anchor firm is effective in implementing an
industrial cluster policy, since a car is composed of ten thousand compon-
ents. Component firms move into a cluster where an anchor firm exists if
they can have profits by building a plant. Cross-dock logistics are character-
istic of Tianjin Toyota’s cluster. It is a just-in-time system of collecting com-
ponents in Shanghai and transporting them to Tianjin. The logistics reduce
transportation costs from Shanghai to Tianjin and weaken firms’ incentive
to move into Tianjin.
Kuchiki (2003) applied our flowchart approach to a case-study in north-
ern Vietnam. In this case products were exported to market. Saucers in the
region were (1) the industrial zones of Nomura Haiphong Industrial Zone
and Thang Long Industrial Park in Hanoi. Physical infrastructures as part of
(2) capacity-building were the key to success in forming industrial clusters
in Hanoi and Hochiminh City. The construction of National Highway
198 A Flowchart Approach

Route 5 and the rehabilitation of Haiphong Port, mainly under the Official
Development Assistance commitments of the Japan Bank for International
Cooperation, were crucial to attracting foreign investors by combining
infrastructures with institutional reforms such as streamlining investment
procedures and establishing one-stop services. Hospitals, international
schools and entertainment facilities as part of living conditions were also
needed to invite foreign investors. Vietnam has the advantage of both
cheap labour and skilled labour at universities. Canon (3), a Japanese
anchor firm, chose not China but Hanoi to build a plant to produce inkjet
printers in order to avoid the risk of investing in China, country risk being
one of the most important factors for firms in determining where to invest.
A lot of Canon’s related keiretsu component firms have become residents of
the industrial zones in northern Vietnam. Other related firms are also
agglomerating there.
We have shown that our approach is effective in analysing both cases
and determining their characteristics. However, in order to generalize the
approach it may well be necessary to increase the number of case-studies.

Notes
1. Sogoshosha: [Link]/naoyuki_hashimoto
2. National Economic and Technological Development Zones (2003),
([Link]
3. 80 per cent: ([Link]
4. Keiretsu: ([Link]
[Link]
5. Cross-docking logistics: ([Link]
[Link]
6. A Denso staff member told us that the number is from 100,000 to 150,000
according to my interview in the Economic Analysis Project of IDE-JETRO in
1998.

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