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International Journal of Emerging Markets

Value-based localization strategies of automobile subsidiaries in Thailand


Lalit M. Johri Phallapa Petison
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Lalit M. Johri Phallapa Petison, (2008),"Value-based localization strategies of automobile subsidiaries in
Thailand", International Journal of Emerging Markets, Vol. 3 Iss 2 pp. 140 - 162
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IJOEM
3,2 Value-based localization
strategies of automobile
subsidiaries in Thailand
140
Lalit M. Johri
School of Management, Asian Institute of Technology,
Received October 2006
Revised April 2007 Pathumtani, Thailand, and
Accepted July 2007 Phallapa Petison
College of Management, Mahidol University, Bangkok, Thailand
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Abstract
Purpose To analyse the scope of localization strategies and corresponding benefits of these
strategies to subsidiaries of international companies in the automobile industry in Thailand.
Design/methodology/approach The authors have adopted the case research method to
investigate localization strategies of subsidiaries of seven companies (Toyota, Hino, Honda, Isuzu,
DaimlerChrysler, BMW, and Auto Alliance) as well as 14 of their dealers and suppliers in Thailand.
The information was gathered by conducting in-depth multiple interviews with 120 local and
expatriate employees at various levels in the organizations; by referring to annual reports, policy
documents and internal reports of these companies; and by observation during plant visits.
Findings Contrary to the belief that international companies implement localization strategies to simply
match the local market environment, it was found that these companies implement a wide range of
localization strategies to achieve multiple benefits. The paper identifies nine areas of localization:
localization of strategic decision making; building and exploiting the local knowledge pool; deployment
of local human resources; localization of R&D; localization of products; use of local supplier networks;
adaptations to manufacturing processes; local deployment of subsidiary profits; and localization of
corporate image. These localization strategies are not just based on the principle of cost-based localization
but are based on value-based localization. These strategies work in tandem and create value through a
system of multiple benefits, such as managements ability to comprehend and deal with uncertainty in the
operating environment; make informed decisions to respond to challenges in developing efficient local
assembly and marketing systems; cost reduction; higher degree of commitments by local employees;
product customization and acceptance; and greater brand equity and image as a good corporate citizen.
Practical implications Based on concrete illustrations of seven companies, this study identifies
nine distinct areas for planning and implementing localization strategies and their corresponding
benefits. The managers of subsidiaries can benefit by focusing their localization efforts in these areas
to gain maximum advantage from host country context and then translate these advantages into a
competitive international strategy.
Originality/value CEOs of subsidiaries in emerging markets can learn how to build and harness
local advantages for global competitiveness by implementing a wide range of localization strategies.
Keywords Competitive strategy, Thailand, International business, Value analysis, Subsidiaries,
Automotive industry
Paper type Research paper
International Journal of Emerging
Markets
Vol. 3 No. 2, 2008
pp. 140-162 Introduction
q Emerald Group Publishing Limited
1746-8809
Several researchers have addressed the nature and scope of international companies
DOI 10.1108/17468800810862614 localization strategies (Seyf, 2001; Ramarapu et al., 1999; Bartlett and Ghoshal, 1990).
It has been argued that companies should emphasize localization strategies because Automobile
adaptation to local norms is essential for the success of a new subsidiary (Lee and subsidiaries
Chen, 2003). Numerous benefits have been attributed to localization in its various forms
(Bartlett and Ghoshal, 1990; Brikinshaw, 1996; Negandhi et al., 1987). in Thailand
Clearly, there is evidence that localization can benefits international companies.
However, the research cited above addresses localization from a wide range of
perspectives and applies a variety of definitions, for example, tailoring operations to 141
local needs (Bartlett and Ghoshal, 1990) or observing local business practices and
norms (Lee and Chen, 2003). As detailed below, there is much variety in the literature
on the definition of localization, its relationship to globalization, and its pros and cons.
What is lacking is an integrated analysis that comprehensively identifies the nature,
scope, rationale and benefits of localization strategies adopted by subsidiaries of
international companies in emerging markets.
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The purpose of this research is to fill this gap by investigating localization strategies
adopted by the subsidiaries of international companies in Thailands automobile industry.
The industry is dominated by subsidiaries of international automobile companies. Case
studies of Thailands seven leading automobile manufacturers, all subsidiaries of
international manufacturers, document the characteristics and benefits of localization
strategies.

Literature review
Scholars have defined and discussed localization in a variety of ways. Most discussions
contrast localization with globalization or standardization. For example, Hines
(2003), Lucas (2003), and Pike and Tomaney (1999) have discussed localization as an
alternative process to globalization, which is seen in terms of the integration of national
economies. Both Hines (2003) and Lucas (2003) viewed globalization as a process that
reduces local control and produces an adverse effect on wages, local welfare standards,
and the environment, while localization benefits workers, the local community and the
environment.
Other scholars do not view localization as necessarily an alternative to
globalization, but define it in terms of business function processes. For example,
both the Localization Industry Standard Association and the journal World Trade see
localization as the process of adapting or modifying products or services for different
markets. Both Edwards et al. (2002) and Wailerdsak and Suehiro (2002) referred to
localization as the use of local processes, services, and resources. This can cover a lot of
territory. Localization is not limited to using locally made parts and local labor to
reduce production costs. Suguira (1990), for example, reported that Honda focuses its
localization strategies in four target areas: localization of products adapted to the needs
and economic characteristics of local customers; localization of profits by reinvesting in
local markets; localization of production by increasing the ratio of local content and by
increasing the value added in local production; and localization of management
by adopting corporate philosophy and Japanese managers to local conditions.
Even within this perspective, however, there are differences in focus and even in the
use of the term localization. For example, in contrast to those mentioned above, Lane
(1998), referred to localization as the degree to which a multinational corporation is
embedded within the economic and policy networks of the parent companys country
rather than to the use of local resources in foreign subsidiaries. In general, though,
IJOEM most of the above definitions of localization focus on modifying products and services,
3,2 emphasizing local inputs, and using local resources. In view of the above, it is interesting
to examine how subsidiaries of international companies view localization, what areas of
localization they implement, and how they implement localization strategies.
Whether or not to adopt localization has been widely discussed. Arguments in favor
focus mainly on improved service delivery and reduction of human resource costs.
142 For example, various forms of localization have been related to increased efficiency and
productivity (Negandhi et al., 1987), faster responsiveness to changes in the local
business environment (Bartlett and Ghoshal, 1990), reduced management and labor
costs (Chen and Cannice, 2006), and better ability to explore opportunities in the host
country (Brikinshaw, 1996).
On the contrary, those who argue against localization focus mainly on localization
versus standardization of products and processes. For example, Levitt (1983) observed
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that although localizing products and practices helps multinational companies respond
better than applying a global standard, it results in higher costs; in contrast, global
corporations employ standardization as a means to keep costs low and remain
competitive.
In the case of the automobile industry, Howell and Hsu (2002) favored a
globalization strategy, indicating that adopting a global network of alliances would
help GM reduce research and development costs. Fujimoto (2000), on the other hand,
pointed out the advantage of localization of new product development activity in
helping to incorporate local information about production, sales, and consumption,
while standardization of products lends the advantage of economies of scale and scope.
In summary, a review of the literature related to localization identified two salient
issues:
(1) Discussions on localization often focus on a limited scope, such as product
adaptation or use of local resources. The emphasis is on input and output
aspects i.e. the use of local materials and use of local labor with the aim of
making products that meet local tastes.
(2) The decision whether or not to implement a localization strategy often depends
on its economic costs and benefits.

The study of localization strategies of the subsidiaries of international automobile


companies in Thailand, described in this paper, addresses these two salient points.

Research methodology
This study adopted a case research method, which is considered a particularly useful
method for research in the business field (Buchanan et al., 1999; Yin, 2002). Using the
multiple case study design allowed us to map the pattern of localization strategies
implemented by automobile manufacturers in Thailand. Other researchers who have
employed and benefited from this approach include Tellis (1997) and Herriott and Firestone
(1983).
Data were gathered from seven automobile manufacturers that are market leaders
based on product categories Toyota Motor Thailand Co. Ltd (TMT), Hino Motors
(Thailand) Ltd (HMT), Honda Automobile (Thailand) Co., Ltd (HATC), Isuzu Motors Co.,
(Thailand) Ltd (IMCT), DaimlerChrysler (Thailand) Ltd (DCTH), BMW (Thailand) Co.,
Ltd (BMW), Auto Alliance (Thailand) Co., Ltd (AAT) as well as 14 of these companies
dealers and suppliers. The information was gathered by conducting multiple in-depth Automobile
interviews with 120 local and expatriate employees from various levels in these subsidiaries
companies, by referring to annual reports, policy documents and internal reports of
these companies, and observation during plant visits. The data were collected between in Thailand
2003 and 2006 and updated prior to writing this paper.
This research evolved out of an earlier investigation into the reasons for the quick
recovery of TMT, HATC, and IMCT from the Asian economic crisis of 1997 despite severe 143
decreases in the sales volumes of these companies. Interviews with five senior managers of
each of these companies revealed that all three companies had tried to reduce costs by
increasing local content usage, increasing the role and responsibility of local employees
while reducing number of expatriates, developing products to penetrate untapped local
demand, enhancing local employees ability to produce products for export globally, and
other similar activities. As a follow up to these interviews, a literature review was
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conducted to further identify the definition, scope, and benefits of localization. The issues
and concepts identified in the earlier investigation and literature review were used to
develop the data collection approach, including the interview guides.
Reliability and validity were important concerns in this study. Both Denzin and
Lincoln (2003) and Guion (2002) have argued that establishing the validity of a
qualitative research method requires implementing a triangulated evaluated design. In
this research, two types of triangulation were applied: methodological triangulation
and data triangulation.
Methodological triangulation was adopted by using multiple methods of data capture:
in-depth interviews, plant visits, and analysis both of companies internal documents and
external documents. Internal documents included annual reports, policy documents,
working manual, manager handbook, strategic planning form, and other similar items.
External documents included company sales and production volumes, financial reports,
published news and announcement marketing-related activities, social contribution
activities, and research and development data gathered from the Thailand Automobile
Institute, the Thai Automobile Industry Association, the Thai Automotive Industry Club
of the Federation of Thai Industries, and the Auto-Parts Industry Club of the Federation of
Thai Industries. Visits were carried out at all plants for observation of the assembly line,
including the implementation of manufacturing processes, supplier development
processes, and part-management processes, such as stock, quality checking, and so forth.
Data triangulation using a variety of data sources were adopted by spreading
the interviews over a period of several months, cross-checking information from
multiple sources within the company and with suppliers and dealers, interviewing both
expatriate and Thai employees, selecting interviewees from various departments, from
different levels within departments, and from among the functionaries of the workers
union. The various positions can be classified into four levels:
(1) top-management level (board of directors, president, senior advisor to the
president, vice president, and managing director);
(2) middle management level, which can be classified into two sublevels: upper
middle management level (division manager, area manager, department
manager and general manager), and lower middle management level (manager);
(3) supervisor level; and
(4) line worker level.
IJOEM The various departments and functions represented were: strategic planning, human
3,2 resources, finance, marketing, sales and promotion, dealer and distributor
management, research and development, quality control, production and planning,
supplier management, government and public relations, and labor unions.
The main source of data collection in this research was in-depth interviews. The
interview guide used open-ended questions, as many researchers (Travers, 2001;
144 Patton, 1987) prefer this approach for its ability to produce rich and original data.
Separate interview guides were used for automobile manufacturers, suppliers, and
dealers. In each case, the questions were structured to elicit information about
localization activities in the areas identified in the earlier investigation and literature
review.
Areas or categories of localization were identified based either on categories
identified in previous research or on similarities among specific activities mentioned in
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terms of their goals, the company functions that were affected, the types of outcomes
that were intended, the intended target groups, and so forth.
The interview guide for manufacturers focused on localization strategies
implemented by the manufacturer. In the case of local suppliers, the interview
focused on the relationship and mutual support provided between the automobile
manufacture and suppliers to achieve parts localization. The interview guide for
dealers was designed to find out how they were involved in gathering local customer
needs information and in helping automobile manufactures localize product design.
Interview guides were updated from questions that evolved and new localization areas
identified during each interview. As new questions were added, persons previously
interviewed were recontacted to elicit responses to the new questions. The final
interview guides for automobile manufacturers, suppliers, and dealers are presented in
Appendices 1, 2, and 3, respectively.
Additionally, during observation visits at plants, informal conversational
interviews were conducted with operations-level employees to supplement and
verify the information obtained during the formal interviews. Patton (1987) identified
this as an appropriate way to increase the salience of information that emerges from
the immediate context and to obtain information pertinent to a particular situation.
During interviews, tape-recorders were used only with the interviewees permission.
However, notes were taken in all interviews.
The draft reports of interviews were sent to the interviewees for review, to ensure
that the information was taken down and recorded accurately. Finally, managers who
were interviewed were recontacted to clarify or verify new or different information
obtained from other resource, such as press announcements made by the companies,
after the interview had been conducted. If the manager was not in Thailand, he or she
was recontacted by e-mail.
Data obtained from all methods and sources were used to write each company case
study. After each case study was completed, the investigators reviewed it to identify
and note the localization areas that were represented. The results were tabulated and
analyzed as presented below.

Findings and discussions


While previous discussions of localization focus narrowly on specific functional
strategies, such as adaptation of products or services or using local human resources to
reduce costs, this study found a pattern of localization that encompassed nine areas: Automobile
strategic decision making, building and exploiting the local knowledge pool, subsidiaries
deployment of local human resources, localization of R&D, localization of products, use
of local supplier networks, adaptations in manufacturing processes, local deployment in Thailand
of subsidiary profits, and localization of corporate image. Table I shows the
companywise scope and depth of localization strategies.
145
Localization of strategic decision making
Localization of strategic decision making refers to appointing locals to the board of
directors to help determine strategic direction. Only Japanese subsidiaries did this.
Two approaches were found: using external and internal appointees. The first was
appointing Thais from outside the companys staff to obtain local information and
strengthen connections with the local community. At TMT, respected top-rank
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government officers were offered board membership for their insights and information
on government policy and economic conditions and their influence on government
policies. This helped TMT successfully lobby the government to establish a tax break
for manufacturing passenger cars using pickup platforms; it then became the first
automobile manufacturer to benefit from this tax policy when it launched a pickup
passenger vehicle into the Thai market. This approach thus allows subsidiaries to
implement strategy proactively by reducing uncertainty and investment risk.
Recognizing the benefit of localization in strategic decision making in Thailand, its
first overseas subsidiary, Toyota Motor Corporation Japan now uses this strategy as a
platform for regional and global strategies.
In another type of external appointment, TMT, HATC, and IMCT all appointed
top-level Thai managers of partner companies to enhance their connections within the
Thai business community and obtain in-depth market information. Using the
experience and expertise of these board members enabled, these subsidiaries to
improve their operational efficiency, minimizing the learning curve for new projects.
TMT improved implementation of new promotion and public relation campaigns and
strategies. IMCTs external board members provide market analysis to help it compete
with TMT, its main competitor. This approach runs counter to the western idea that
companies should not appoint external board members who have a business or
professional relationship with the corporation or an affiliated enterprise, in order to
maximize the independence of the board and improve the quality of corporate
governance (Hall et al., 2005).
The second approach was through internal staff appointments to the board, which
provides the benefits of the experience and tacit knowledge that appointees have gained
from working with the company. This approach develops Thai employees career path,
promotes higher transparency and good governance in the organization, and helps build
mutual trust and a positive attitude between both parties. By contrast, Hammer et al. (1991)
found that internal staff were made board members in the USA usually because they
purchased company stock, and, in Europe (especially Scandinavia, Germany, Luxembourg,
and Austria), because legislation required worker representation on the board.

Building and exploiting the local knowledge pool


Subsidiaries build and exploit the local knowledge pool by organizing suppliers and
dealers clubs where members share information about problems, remedial actions,
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3,2

146

Table I.

strategies
IJOEM

Companywise action
and depth of localization
Depth of localization
Area of localization/actions TMT HMT HATC IMCT DCTH BMW AAT

Localization of strategic decision making ppp p pp pp


Appointing locals to the board of directors (not because of Thai regulations)
Local participation in making strategic direction decisions
Local involvement in determining companys strategic-level policy
Building and exploiting the local knowledge pool
Creating a place where local partners can share information with each other and with pp p p p p
the company, such as supplier and dealer clubs
Deployment of local human resources ppp pp pp p p p p
Appointing Thais to management positions with power and authority
Giving Thais authority to determine company strategic decision
Reducing the number of expatriates
Reducing the power and authority of expatriates
Changing the role of expatriates from directing to supporting
Localization of R&D pp p pp p p
Involving Thais in R&D activities at the subsidiary and HQ levels
Establishing an R&D center
Localization of products
Manufacturing international models with only adaptations required by laws or ppp pp p ppp p p p
regulations
Manufacturing international models with minor interior and exterior parts
adaptations
Developing a new model particularly for the Thai market
Use of local supplier networks
Developing various kinds of relationships with suppliers to increase quality and ppp pp pp pp p p p
amount of parts produced locally
Investing in developing suppliers technology
Adopting joint venture strategies with local suppliers
Entering into technological licensing agreements
Adopting strategic alliances with suppliers
Integrating manufacturing processes with suppliers manufacturing processes
Linking production planning schedules with suppliers
(continued)
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Depth of localization
Area of localization/actions TMT HMT HATC IMCT DCTH BMW AAT

Creating online parts ordering system


Adaptations in manufacturing processes ppp pp p pp p p p
Modifying layout of assembly line, sub-assembly line, work stations
Adapting technology and tooling to suit investments, production volumes, and plant
characteristics
Involving local employees in decisions about planning and operating manufacturing
processes
Involving local employees in redesign/modification of assembly layout
Local deployment of subsidiary profits ppp p pp pp p p pp
Reinvesting profits in expanding subsidiaries production capability
Reinvesting in upgrading technology, machinery, and tooling
Reinvesting profits by developing local employees capabilities (through training)
Using profits to sustain subsidiary operations during economic slow-downs
Localization of corporate image
Implementing social responsibility activities such as environmental production, ppp pp ppp pp ppp ppp pp
education funding, and poverty reduction
Establishing foundations to support social needs
Following government regulations
Developing a linkage with industry
Good governance
Providing good quality cars to serve needs of local customers
Notes: The depth of localization is an estimate based on number of localization programs undertaken by the company in each area. These estimates have
been jointly arrived after discussions between the researchers and the company managers. After all nine areas were derived the table was brought to
managers to rank using three degree: high, moderate, and low, which represented by three, two, and one check marks consecutively
subsidiaries
Automobile

in Thailand

147

Table I.
IJOEM new ideas and best practices. TMT, IMCT, HATC, and DCTH had formed these clubs.
3,2 During club meetings the suppliers hear information on what customers need in order
to improve the design, appearance, and quality of parts to match customer
expectations. For example, a dealer informed DCTH that Thai customers prefer smooth
leather seats, in contrast to German customers, who want leather with a natural,
wrinkled look. Using such information, DCTH and suppliers collaborated to customize
148 the leather seat design to meet Thai preferences.
Sharing market knowledge also provides operational benefits, such as increasing
quality and punctuality of delivery and reducing cost. At the Thai Hino Cooperation
Club, Thai managers, expatriates, suppliers, and dealers regularly meet and thrash
out a host of problems that include quality of parts, assembly scheduling and logistics
delays. The discussions help improve the learning of local staff, expatriate staff,
suppliers, and dealers. Since, the launch of this club, the number of quality problems
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has dropped.
TMTs and HACTs suppliers commented that the suppliers clubs made them feel
that these automobile companies recognized them as team members and as part of the
companies success in winning Thai customers hearts. This has created of a sense of
belonging among suppliers and dealers.
Learning from best practices helps suppliers and companies reduce costs incurred
from repeating the same mistakes and helps shorten the time needed to solve problems.
HACT has benefited by applying lessons learned at club meetings from best-practice
suppliers to yearly evaluations that have reduced the number of worst-performance
suppliers. Additionally, HACT and IMCT quality management managers and
engineers commented that creating a knowledge pool helped reduce the cost of sending
the manufacturers engineers to monitor quality performance or help solve problems at
a suppliers plant. This is consistent with Dyer and Hatch (2004), who found that
sharing knowledge with a suppliers network enabled Toyota to create a sustainable
competitive advantage.

Deployment of local human resources


All subsidiaries have recruited an increasing number of Thais into management while
decreasing the number of expatriates. This is consistent with Lavy and Teramura
(1993), who found that Japanese companies attempt to promote American managers to
the top level as part of their strategic employment tactics. The prominent objective of
deploying Thais is to obtain local knowledge. During the data-gathering period, only
AAT appointed a Thai president. The reason is that AAT believed that Thais knew
best how to deal with Thai stakeholders. As a late entrant in the Thai market, AAT
had to accelerate acquisition of Thai market knowledge to design strategies to
penetrate that market.
Additionally, we found a trend toward giving Thai managers more autonomy and
power in decision making by appointing them to important committees while
expatriates roles were becoming mainly supervisory. At TMT, HMT, IMCT, and
BMW, expatriates in key committees, such as those related to promotions, salary
administrations, and discipline, were replaced by Thai managers.
Companies identified several general benefits of using more local managers and
giving them greater autonomy. The most important benefit was an increase in the
stability of the management force, since local employees stay longer with company,
while expatriates move in and out of their positions every three to four years. The Automobile
accumulated knowledge helps subsidiaries create a learning organization. Companies subsidiaries
specifically reported that they have benefited from local knowledge brought by local
managers. In addition, deploying local managers closes the cultural gap that exists in Thailand
between expatriate managers and local line employees, thereby providing better
communication among the various levels within the company and greater integration
as a result of better mutual understanding. Some companies reported that employees 149
have commented favorably on the difference between the foreign management style
practiced in the past and the more autonomous functioning that replaced it.
The involvement of Thais at all levels of decision making has resulted in several
specific improvements in performance or operations. First, companies reported an
increase in employees ability to analyze and solve problems. Second, overall team
performance has improved as employees share problems and discuss solutions. Third,
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less time is required to tackle problems. Fourth, the employees commitment is higher
as they feel empowered to design plans for their teams. Fifth, subsidiaries can
implement strategies proactively prompt reaction and control exercised by local
employees helps to reduce the uncertainty and risk that the company faces in a very
competitive market. Sixth, by appointing local managers to key decision bodies,
companies were able to eliminate unfairness in promotion, which was a problem when
these committees were comprised of expatriate managers only.
Finally, by replacing expatriates with local managers, the companies benefited from
cost reduction, as expatriate managers salaries are five times higher than those of local
managers.

Localization of R&D
Localization of R&D refers to greater involvement of Thai employees in R&D
activities. Although all subsidiaries have involved an increasing number of Thais in
R&D, they are still limited by a shortage of skilled engineers and R&D technologies at
the subsidiary level. TMT and HATC are the only companies that are actively
localizing R&D the only ones that have established an R&D center in Thailand.
At TMT, the Toyota Soluna was designed expressly as a model built in Thailand
for Thais by Thais. The model was designed specifically to fill the need of middle-class
Thai customers for an economical family car after the economic crisis. TMT involved
200 Thai engineers in its development. The prototypes were designed and tested by
engineers at headquarters as well as at TMT. The local Thai managers and engineers
provided valuable feedback to fine-tune the design. As a result, Thai managers and
engineers benefited from an increase in knowledge and experience. Although this first
project consumed more time than usual, it reduced the risk of poor exchange of
information between headquarters and subsidiary. The local R&D team was able to
shorten the design process for continuous improvements on subsequent variants of the
Soluna model. Based on this success, other Toyota subsidiaries, such as in Indonesia
and Malaysia, have involved locals engineer learning from the Thai design in the
redesign and engineering process for this model.
HATC also has involved Thai engineers in the design of the new model Honda Jazz.
As a result of Thai involvement, Jazz was able to overcome the existing Thai objection
to the five-door style. Fujimoto (2000) argued that although localization of a product
allowed a company to win local customer satisfaction, standardization of the product
IJOEM offered the benefit of economies of scale. However, this case shows that localization can
3,2 later allow a company to achieve economies of scale from high-scale volume as, in this
case of product localization, the Jazz model was unique and matched the needs of the
target group of customers, who otherwise would not have purchased the product.
By establishing an R&D center in Thailand and using local employees, local
suppliers, and local resources, TMT and HATC both expected to achieve a 20 percent
150 cost reduction. Additionally, localization of R&D and coming up with new localized
models has allowed both companies to fully utilize their production capabilities.

Localization of products
Product adaptation refers to:
.
a difference in vehicle appearance (either interior and/or exterior) from the
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original models designed by the parent company, including a vehicle sold under
a different model name than the same vehicle manufactured and sold in other
parts of the world; and
.
development of a new model for the Thai market based on the original platform
of the parent company.
Based on this definition of product adaptation, three types of strategies were
implemented in Thailand. The first was the manufacture of international models with
only adaptations required by laws or regulations. BMW marketed series 3 and 7
models with no adaptation. DCTH made limited adaptations related to the safety belt
and mirror in the case of Mercedes C- and E-class models. This is because Thais
customers want to buy BMW and Mercedes Benz cars that look exactly like those sold
in Germany. Using this strategy, subsidiaries were able to utilize the global platform
and lower production costs.
The second strategy was the manufacture of international models with minor
interior and exterior parts adaptations. Several models of cars sold by TMT (Corolla
and Camry), HMT (Dutro and Sia), HATC (Civic and Accord), AAT (Ranger and
Everest); BMW (series 5) were adapted to serve the local tastes and preferences, usage
conditions, user behavior, and local geographic conditions. The scope of adaptation
covered not only adaptations to the internal and external appearance but also changes
to the model name to allow Thais to pronounce or recognize the name easily. For
example, instead of using a model number, as in Japan, HMT used the Thai word Sia,
which means millionaire. Ramarapu et al. (1999) also considered localization of
product names to be an aspect of product adaptation.
The third strategy was the development of a new model particularly for the Thai
market. This strategy enabled companies to use the subsidiarys capabilities to
differentiate products from competitors and penetrate new market segments. TMT,
IMCT, and DCTH launched locally developed new models in the Thai market. Through
accumulated knowledge, subsidiary engineers are able to further adapt some models,
first designed to serve only the Thai market, for other foreign markets.
The product adaptation tactics have helped these companies to improve their
market share and lower costs. The benefits of lower cost have been passed on to
customers through a penetration pricing strategy. TMT adapted its model Soluna to
produce Limo as a city taxi in Thailand. The large city taxi market segment enabled
TMT to achieve economies of scale and 10 percent reduction in assembly cost.
Use of local supplier networks Automobile
The majority of Thai suppliers have been small- and medium-sized companies that subsidiaries
lacked knowledge of state-of-the-art technology, design and production infrastructure,
manpower, managerial, and financial resources. In contrast with the case in developed in Thailand
countries, achieving high levels of supply network localization to procure international
quality parts at an economical cost requires that automobile manufacturers invest in
local suppliers in various ways, such as providing technology and knowledge support, 151
parts design, and financial support, although to different degrees based on the type of
relationship adopted with each local supplier. As part of this strategy, subsidiaries
have developed three types of relationships with local suppliers: market exchange,
cooperative, and ownership.
All subsidiaries have adopted a market exchange relationship with local suppliers
when parts were highly standardized, consistent with Bensaous (1999) finding that
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standardization leads to this relationship type. However, the market exchange-type


relationships observed in Thailand were not of the pure buyer-seller style found in
developed countries, in which the manufacturer provides no support to the supplier.
The reason is that Thai suppliers produced highly standardized parts with little
innovation. Subsidiaries needed to provide support and advice to these suppliers on
product design and technology. Indeed, the subsidiaries must invest in developing
suppliers to gain in terms of just-in-time supplies, consistent supplies without
uncertainty, and international quality at lower cost. TMT, HMT, IMCT, and AAT have
achieved these gains to improve their overall competitiveness. Additionally,
subsidiaries and suppliers were able to focus on their resources and capabilities in
executing their core activities efficiently.
The second type of relationship, cooperative, is built through technical licensing
agreements, alliances, and joint venture arrangements. In Thailand, the necessity of a
high level of investment for tooling, equipment, technology, and process customization
drove the cooperative form of relationship because local suppliers needed the support
inputs that the cooperative relationship provided. Local suppliers are reluctant to enter
into exclusive supply arrangements to produce customized parts for manufacturers.
They expect a risk-sharing with manufacturers; therefore, they prefer this form of
relationship. Cooperative relationships also were preferred by subsidiaries in the case
of customized parts and components. Adopting this type of relationship, TMT, HATC,
and IMCT commented that it helped increase supplier loyalty. This type of relationship
was implemented by TMT (shock absorbing system), HATC (seat belts), IMCT (seats),
and DCTH (rear view mirror).
In the ownership relationship type, an automobile manufacturer (subsidiary) sets up
its own subsidiary in Thailand to produce parts exclusively for it. This relationship
type is adopted in Thailand to prevent leakage of knowledge about core technologies to
competitors. The purchasing staff of TMT (GOA body), HACT (engine subassemblies),
and IMCT (direct injection engine) revealed that they considered the use of a
cooperative relationship somewhat dangerous, as it might allow key competitors to
gain information about new model parts, which were considered highly secretive.
Another situation for which ownership relationship type are appropriate is when
high-value parts, such as the car body, are involved, such as the chassis in the case of
AAT, the engine in the case of HMT, and the black box of DCTH. In the case of
Thailand, where metal needed to be import, using this relationship type, automobile
IJOEM manufacturers are able to mitigate foreign exchange risk when producing metal
3,2 bodies. This strategy is not unique to Thailand. It is part of the global supply chain of
many automobile manufacturers, particularly Japanese manufacturers. Using this
relationship type, automobile manufacturers can benefit from using Thailand-made
parts and vehicles to trade within the ASEAN region with very low tariffs.

152 Adaptations in manufacturing processes


The adaptation of manufacturing processes is defined in terms of:
(1) modifications in the layout of subassembly and final assembly lines, production
process flows, number of workstations, types of machines and toolings, and
number and tasks of workers at each station, in comparison with the
manufacturing processes used at the parent company plant; and
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(2) the involvement of local employees in decision-making in adaptation of the


manufacturing process.

All subsidiaries adapted manufacturing processes in order to match the skills and
abilities of Thai employees. While establishing the Toyota Production System in Thai
plants, TMT made videos of local line workers in each plant and analyzed the
movements and time taken to perform various steps of the manufacturing processes.
The analyses were used to modify the assembly layout and simplify manufacturing
processes. This is somewhat different from Moore (1994), who found that, among
automobile manufacturers in the USA, the use of ergonomic adaptations in the
manufacturing process was the result of concerns for worker safety issues. In Thailand,
adaptations were carried out primarily so that Thai assembly workers could understand
the nature of tasks and perform productively in relation to their technical skills.
All subsidiaries adapted work processes to simplify them, which helped reduce
employee errors and waste of material and time. HMT reduced the defect rate from
employee errors by 70 percent when it involved employees in adapting the
manufacturing process. Additionally, adaptations were made to achieve assembly
automation levels that were cost effective and suited to the ability of local employees
responsible for supervising the automation systems. In both DCTH and BMW plants,
the minor adjustments for stations were found to increase the flexibility to adjust
production speed. This strategy was pursued because of the companies need to benefit
from low cost of line employees who had handicraft skills but who were not trained to
provide substantive input. This finding was in harmony with other researchers
(Baldwin and Gagnon, 1993; Hendryx, 1986; Lawrence and Lewis, 1993), who mentioned
that labor skills, cost, and abilities influence manufacturing process adaptations.
At IMCT, the company kept the main line while adaptation was focused more on
redesigning subassembly to meet with model and demand changes. Subassembly line
redesign allowed IMCT to compete with TMT, its major competitor. Thai consumer
behavior drove IMCT and TMTs strategy of racing to market with competing models.
Interviews with the marketing managers at both companies, as well as with their
distributors, indicated that customers would compare the waiting times for Isuzu
D-Max and Toyota Hilux. Customers would switch brands because of a pressing need
for a new vehicle or just because they wanted to drive the newly launched model earlier
than others. Thus, the ability to increase production volume to beat the competitor to
market was important.
Local deployment of subsidiary profits Automobile
The subsidiaries reinvested their profits in Thailand in various ways. Consistent with subsidiaries
Suguira (1990), several used profits to expand assembly capacity. In 2005, TMT,
HATC, and AAT reinvested US$372, 99, and 497 million, respectively, to augment in Thailand
assembly capacity and installed new tooling and machines to upgrade assembly
technology. However, this study found several more ways these subsidiaries localized
profits. At TMT US$37 million was reinvested for a new plant, which allowed TMT to 153
increase the production capacity of pickups by 100,000 units. Its investment in an
ecological plant has enabled the company to use natural gas and solar cells to generate
electricity, allowing TMT to reduce energy expenditure. HACT was able to reduce
material costs by approximately 5 percent through using recycled parts.
Second, all companies invested in developing the knowledge and skills of local
employees by providing training, both in Thailand and overseas at the parent
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company. HMT and DCTH established technical vocational school. The best graduates
who also have good understanding of the companys manufacturing system are
recruited. This has reduced the need for on-the-job training, saving the companies
substantial costs. The career movement of these graduates to supervisory level was
faster than those directly recruited from outside.
Third, during the 1997 economic crisis, the subsidiaries, faced with a 60 percent
reduction in demand, used their accumulated profits to cover the cost of retaining
well-trained staff. TMT kept employees on full salary even though it did not have
full-time work for them. This is because TMT believes that keeping well-trained
workers is better than recruiting new ones. Such acts have earned TMT a very good
image and, as a result, the company has been able to attract good employees
and business partners, reduce employee turnover and absenteeism, and avoid labor
strikes. TMT also has gained a very favorable image among Thais entering the job
market. When the economy recovered, annual job applications increased from 50,000 to
60,000, giving TMT a greater chance to recruit high-quality human resources.
These profit deployment tactics are beneficial to subsidiaries, enabling them to
reduce foreign exchange risk and increase production capabilities and efficiency. TMT,
HMT, IMCT, and AAT indicated that through deploying profit locally, they became
less dependent on their parent companies. This has helped create an image of
responsive companies that are promoting the technological development and
economic growth of Thailand.

Localization of corporate image


The subsidiaries covered in the study created the identity of an international
company with a local face by implementing three strategies.
First, they implemented a variety of corporate social responsibility activities to
create a positive relationship with their stakeholders business partners, including
local suppliers, dealers, local shareholders, and local workers; local society and Thai
customers; and the government. This is consistent with Mori (2002) and Malone and
Roberts (1996), who indicated that corporate social responsibility should cover these
three groups. AAT positively responded to the Thai governments demand for an
eco-car. All subsidiaries offer scholarships to support education of economically weak
Thai students. TMT, HATC, and AAT invested in green technologies as a reflection
of their awareness on environmental protection. Imai (1997) noted that Japanese
IJOEM companies tend to engage in fewer social contribution activities than American or
3,2 European companies, due to their late awareness of this issue. However, this study
found that all case companies, whether Japanese, American, or European, attempted to
contribute to social activities, albeit in various degree depending on the policies of the
company.
The second strategy was to develop a linkage with industry. TMT, HATC, IMCT,
154 and DCTH involved suppliers and dealers in parts development. AAT invested in
installation of an e-procurement system for their local suppliers. DCTH acted as a
financial management consultant to local dealers.
The third strategy was to focus on responding to customers needs. The subsidiaries
aimed to offer Thai customers affordable cars meeting international quality standards.
HATC, DCTH, and BMW offered driver training programs to customers as a way of
providing knowledge of new products using new technologies. TMT and AAT,
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focused on raising customers safety awareness. Further TMT, HMT, and AAT have
projected their companies as international companies run by Thais. All companies
attempted to create the image of companies with good-governance and companies
that help in technological development and economic growth of Thailand.
Subsidiaries good company image has had a spillover affects on product image.
An increasing number of customers are buying these companies products. By
investing in Thailand and adopting localization of identity with a commitment to their
Thai customers, the parent companies of DCTH, BMW, and AAT, which previously
operated through appointed dealers to import cars and assemble CKDs, helped to
change attitudes toward their subsidiaries and instill confidence in their products and
after-sales services (Table II).

Conclusion
Contrary to belief that the international companies implement localization strategies to
match local market environments, we found that these companies implemented a wide
range of localization strategies for multiple benefits. We have identified nine areas of
localization resulting in greater accuracy and transparency in decision making,
reduction in uncertainty, lowering of cost, higher degree of ownership by local
employees, product customization and acceptance, higher brand equity, and image as a
good corporate citizen. The localization strategies were implemented in many primary
and support activities in the value chain. These strategies were based not just on the
principle of cost-based localization but also on value-based localization.
Further, we found, that after harnessing local advantages, these companies exploit
these advantages for the host market as well as to weave together highly competitive
international expansion strategies. Therefore, localization and globalization are not
mutually exclusive: both can be used in combination.
An important lesson for managers is that the growth of subsidiaries should be seen
from two contexts the host country context and the global context. It is only when a
parent company has a portfolio of strong subsidiaries that it will be able to craft and
implement an international strategy. The automobile manufacturers implemented
localization strategies as a stepping stone towards orchestrating an international
strategy. An example of how localization works within the context of international
strategy is the Innovative International Multi-purpose Vehicle (IMV) project [1]
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Manufacturers
Area of localization/benefit TMT HMT HATC IMCT DCTH BMW AAT

Localization of strategic decision making p p p


Knowledge and insight gains p p
Improved operational efficiency p
Better strategic marketing to compete with competitors p
Minimized learning curve p
Transparency and good governance management p
Mutual trust with local employees p
Connection with the government p
Enhanced local connections
Building and exploiting the local knowledge pool p p
Improved design appearance p
Commitment from suppliers p p
Sense of belonging from local partners p p
Increased parts quality p
Increased punctuality of delivery p p p
Reduced costs p
Improved parts customization
Deployment of local human resources p p p p
Eliminated unfairness in promotions p p p p
Acquisition of local knowledge p p
Increased overall team performance p p p
Increased local employee ability p
Increased commitment p p p p
Improved cultural understanding p p
Proactive implementation strategies p p
Reduced uncertainty and risk p p
Cost reduction p
Improved relations with local stakeholders p
Improved market information
(continued)
subsidiaries

area of localization
Automobile

in Thailand

Benefits perceived by
manufacturers in each
155

Table II.
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3,2

156

Table II.
IJOEM

Manufacturers
Area of localization/benefit TMT HMT HATC IMCT DCTH BMW AAT

Localization of R&D p p p p p
Increased local employee knowledge and ability p
Reduced risks associated with information exchange p
Shortened product design cycle p
Continuous improvement p p
Reduced production cost p
New product models
Localization of product p p
Product differentiation p p
Penetration of new market segments p p p p p
Meeting Thai needs p p
Meeting Thai regulations p
Suiting local usage conditions (geography)
Use of local supply networks p p p p p p p
Better quality/reduction in parts defects p p p p p
Improved delivery p p
Ability to help suppliers maintain international design and quality standards p p p p
Parts customization p p p p p p p
Cost reduction p p p
Increased supplier loyalty p p p
Cost control through reduction of exchange rate risk p p p
Prevention of information leaks to competitors
Adaptations in manufacturing processes p p p p p p p
Helping local workers to work better p p
Reduction and prevention of risks and mistakes
Increased ability of local engineers in manufacturing process planning and p p p p p
management p
Reduction in defect rate p p p p
Reduced investment cost of automation
(continued)
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Manufacturers
Area of localization/benefit TMT HMT HATC IMCT DCTH BMW AAT
p p p p
Increased flexibility to meet market demands p p
Increased flexibility to adjust production speed
Local deployment of subsidiary profits p p
Reduced foreign exchange rate risk p p p p
Responsive company image p p p p p p p
Increased production efficiency p p p
Increased knowledge and capability of human resources p p
Ability to attract better employment candidates p
Increased employee loyalty and commitment
Localization of corporate image p p
Enhanced relationship with stakeholders p p p p p p
Positive image with local society p p p p p
Good PR/positive perception/brand awareness of products p p p p p
Enhanced relationship with customers and government
p
Note: ( ) interviewees acknowledged that these benefits were realized
subsidiaries
Automobile

in Thailand

157

Table II.
IJOEM implemented by Toyota Group. The pickup truck, Toyota Hilux, has gone through
3,2 three stages of localization-internationalization:
(1) TMT undertook local adaptation of the pickup truck according to user
preferences and local usage conditions and developed a network of local
suppliers in Thailand.
(2) TMT made improvements in the overall quality of pickup trucks; increased the
158 usage of local parts and produced the trucks in Thailand, and exported to 140
countries.
(3) TMT became a key player in the global supplier network, exporting diesel
engines for vehicles made under the IMV project.

The results of localization strategies go beyond mere cost reduction. The subsidiaries
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are able to create values for different stakeholders. The customers can buy
international quality cars at affordable prices; the employees see the subsidiaries as
honest employers; the suppliers and dealers see them as dependable partners;
Thai government sees these subsidiaries as drivers of economic growth of Thailand;
and communities see them as good corporate citizens. These effects further enhance
the competitiveness of these subsidiaries.

Limitations
Since, localization strategies in nine areas work in tandem, it is difficult to measure
specific outcomes from each area. The nature of outcomes is as perceived by the
researchers and the managers who participated in case research.
Another limitation arises from the dynamic nature of the automobile industry,
which has changed even within the relatively short duration of the study. For example,
some automobile manufacturers, in response to the changing industry climate, may
shift scope and depth of localization in some areas.

Note
1. More information on the IMV project can be accessed at: www.toyota.co.jp/en/strategy/imv/
index.html

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Appendix 1. Final interview guide for automobile manufacturers


.
What is the product strategy of your company in Thai market? What is the degree of
adaptation incorporated in your companys products? Does your company benefit by
adapting products to match with preferences of Thai consumers? Does your company
involve dealers to gather information required for product adaptation?
. Does your company carryout R&D activities in Thailand? Does your company involve
Thai scientists and engineers in R&D activities in Thailand? How? Does your company
benefit by involving Thai scientists and engineers in R&D activities?
.
Does your company source parts and components from suppliers based in
Thailand? What are the benefits of sourcing parts and components from these
local suppliers? What is the nature of relationship does your company have with local
suppliers?
.
To match with skills of Thai workers, did your company adapt assembly
processes, layout and decision making in the plant? How? What are the benefits of
these adaptations?
.
Does your company involve Thai managers in decision making at strategic and
operational levels? How? What is the degree of autonomy Thai managers are allowed to
exercise? Does your company benefit by involving Thai managers in decision making at
strategic level and operational level?
.
Does you company seek relevant business information from local suppliers and dealers on
regular basis? What kind of information and how does you company collect this
information? In what way has this information benefited your company?
.
Does you company appoint Thai members on the board of directors of your company?
How does your company benefit by involving Thai managers in the Board?
.
Does your company retain and deploy profits of the subsidiary? What are various
activities in which profits are deployed? How does your company benefit by retain and
deploy profits of the subsidiary?
.
What is the corporate image positioning of your company in Thailand? What programs
does your company undertake to strengthen corporate image in Thailand? How does your
company benefit by implementing these programs?
Appendix 2. Final interview guide for local suppliers Automobile
. What is the nature of relationship does you company have with automobile manufacturer subsidiaries
(name the manufacturer)? What kind of support did your company receive in the in Thailand
development of your supply capabilities from this manufacturer? In what manner has this
support benefited your company?
.
Is the information system of your company integrated with the information system of
this automobile manufacturer? What are benefits of this integration of information 161
systems?
.
What is the role played by your company in the parts design and product development
activities of this automobile manufacturer? When you work together with this automobile
manufacturer, what are your benefits?
.
Does this automobile manufacturer tap business information from your company? What
kind of information does your company offer to this manufacturer? Is your company a
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member of the Supplier Club organized by this manufacturer? As a member of this club,
has your company benefited? How?
.
In your opinion what is the image of this automobile manufacturer in Thailand? Are the
image building programs of this company having a positive impact on the image of this
company?

Appendix 3. Final interview guide for dealers


. In your opinion, what is the image of the automobile manufacturer (name the
manufacturer) in Thailand? Are the image building programs of this company having a
positive impact in the minds of Thai consumers?
.
What kind of support did your company receive in the development of your sales and
marketing capabilities from this manufacturer? In what manner has this support benefited
your company?
.
What is the role played by your company in mapping the behavior and preferences of
Thai consumers?
.
Is your company involved in adaptation of automobile products manufactured by this
company? How?
.
Is your company involved in new product development activities of this automobile
manufacturer? How?
.
Does this automobile manufacturer tap business information from your company? What
kind of information does your company offer to this manufacturer? Is your company a
member of the Dealer Club organized by this manufacturer? As a member of this club,
has your company benefited? How?

About the authors


Lalit M. Johri, MBA, PhD is a Professor of International Business and Director of the Executive
MBA program at the School of Management, Asian Institute of Technology (AIT), Thailand. His
fields of research and teaching interests are international business, joint ventures and alliances.
He has taught in the Global Business Consortium and International Teachers Program of the
London Business School and has been a Visiting Professor at China Europe International
Business School, Shanghai, China; Escuela De Alta Direccion Y Administration, Barcelona,
IJOEM Spain; SDA Bocconi, Milan, Italy; ESCP-EAP, Paris, France; Bangkok University, Bangkok,
Thailand; Institut Francais De La Mode, Paris; France and AIT Centre in Vietnam (AITCV),
3,2 Hanoi, Vietnam; FHS Hochschule fur Technik, St. Gallen, Switzerland. Dr Johri is a consultant to
several international agencies and international companies in USA, Europe and Asia. He has
been the regional Vice President (Australasia) of Production and Operations Management
Society.
Phallapa Petison, MBA is the Coordinator of MBA program at College of Management,
162 Mahidol University, Bangkok, Thailand. She is a Visiting Lecturer at several universities in
Thailand. Phallapa Petison is the corresponding and can be contacted at: phallapa.p@cmmu.net
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over 500 articles, books, book chapters and other contributions and knowledge transfer outputs. He has
worked and published with eminent and world-renown thought leaders and management gurus, such as
Dave Ulrich. He also writes regularly for several international business journals, magazines and newsletters.
School of Government, University of Economics Ho Chi Minh City (UEH), Ho Chi Minh City, Vietnam
Cass Business School, City University, London, UK . 2016. The relationship between cultural intelligence
and i-deals. International Journal of Organizational Analysis 24:5, 908-931. [Abstract] [Full Text] [PDF]
2. Luu Trong TuanDepartment of Economics, University for Natural Resources and Environment, Ho Chi
Minh City, Vietnam. 2012. Behind knowledge transfer. Management Decision 50:3, 459-478. [Abstract]
[Full Text] [PDF]
3. P. Wells. 2010. The Tata Nano, the global 'value' segment and the implications for the traditional
automotive industry regions. Cambridge Journal of Regions, Economy and Society 3:3, 443-457. [CrossRef]
4. Phallapa PetisonCollege of Management, Mahidol University, Bangkok, Thailand Lalit M. JohriSad
Business School, Oxford University, Oxford, UK. 2008. Localization drivers in an emerging market: case
studies from Thailand. Management Decision 46:9, 1399-1412. [Abstract] [Full Text] [PDF]