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RIM September 1998, No.41

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Employment and Human Resource Development in Japanese-affiliated Manufacturers in Southeast Asia

Sakura Institute of Research, Inc.
Junko Takeuchi


Many commentators have highlighted the importance of human resource development in Southeast Asia. Until recently, it was discussed as a prerequisite for sustainable economic growth. More recently, it has been seen as a priority from the viewpoint of economic reconstruction. This article was written to examine human resource development as a specific issue, albeit within a limited frame of reference.

Data for this article was gathered by studying human resource development activities in Japanese-affiliated manufacturing companies in Southeast Asian economies (the ASEAN-4: Indonesia, Thailand, Malaysia, and the Philippines). In factories with identical facilities, productivity will vary widely according to the people who work there and the organizational systems.(1) Corporate human resource development activities help companies to draw on the latent abilities of their employees. Their approaches to employee training and motivation are therefore an essential consideration.

It is almost inevitable that the training and incentive systems used by overseas subsidiaries will be influenced by the systems used by parent companies. This situation has both positive and negative implications. On the positive side, the systems used by parent companies in Japan will have been used successfully and refined through years of trial and error. On the negative side, such systems tend to be used because no suitable alternatives are available.

Particularly major export-oriented companies that have expanded their operations into Southeast Asia need to produce goods that are of world standard in terms of both cost and quality. We are frequently told the advantages of Japanese companies are high product quality and the efficiency of their production operations. The knowhow that underpins these attributes is thus a crucial business resource, and manufacturers are presumably working to apply that same resource in their overseas subsidiaries.

Yet, the human resource development systems used by parent companies obviously cannot be transplanted entirety to their overseas subsidiaries. Personnel management systems are limited first of all by labor laws and employment practices in the host country. They must also be adapted to reflect qualitative and quantitative factors affecting labor supply and demand. In the case of joint ventures, the approach to human resource development will also be affected by the systems of the local partner company.

It would be more accurate, therefore, to say that overseas subsidiaries adapt parent company's knowhow to local circumstances to achieve the goals that are an intrinsic part of their parent company's human resource management systems. In this article, we will examine the methods used by Japanese-affiliated companies to apply this knowhow and the factors that hinder those efforts.

According to a 1998 report published by the Japanese Ministry of International Trade and Industry (MITI), 1,114 Japanese-affiliated manufacturers had business operations in the ASEAN-4 and employed an aggregate of 590,000 workers as of FY1995. Of this, approximately 70% had been established since FY1987. The ten-year period starting in 1987 was a time of rapid economic growth for the ASEAN. It was also a time of dramatic change in the employment environment, including social and economic conditions. The recent currency turmoil has triggered another phase of massive change in the labor markets.

We will begin with a general overview of the employment environment in Southeast Asia. This will be followed by an analysis of trends in human resource development in Japanese-affiliated companies in both production and non-production areas.

I. The Employment Environment in Southeast Asia

1. Changes in the Labor Market

(1) Employment Growth in the Manufacturing Sector

One of the most remarkable changes in the labor market over the past decade has been the growing contribution from the manufacturing sector to job creation. Between 1980 and 1986, the manufacturing sector accounted for less than 10% of employment growth in all ASEAN economies except Malaysia. In the period from 1990 to 1996, the manufacturing sector contributed 60-70% of new jobs created in all ASEAN countries except the Philippines (Table 1). The ratio of manufacturing jobs to total jobs has risen in all of the countries surveyed except the Philippines.

A second significant change has been the rise in the absolute number of professional and managerial personnel. A comparison of employment by job category in 1987 and 1996(2) reveals that there has been little change in percentage terms (Table 2), but that in absolute terms the number of managerial and professional/technical personnel has risen by approximately 620,000 in Thailand, by 540,000 in Malaysia, and by 500,000 in the Philippines. However, it is the service industries, including the financial sector, that have the highest percentages of managerial and professional jobs. The percentages tend to be somewhat lower in the manufacturing sector.

A third change is the rising educational level of the work forces. A comparison between figures from the mid-1980s and the present day shows that the percentages of uneducated workers have fallen in all of the countries surveyed, and that there has been a uniform rise in the percentages of workers who have completed education to the secondary level or higher (Table 3).

As recently as the latter half of the 1980s and the first half of the 1990s, there was serious concern about the mismatching of labor supply and demand, especially the shortage of technical and managerial personnel. This concern was driven by a rapid rise in the number of foreign-affiliated companies, and changes in industrial structures. During this period, the ASEAN countries moved, to a greater or lesser extent, toward the development of heavy industries, primarily through the expansion of the machinery sector.

As a consequence, they all faced a rapid increase in the demand for skilled and technical workers. Moreover, companies moving into the ASEAN countries for the first time needed to start up large-scale production operations within a short period of time. They wanted, therefore, to recruit workers who could be deployed immediately. Unfortunately, the number of people with the required experience was limited. If demand exceeds supply, then the labor force will naturally become more mobile. The result is a vicious circle, since increased mobility hinders the efforts of companies to train and accumulate human resources.

During the period covered by Table 3, the absolute numbers of workers with the tertiary education background, which is a potential source of managerial and technical personnel, rose by 1.80 million in Indonesia, 1.59 million in the Philippines, 820,000 in Thailand, and 700,000 in Malaysia. In all cases, these increases are substantially larger than growth in the numbers of managerial and professional/technical personnel over the same period. Of course, new graduates cannot immediately take on a managerial role, so the increases will not bring an overnight solution to personnel shortages.

Even so, growth in the absolute number of highly educated people is likely to result in easier selection and recruitment of new graduates and lead to increased effects of in-house training. However, while the supply of university students (the number of students enrolled) has expanded, the percentages of students majoring in engineering, science and mathematics remain low. They range from a high of 14.7% in the Philippines (FY1993/94) down to a low of 9.2% in Indonesia (FY1992/93). Shortages of technical personnel continue to be an issue.

(2) Outbreak of Large-scale Unemployment

The currency turmoil triggered by Thailand's shift to a floating exchange rate system in July 1997 spread to all Southeast Asian countries. As a result, they all experienced economic downturns for the first time in 13 years. The employment situation has become increasingly unstable. The latest official labor statistics as of 1996 show that the number of jobless people was 4.42 million in Indonesia and 640,000 in Thailand. However, according to recent press reports, the number of jobless in Indonesia had reached a historic high at 15.4 million by June 1998 (Jakarta Post, June 19, 1998), and Thailand's jobless population is also expected to exceed the unprecedented 2.3 million by the end of 1998 (Bangkok Post, June 11, 1998). A rise in unemployment rates is also seen as inevitable in Malaysia and the Philippines.(3)

Uncertainty about employment leads to reduced consumer spending, creating a vicious circle that brings accelerating reductions in the performance of industries that rely on domestic demand. Thailand and Malaysia both have a policy of sending home foreign workers to retain jobs for their citizens. However, the potential difficulty of recruiting labor has become a source of concern in some industries. These include rice processing, fisheries and plantation farming.

Unemployment is rising in the financial and real estate sectors because of corporate closures and poor business performance. Malaysia, at least, is likely to face a simultaneous shortage of workers for low-wage heavy manual jobs, and a shortage of jobs in high-wage categories.

Yet, the trend toward higher educational attainment continues, and demand for managerial and specialized workers will continue to increase in the medium- to longer-term. The improvement in educational standards of workers and the accumulation of human capital in companies during the present adjustment phase will have an important bearing on economic performance in the next expansionary phase. The adjustment phase should be seen as an opportunity to correct mismatches. Of course, there are serious threats to the spread of, and improvement in, education and the accumulation of human capital in companies. It is obvious that cases of children leaving school before graduation or abandoning plans for higher education will increase, following job losses or wage cuts that affect their parents. Also, the dismissal of workers results in educational divestment for both employers and workers.

Despite this, companies in various industries are being forced to lay off large numbers of workers. In Thailand, 5,000 cases of claims were filed in the labor court in the first four months of this year (Bangkok Post, April 23, 1998).(4)

The Japanese government has announced that it will partially subsidize the cost of transferring employees of Japanese-affiliated subsidiaries in the ASEAN-4 to other group companies in Japan or elsewhere temporarily (Nihon Keizai Shimbun, April 24, 1998). This policy aims to help Japanese-affiliated companies to provide employment in the ASEAN-4.

2. Employment by Japanese-affiliated Manufacturers

According to the MITI (1998), Japanese-affiliated manufacturers(5) employed approximately 590,000 people in the ASEAN-4 as of FY1995. This is 80% higher than the total at the time of the previous Fifth Basic Survey(6) and is equivalent to 32% of the total employment by the overseas operations of Japanese-affiliated manufacturers. Malaysia has the biggest number of employment, accounting for 32.3% of the total, followed by Thailand (31.6%).

A feature of employment by Japanese-affiliated manufacturers in the ASEAN-4 is the large number of jobs created in the machinery industries. The electrical machinery industry accounts for 42.8% of total employment, and the transportation equipment industry for 18.7%. In all countries surveyed, these two industries ranked either first or second, and in all countries except Indonesia, they accounted for over 60% of those employed by Japanese-affiliated manufacturers (Table 4). Employment by American-affiliated manufacturers is especially high in the electronics industry, which accounts for 43.5% of all jobs created by American-affiliated companies in the ASEAN-4. If the manufacture of machinery based on data processing and telecommunications equipments is included, the percentage of jobs created by the electronics industry is estimated at around 60%. Among the ASEAN-4, only Thailand has a higher percentage of jobs in the machinery industry than in the electronics industry.

Another characteristic of employment by Japanese-affiliated companies is the large number of employees per company. At the time of the Sixth Survey, the average number of employees (including directors) per company in the ASEAN-4 was 546. This is significantly higher than the world average of 391 per company. This expansion of employment has been a feature of trends since the latter half of the 1980s. At the time of the Third Survey, the average number of employees per company was 336, which was below the average for the world. By the time of the Fifth Survey, the figure had climbed to 444. By the Sixth Survey, the number increased to 546 per company.

A comparison of employment by job category reveals that the absolute number of managers have increased 1.9 times, and research and development (R&D) workers 1.4 times, since the time of the previous survey. However, there has been little change in the size of these categories as a percentage in the total job numbers (Table 5). A comparison with the North American subsidiaries of Japanese-affiliated manufacturers reveals that ratios of the numbers of directors to total number of employees are similar to those in the ASEAN-4. However, the percentages of managers and R&D workers are lower in the ASEAN-4. On average, local subsidiaries in the ASEAN-4 have 5.2 directors, 10.6 managers, and 5.6 staff sent from Japan.

II. Human Resource Development in the Production Workplace

1. Characteristics of Skill Formation in Jpanese Companies

Before examining the situation in local subsidiaries of Japanese companies in Southeast Asia, we first need to analyze the meaning of "skill formation" in production workplaces in Japan, and the characteristics of the methods used to develop skills.

(1) What Are Skills?

The goals for employee training in the production workplace are broadly divided into productivity improvement and the acquisition of complex skills. Productivity can be improved by (1) increasing work speed, (2) improving production processes, (3) raising yields, (4) increasing operating rates, and (5) building the ability to respond quickly to changes in plans.

Work speed is increased largely by employees learning their respective tasks. However, the other prerequisites for productivity improvement depend on a variety of contributions from workers. For example, the improvement of production processes depends on the development of new ideas in the workplace. This is not possible unless employees continually monitor operations on a day-to-day basis, identify possible improvements, and make suggestions. The nature and effectiveness of such improvements is determined to a large extent by each worker's knowledge of products and facilities and their understanding of overall production operations. To raise yields, improved quality control in the workplace is essential. This depends not only on observance of formal quality control procedures, but also on intervention to identify the causes of product defects and record any action taken.

The improvement of operating rates is linked to facility maintenance. While actual maintenance may be carried out by specialist staff, production workers also play an important role in such areas as day-to-day preventive maintenance and the identification of abnormal situations.

In other words, the contribution sought from workers is not limited to the efficient implementation of operations in the areas for which they are responsible. Worker input is also needed in such areas as quality control, maintenance, and process improvement. The ultimate purpose of training is to expand worker's knowledge of production, and to build their ability to deal with problems.(7)

Where skilled workers, such as those responsible for machine processing, are concerned, it is necessary not only to improve productivity but also to give them the ability to learn complex skills. Specific criteria for skilled workers vary widely according to the particular type of work. For example, criteria for skilled lathe operators is different from that for skilled painters.

Koseki (1985) emphasizes the importance of "intellectual skills." He defines these as the ability to initiate and arrange tasks. "This is not a matter of manual dexterity.....They need the ability to identify the key components of a task, aspects of the task that require special care, points of vulnerability, and knowing what tools to use." The common requirements for skilled workers, regardless of the particular area of work, appear to be judgment skills and insight based on past experience.

(2) Training and Incentives

How are such skills developed? In addition to effective training systems, human resource development also depends on the use of incentives to motivate workers.

According to the Japanese Ministry of Labor (1996), over 80% of Japanese companies with 300 or more employees use organized on-the-job training (OJT) to train staff. The percentage is especially high in production operations.

OJT is a method that allows workers to learn while actually working. Basically, a superior or experienced fellow-worker first demonstrates and explains the task. The trainee then attempts the task and is assessed by the superior or experienced fellow-worker. Through these processes, and through repeated job rotations, the trainee advances from simple to complex tasks and diversifies the range of tasks learned. This approach, known as "multiple skilling," enhances the worker's understanding of a wide range of tasks.

Job rotation is extremely important. One of the direct benefits is multi-skilling of workers. This gives employers greater flexibility when dealing with absences or changes in production volume. While the acquisition of work skills through demonstration and evaluation is the elementary goal of OJT, a more fundamental goal is the improvement of problem-solving skills. Job rotation helps workers to develop an ability to see the overall structure of production operations.

A common feature of OJT in Japanese companies is wide-ranging job rotation. Asanuma (1997) divides production operations into production line categories and skilled work categories. He identifies the use of rotation between these two categories as an important feature of Japanese car plants when compared to the American counterparts. The advantages of the Japanese approach are recognized by those involved in actual production operations. They say that workers who have no experience of die maintenance cannot quickly establish the causes of problems on press lines and take appropriate action.

In the United States, the United Auto Workers has negotiated agreements strictly defining responsibilities, which include job descriptions on each job category, basic hourly wages, and rules for transfers between job categories. This approach has resulted in the formation of finely differentiated job categories and clearly defined job hierarchies. Naturally, jobs at the top end of these hierarchies command higher wages. Promotion to these levels is determined by seniority basis. Workers wanting to work in the categories known as "skilled trades" must first acquire qualifications by completing lengthy apprenticeship-type training courses.(8) Similarly, in Germany, where qualifications are a fundamental part of the social structure, there are stringent qualification requirements for skilled work.(9) It would be difficult to reconcile the wide-ranging job rotation systems used in Japan with practices such as these.

OJT is more than just a process for learning job skills. It is also an on-the-job screening (OJS) process. In the course of their day-to-day work activities, employees are evaluated and promoted on the basis of such criteria as work skills, ability to instruct younger workers, and leadership. In this way, they can advance to the upper rank of job grade system or even higher positions.

OJT is never ending. Workers promoted to team leader or section leader status need to develop problem-solving skills in keeping with those positions. They can acquire those abilities only through their actual work activities. As workers advance to higher ranks, however, the proportion of companies which provide them with off-the-job training (Off-JT) outside of the workplace tends to increase.(10) Off-JT, which usually involves group courses, is seen as a way of systematizing knowledge gained through day-to-day operations. In this sense, it complements OJT.

OJT-based training in Japan focuses on the long-term development of employee skills and assumes long-term employment with the same company. The investment is considerable for both worker and employer, and a considerable portion of job skills are specific to particular companies. To encourage long-term employment, wage structures and promotion systems are designed to favor those with long years of service. Koike (1997) identifies two characteristics of wage systems for production workers in Japanese companies. First, the wage curve is linked to years of service. Second, there is little variation in wages between clerical and production jobs. In the West, wage curves for white-collar workers are sometimes linked to years of service.

A feature of Japanese systems is that this pattern is also applied to production workers. This is because the wages of production workers in Japan are determined not by the job, but by the grades based on the years of employment and ability, and that wages rise over the years through a series of "periodical salary increases." This does not mean, however, that all workers' wages rise at the same rate. To encourage individual effort, a competitive environment is maintained by means of an "assessment" process that is reflected in promotions and wage increases.

(3) Production Systems and Human Resource Development

To what extent is this Japanese approach to training and incentives influenced by changes in the production workplace? Production systems are constantly changing in response to market trends, technological advances and other factors. In particular, the revolution in mechanical and electronic technology and the resulting development of automation are seen as having polarized production workers through the objectivization and standardization of skilled work. As more and more technology was built into machines, the range of tasks that could be handled by unskilled workers expanded. At the same time, machinery maintenance tasks became more complex and increasingly important. It also became necessary to translate work into forms that could be handled by machines.

In practice, however, the growing sophistication of production systems also meant that the base skill levels of general workers rose. The skill requirements for general workers are still tending to rise. The Japan Society for the Promotion of Machine Industry (1997) states that the most important skills for general workers today are product checking and adjustment, but that over the next five years, the ability to objectivize skills and carry out maintenance and programming tasks will become increasingly important.(11) The Society also stresses that training methods and employee wages and benefits will not undergo drastic changes in the future.

Yet, while less than 10% of companies currently emphasize Off-JT as a method of skill development in the production workplace, around 20% have policies based on the use of Off-JT in the future. The expectation that general workers will improve their maintenance and programming skills is likely to increase the need for them to be equipped with knowledge of machines and other subjects, leading to a greater corporate policy emphasis on Off-JT.

2. Japanese-style Skill Formation in Southeast Asia - Current Trends and Future Potential

We will now examine human resource development issues in Japanese-affiliated manufacturers in the ASEAN-4. We will focus in particular on the machinery industries and related sectors, which account for over 60% of the employment by Japanese-affiliated manufacturers. We will begin by analyzing current trends in training and incentive systems among Japanese-affiliated companies. We will then present three case studies based on observations in Thailand.

(1) OJT and Job Rotation

The figures in Table 6 indicate the percentages of Japanese-affiliated manufacturers that have training systems.(12) Compared with subsidiaries in North America, a high proportion of subsidiaries in the ASEAN-4 have training systems (systematic Off-JT). As many as 70% of companies operate such systems. The most common form of training is transfers to parent companies. However, time-series comparisons indicate that companies are increasingly using local training, either in-house or outside.

The Malaysian government has implemented a number of measures to encourage companies to provide worker training. These include tax deductions for training-related investment in such areas as facility construction and program development, and subsidies toward the cost of sending workers to outside training organizations. Thailand has started also to offer incentives, including cost subsidies, to companies that provide in-house training. Companies building training centers are increasing. The growing emphasis on local training, as indicated in Table 6, is also linked to the expansion and development of local training systems.

In its survey, JETRO (1992) asked companies to describe their employee training programs for production workers and management staff. In the ASEAN-4, 83-89% of companies indicated that they provided OJT for production workers, while 78-82% responded that they used the method for management staff. It appears that OJT is the principal training method used by companies in the ASEAN-4, and that Off-JT is used to complement OJT.

The importance of OJT and Off-JT is different for different job categories. The results from the Japan International Cooperation Agency (JICA)'s questionnaire surveying electronics manufacturers in Malaysia, though somewhat dated, suggested that the training system varies according to the job category. In many companies, engineers received Off-JT, such as transfers to parent companies. For general workers, 90% of the companies indicated that they used OJT, with only a small percentage of them using Off-JT for workers in this category (Table 7). It appears that Off-JT is widely used for employees other than general workers, and that outside training is especially prevalent in specialized and highly standardized areas, such as information processing.

Many companies use job rotation as part of their day-to-day operations, but the extent to which this method is used deliberately as a skill diversification (multiple skilling) method could not be determined.(13) However, there are survey results showing that workers in Japanese-affiliated companies are conspicuously less reluctant to move beyond the original range of their work than their counterparts in European- or American-affiliated companies or local companies.(14) These results may well indicate that workers in Japanese-affiliated companies are more accustomed to flexible job categories or are aware of the significance of that flexibility.

(2) Systems to Encourage Long-term Employment

The first prerequisite for Japanese-style skill formation based on OJT is long-term employment. Data relating to employee turn-over ratios are available only for the Philippines.(15) It is difficult, therefore, to ascertain changes in employment fluidity in Southeast Asia from existing figures. Instead, we will examine the nature of long-term employment incentives offered by companies.

First, there is the potential for promotion. Many case studies have shown that Japanese-affiliated companies have a strong preference for internal promotion.(16) Shiroki (1995) points to the results of his survey conducted in Indonesia. Of the 162 companies that participated in the survey, the percentages indicating that they train production supervisors internally were 5.9% for European- and American-affiliated companies, 37.2% for local companies, and 65.2% for Japanese-affiliated companies.

It is widely known that there is a strong tendency in all of the ASEAN-4 toward the definition of job categories according to educational attainment. This pattern is confirmed by figures from the aforementioned questionnaire survey of electronics manufacturers in Malaysia. These show that over 70% of engineers are university graduates, and that graduates of vocational training schools or polytechnics occupy over 70% of technicians (Table 8). The most common educational qualification among supervisors is graduation from high school, and it is reasonable to assume that about one-half of supervisors are promoted from among general workers. However, while 19.6% of university graduates and 13.9% of polytechnic graduates become supervisors, only 2.9% of high school graduates reach that level. For high school graduates, the door leading to managerial work as supervisors is clearly a very narrow one.(17)

Meanwhile, European- and American-affiliated companies commonly recruit supervisory staff externally. The aforementioned survey results cited above indicate that the scope for advancement from below is very limited in the Western companies, and it appears, in this context, that Japanese-affiliated companies actually offer general workers a relatively broad path to promotion.

Most Japanese-affiliated companies have established job rankings similar to grading systems for production workers. Grades are reflected in wages. Since grades rise in step with experience, the potential for promotion increases in proportion to length of service. Moreover, the fact that a large number of companies implement periodical salary increases suggests that many Japanese-affiliated companies in Southeast Asia have adopted wage systems that are linked to years of continuous service. It has also been suggested that wage differential affiliated to educational background is relatively little in Japanese-affiliated companies.(18) However, there is a significant gap between high school graduates and university graduates (technical fields) in terms of levels of starting wages (Table 9). The wage gap between high school and university graduates is small in the Philippines and large in Indonesia. These differences probably reflect the scarcity of university graduates in Indonesia.

One of the methods used to motivate workers to acquire skills is the establishment of in-house certification systems for skill grades. Levels, recognized as qualifications, are established for each skill category. Workers are assessed according to these levels. Similarly, many companies gave certificates to workers who had completed in-house training programs. Workers welcome this kind of recognition, in part because certification is a valuable asset for appealing their skills when changing jobs. Yet, there are also cases in which the opportunity for self-improvement itself is an incentive to stay with one company. However, the ultimate purpose of self-improvement is the improvement of terms of employment. Unless there are systems to reflect such achievements in wages and other conditions, self-improvement program cannot be effective.

(3) Case StudiesF Production Operations in Thailand(19)

We will now examine some specific case studies. Company A, a semiconductor manufacturer, employs 1,300 people, including large technical work force that consist of 200 technicians (junior college graduates) and 100 engineers (university graduates). Technicians are placed mainly to be in charge of maintenance work. High school graduation is the minimum requirement for general production workers.

In Southeast Asia, the semiconductor industry specializes in final processing (assembly) and is regarded as a typical labor-intensive industry. In reality, however, many of the processes have been automated, and the semiconductor industry can thus claim to be capital-intensive in many respects. Machines carry out a number of processes, including chip dicing and mounting, bonding and package sealing. The main task of production workers is to monitor machines operating. The process that requires the largest number of workers is inspection, which follows assembly. Yet, even here, there are things that only inspection equipment can check, and thus the whole processes rely heavily on machines.

This means that probably the most important priorities for Company A, because of the heavy fixed investment involved, are to maximize operating rates for machinery, to prevent accidents and faults, and to ensure prompt action when problems arise. Maintenance is handled as a totally independent operation by a dedicated department. Because the machinery is so complex, there is little scope for intervention by general workers. For this reason, Company A appears to give priority to training for technical personnel, including maintenance workers, in its training programs. General workers and technical personnel are recruited and work under separate systems.

Among technical personnel, there are clear distinctions between engineers and technicians in terms of duties and promotion, but Company A is starting to lower these barriers on an experimental basis. The job rankings in the production section of Company A are operator, leader, junior foreman, foreman, and supervisor. The promotion ceiling for general workers, who are high school graduates, is low, being unable to advance beyond leader status.

Company B's employment criteria for general workers are less demanding than those imposed by Company A, and there are more opportunities for general workers. Company B commenced operation in 1987. It produces pressed metal parts, injection-molded plastic parts, and a variety of parts combining these two elements (such as VCR main chassis or CD player chassis) for electrical home appliance manufacturers. Its production operations can be broadly divided into press processing and plastic injection molding section, and assembly and inspection section. In 1996, it established a new metal mold production section aimed at in-house production of molds.

Company B differs from Company A in two ways. First, maintenance staff are promoted from among general workers. Second, general workers can advance to the supervisor level. Initially, Company B hired male maintenance technicians separately from general workers, but it changed its policy in 1990 after gaining a significant improvement in performance when female general workers were promoted and trained. Female general workers who were judged to have aptitude were promoted and trained to work in the metal mold production operation also, regardless of their educational background. This let Company B put its first unit into production after a preparatory period of just over one year.

The job rankings in Company B's factories are operator, leader and supervisor. Workers at each level are promoted from the rank below. Supervisors in Company B prepare work manuals in the Thai language. Because they know the production operations well, they are able to produce manuals that are easy to understand.

Company B and its subsidiaries employ approximately 5,000 workers in two shifts. Because the range of products handled is so diverse, manuals are needed for each production operation. This means considerable benefit can come from the appointment of supervisors from among the ranks of general workers. Workers in Company B's assembly operations are rotated between work groups and often help other work groups.

Company C, a metal working machine manufacturer, also has a wide range of operations. Because the tasks involved in each process vary widely, each department appears to operate as an independent factory. Company C's operations can be broadly divided into (1) electrical assembly (including PCB assembly and harness wiring), (2) machine processing of large castings for use as bases for machines, (3) production and surface processing of sheet metal chassis parts, (4) sintering of ceramic parts, and (5) final assembly. Each shop is housed in its own building.

The fourth process, ceramic sintering, was introduced in 1996. The work force of 500 includes 20 engineers (university graduates). General workers must be graduates of high schools or industrial schools. There is a ten-member specialist maintenance team, but Company C operates a mixed system under which maintenance officers are also stationed in each section. The job ranks in Company C's production operations are operator, leader, assistant chief, chief, and supervisor. Workers with industrial school diplomas can be promoted up to the supervisor level, and thus some general workers can advance to management level.

Worker retention is good at present, but the turn-over rate was high until the present personnel system stabilized after three years after the start of production in 1990. The number of workers leaving in their first six months of employment was especially high, because even university graduates were required to start as production workers under a system similar to that used in Japan. Once its systems were in place, Company C implemented an 18-month program to improve the accuracy of each process. In 1997, it acquired ISO9002 certification. Realizing that the improvement of quality control would require a clearly defined goal, it chose the acquisition of ISO certification as its target. One reason for this choice was the fact that Company C exports over 90% of its products, with two-thirds of exports going to Europe and North America.

Two patterns emerged from these case studies. First, the level of skill demanded of general workers varies according to the industry and the characteristics of production systems. This is because the role of workers varies according to a number of factors, including differences in the level of automation, the types of facilities, production processes, and the nature of the products. For example, tasks for general workers employed by Company A are limited by the complexity of the facilities and the processes that are automated. In the case of Company B, however, many processes involve manual work and the range of tasks is wide. These factors create a strong incentive to train general workers in multiple skills and enable them to advance to supervisory jobs.

Second, the methods used to manage and train workers have been introduced and developed gradually. Company C was not able to advance to the stage of improving quality control and introducing new processes until it had gone through the initial sequence of introducing its personnel system, meeting resistance in the form of a high turn-over rate, and finally gaining acceptance for the system. Company B succeeded in changing and improving normal local practice of appointing and training maintenance personnel, but it took four years of experimentation before the company was able to apply the changes. Clearly, companies develop methods that adapt well to local conditions by implementing new systems, assessing the abilities of workers, and repeatedly adjusting their approaches.

(4) Selective Approach to Skill Formation

Since the latter half of the 1980s, there has been rapid growth in the number of export-oriented production facilities for machinery and machinery parts in the ASEAN countries. To produce these items successfully, it is essential to meet world standards in terms of both cost and quality. For this reason, quality control systems and facilities are often equal to those used in Japanese factories. Systems need to be modified, however, when factory operations are started up under the management of a few key personnel, including people on short-term assignment from Japan and potential supervisors who have undergone training in Japan, together with large numbers of inexperienced workers. For example, it may be necessary to limit the range of tasks per worker and the spread of job rotation to accelerate job training and reduce errors.

General workers cannot be expected to participate in maintenance and, instead of attempting to build quality control into production processes, companies choose to separate quality control from production. They then deploy large numbers of workers to inspect every single product. While this approach hinders skill formation, it offers other advantages, including the abilities to start up production operations quickly and to cope with the problem of worker mobility more easily.

If companies wish to emphasize skills, they need to adjust their employment conditions to support training as an investment based on long-term employment (Fig. 1). The two approaches are not mutually exclusive, and it is possible to place greater emphasis on skills in some areas, or to introduce a skill-oriented policy gradually. Targets need to be set with reference to such factors as cost benefits and improved work performance, company characteristics and conditions in the labor market.

III. Human Resource Development in Non-production Sections

As space is limited, we will confine ourselves to a brief discussion of this topic with reference to two aspects: the elements of local staff training(20) that are likely to become more important in the future, and localization of management positions as a key factor influencing policies on employment conditions for local staff.

1. The Significance of Staff Training in Overseas Subsidiaries
An increasing number of Japanese-affiliated companies have established regional headquarters since the latter half of the 1980s, especially in Singapore and Hong Kong. The functions of regional headquarters commonly include (1) financial and legal administration, (2) personnel management and training, (3) marketing, and (4) systems development. In some cases, regional headquarters also function as international procurement offices (IPOs) and distribution subsidiaries, providing integrated management of distribution for affiliated companies within the region.

In other words, the establishment of regional headquarters appears to reflect a tendency to centralize non-production operations in particular locations, in order to avoid the duplicated investment in those operations within a same corporate group that has expanded into neighboring countries. Only 8% of all Japanese-affiliated manufacturers in the ASEAN-4 have regional headquarters,(21) and many companies appear to have only limited functions in their non-production sections.

Even in ASEAN, however, companies have been under pressure to expand and improve the non-production aspects of their operations in the 1990s. One reason for this trend is an increased need for regional marketing due to the expansion of local markets and trade liberalization. Other factors include a rise in local procurement as a way of reducing costs, and the growing importance of factories in ASEAN, some of which are to be core factories in the world.

From the viewpoint of global management, local human resource development is also becoming increasingly important in terms of both costs and added-value. On the cost side, companies can obviously reduce the expense of stationing Japanese executives overseas. Japanese-affiliated companies reportedly station more Japanese staff overseas than their European and North American counterparts. Significant cost savings can be achieved by localizing tasks and management positions and reducing the number of Japanese staff stationed overseas.(22) As discussed later in this article, the localization of management positions also has an important effect on the morale of local staff.

In terms of added-value, the expansion of local markets has increased the importance of product development targeted toward those markets. As a result, companies now benefit more by gathering and analyzing market information. The first boom in overseas investment by Japanese companies was triggered by the "Nixon Shock" 27 years ago, and 13 years have passed since the start of the biggest overseas investment boom in the wake of the Plaza Accord. Many companies have been running overseas operations over long periods and have built up resources of management knowhow in each subsidiary. Considerable advantages can be gained by formalizing and sharing this information among subsidiaries. It is becoming increasingly important in today's environment of fierce global competition to absorb and utilize information and ideas from global networks of local subsidiaries.

European manufacturers of consumer goods invested in Asia early and have put down deep roots in local markets. In one case, marketing and planning for Asian markets have resulted in the creation of a worldwide hit product.(23) This company emphasizes the sharing of knowhow. For example, it uses its telecommunications network to seek suggestions from group companies around the world when a problem arises in a particular plant. In addition, it stores all information about new product development and sales in an integrated data base that is available to all group companies.(24) The ability to share information instantaneously has enhanced the value of overseas subsidiaries as information sources. As the activities of overseas subsidiaries become more sophisticated and the potential for added-value emerges, it will be possible to gain significant benefits by training overseas staff in non-production areas as well.

2. Management Staff in Japanese-affiliated Manufacturers in Southeast Asia

Fig. 2 shows characteristics of staff recruitment and promotion in major companies in various countries. In non-production areas, too, the scope for promotion to management level normally depends on an individual's educational background. In Company A, which was one of the case studies examined in II. 2 (3), the job ranks for non-production areas are junior staff, staff, senior staff, and officer (equivalent to a section chief in Japan). When first recruited, junior college graduates start as junior staff and university graduates as staff. There is also a clear difference in promotion prospects, which in the case of junior college graduates are limited to the staff level.

Many companies have made university graduation a requirement for promotion to management positions other than production supervisors.

(1) Trends in Localization

The average personnel composition for Japanese-affiliated manufacturers in the ASEAN-4 is 546 employees, five directors, and 11 managers (department chief level). The average composition for local staff is three directors and nine managers. Yet, assuming that non-production workers make up about one-tenth of the work force,(25) or 55 workers on average, the ratio of directors and managers to total white-collar workers is higher than usually expected.

As in Japan, Japanese-affiliated companies in Southeast Asia have a strong tendency to train managers internally. Suehiro (1997) notes that major companies and government departments in Thailand also use internal promotion. The Center for Pacific Business Studies has also surveyed several major local corporate groups.(26) The results confirm that most managers are university graduates, and that priority is given to internal promotion. The issue is the level of promotion ceilings. As shown in Fig. 2, large companies in Thailand and Indonesia have divided structures under which it is difficult for directors to be promoted from below.

This is because most major companies in Thailand and Indonesia are basically family businesses in which there is no separation of ownership and management. As a result, directors, in most cases, are appointed from among owners' relatives.(27) Japanese-affiliated companies are structurally similar to major local companies in the sense that C.E.O.s and some directors are assigned from Japan.

MITI (1998) found that Japanese staff made up 39.6% of directors and 14.4% of managers in Japanese-affiliated manufacturers (Table 10). These figures are low compared with those for subsidiaries in North America, in part because most ASEAN-4 countries are seeking to reduce or limit the number of positions held by foreigners through administrative guidance. There has been little change in the percentages of Japanese directors and managers, compared with the results of earlier surveys. However, the percentage of Japanese directors varies widely according to the type of company. According to JETRO (1997),(28) the percentages of Japanese-affiliated companies with wholly Japanese boards are 56.4% in Malaysia, 44.8% in the Philippines, 34.8% in Thailand, and 21.6% in Indonesia.

The results show that in over one-half of Japanese-affiliated companies in Malaysia, all the directors are Japanese. The percentage of Japanese directors is closely linked to equity ratios. Most of the companies without any local directors are wholly Japanese-owned. In joint ventures, however, some directors are appointed by local partners according to equity ratios. Usually, however, most board positions are taken by owners, and appointment through internal promotion is therefore slow. The years of operation since the company first commenced business also has an important bearing on the appointment of local directors through internal promotion.

Table 11 shows the degree of localization at the executive level. The upper section of the table shows the percentages of companies in which executives are assigned from Japan. The results of the Sixth Survey show that the localization of executive positions in local subsidiaries in the ASEAN-4 is relatively advanced in the areas of personnel management, procurement, and planning. Compared with the results of earlier surveys, the percentages of Japanese staff are falling at all levels except the chief and deputy executive officer posts. This suggests that more and more companies are moving toward localization. A similar trend is occurring in North American subsidiaries. In North America, however, the degree of localization is somewhat higher among sales and procurement executives, and at the deputy executive officers.

Another issue is the areas in which authority is being devolved to overseas subsidiaries. The devolution of authority in this context is defined in terms of aspects for which prior authorization from the parent company is not required (localization of decision-making). On this basis, there has been considerable localization of decision-making in personnel-related areas, such as employment, dismissal and wage increases (Table 11, lower section). In other areas, the results of the Third and Fifth Surveys show that the degree of localization is relatively high in areas relating to production and sales(29) but that there is strong pressure for prior authorization by the parent company in the case of matters relating to money, such as profits and investment. Similar trends are observed in North American subsidiaries.

(2) Japanese Companies as Employers

Okamoto (1998) conducted a questionnaire survey of 273 local managers working for Japanese-affiliated companies in Southeast Asia on the subject of personnel policies. The item indicated by most participants (approximately 80%) in response to a question about satisfaction was "job security," while "salary" received the lowest score (less than 40%). When employers were asked to indicate what steps they had taken to discourage workers from leaving, the most frequent response was "ffering opportunities for the future." Views on this aspect were divided, however, and only 50% of workers stated that they were satisfied with their promotion prospects. Some companies show their employees that there is the possibility of promotion to board level by running training programs for local staff who are candidates for board membership.(30)

As such, it will probably be necessary to offer future promotion models in some visible form. It will also be necessary to consider whether the benefits of job security outweigh the disadvantages of working for Japanese-affiliated companies, including relatively low starting ranks for university graduates, and the slow pace of promotion and wage increases. Production workers can look forward to relatively long-term wage growth, and job security is seen as an important advantage at a time when the supply of labor is perceived to be greater than demand in all but a few countries. However, relatively less value is placed on job security in job categories in which demand exceeds supply.


Generally speaking, Japanese-affiliated companies in Southeast Asia appear to be implementing human resource development systems with the potential to yield rapid benefits. These systems are based on Japanese-style skill development methods, but with modifications to reduce their scope. "Scope" in this context means the range (breadth) of job categories targeted for prioritized training and also indicates the range of abilities (diversity of skills and areas of involvement) required in employees. It varies according to company characteristics, such as production systems and product diversity. Companies have needed to reduce the scope in part because of the desire to achieve a high level of output from an early stage. Another reason is the need to counteract worker mobility.

In absolute terms, Southeast Asia's resources of skilled and specialist personnel are small, and the region is far from having a highly developed external labor market. However, social characteristics of the region include a low resistance to job-hopping, and minimal economic losses as a result of job changes. During the high-growth period, simultaneous growth in multiple manufacturing and non-manufacturing industries was reflected in fierce competition for human resources, not only among companies in the same industries, but also across sector boundaries, such as between finance and telecommunications, and between telecommunications and electronics.

Though companies gave priority to internal promotion, they were also forced to scout for talent in order to cope with rapid expansion or diversification into new areas of activity. In this environment, workers became acutely aware of their own market value, and the mobility of people in areas of high demand increased. This was reflected in an increasing perception of loss on the part of employers.

As workers become more aware of their own market value, training itself can be an incentive for staying with the same employer. After a certain period, however, if remuneration falls behind levels in the outside market, there is risk that workers will leave. This tendency appears to have intensified during the period of high growth that began in the latter half of the 1980s.

Skill formation across a reduced scope of activities is inadequate in terms of developing human resources capable of understanding the overall situation. This can easily lead to "black box" situations, and it becomes necessary to use Japanese staff continuously to overcome the deficiencies. Companies will need to adopt wide-ranging skill formation methods targeted toward human resource development in the medium- to long-term perspective. They should take advantage of the present difficulties, which are expected to increase job uncertainty and reduce worker mobility.

End Notes
  1. Koike and Inoki (1987) confirmed the influence of worker skill on productivity. Their case study was a cement factory in Malaysia, which had basically the same facility as factories in Japan but was only one-third as productive.
  2. The comparison is between 1987 and 1995 in the case of Thailand, and between 1986 and 1995 in the case of the Philippines.
  3. The EUI predicted 1998 average unemployment rates of 4.8% for Malaysia and 9.1% for the Philippines. However, the rate for the Philippines had reached 13.3% in April.
  4. This figure is higher than normal. Some observers attribute the increase to the fact that companies rushed to implement lay-offs ahead of changes in the retirement pay regulations under a new labor law, which will take effect on August 19. (Under the new law, the maximum payment will increase from six months' pay to ten months' pay.) Malaysia also intends to amend its employment laws, including an increase in the fines imposed on companies that fail to pay employees on time. The aim of these and other moves is to give workers increased protection against the present instability in the employment environment.
  5. For the purposes of this article, a Japanese-affiliated company is defined as a subsidiary in which the parent company has a direct equity interest. "Grandchild companies" are not included in the figures.
  6. The Ministry of International Trade and Industry (MITI) conducts two kinds of surveys of overseas business activities by Japanese companies. The survey conducted in every three years is called the "Basic Survey." The results of the first five of these surveys were published under the title Kaigai Toshi Tokei Soran (Statistical Overview of Overseas Investment). Starting with the latest survey, the sixth in the series, however, the report has been integrated with the reporting of annual survey, and the results were published as Dai 26kai Wagakuni Kigyo no Kaigai Jigyo Katsudo Chosa (The 26th Survey of Overseas Business Activities by Japanese Companies). The dates of surveys cited in this article are as follows:
    Third Survey: March 1987
    Fifth Survey: March 1993
    Sixth Survey: March 1995
  7. Koike (1994) divides work into "ordinary" and "extraordinary" tasks. In relation to the latter category, he describes the ability to cope with change and abnormal situations as "intellectual skills." He views systems that give production workers wide-ranging intellectual skills of this kind as the foundation for efficiency in Japanese workplaces.
  8. Asanuma (1997), pp. 99-102.
  9. For a discussion of the labor situation in Germany, see Toshio Takahashi and Takeo Onishi, Doitsu no Kigyo (German Companies), Waseda University Press, 1997, Chapter 3.
  10. Ministry of Labor (1996), p.130.
  11. The same report ranks the skills of general workers in order of difficulty as follows: (1) supervision and operation of machines, (2) product checking and adjustment, (3) rearranging operations, (4) objectivizing one's own skills, (5) facility maintenance, (6) programming and teaching.
  12. It should be noted that these are not training systems catering solely for general workers.
  13. Some companies also use job rotation to prevent the deterioration of efficiency that occurs when workers are required to do simple repetitive tasks. Survey results show that about 60% of Japanese-affiliated companies in Thailand use job rotation, and that about 40% use it as a training method [Japan Institute of Labor, Thai no Rodo Jijo (The Labor Situation in Thailand), Japan Labor Association, 1998].
  14. Shiroki (1995), p.13.
  15. In the Philippines, the employee turn-over rate for manufacturing workers reached 5.0% in 1995. The rate for manufacturing industries is higher than the all-industry average (3.2%) and has been rising since 1991 (Philippine Department of Labor and Employment, Yearbook of Labour Statistics Philippines, 1996).
  16. Imaoka (1987) has also pointed out that Japanese-affiliated companies emphasize internal promotion rather than wage increases as a way of achieving employment stability.
  17. While job rank structures vary from company to company, many companies have 1-3 ranks up to supervisor level. They usually regard supervisors (equivalent to section chief) and the upper ranks as managerial staff.
  18. Shiroki (1995), p. 24.
  19. In all cases, interviews with company representatives were carried out between late August and early September of 1997. All three companies are export-oriented companies under 100% Japanese ownership. I would like to express my appreciation to the company officials concerned.
  20. "Staff" in this context means junior college and university graduates who are engaged in clerical work, with the potential to become managers in the future.
  21. According to MITI (1998), 90 Japanese-affiliated manufacturers in the ASEAN-4 responded that they had regional headquarters.
  22. The deterioration of the business environment following the currency turmoil has already led to reductions in the number of Japanese staff stationed overseas.
  23. Unilever successfully launched a beauty essence developed by an Asian subsidiary onto the world market (Nihon Keizai Shimbun, March 24, 1998).
  24. Based on an interview with the Chairman of Unilever (Nikkei Sangyo Shimbun, March 23, 1998).
  25. According to labor statistics, managerial, technical/ professional and clerical jobs account for 13.2% of total manufacturing jobs in Malaysia (1993). This is the highest ratio among the ASEAN-4.
  26. Representatives of 28 companies in seven Asian countries were interviewed between mid- and late May of 1998.
  27. Kato, Hideki ed., Asia Kakkoku no Keizai Shakai System (Economic and Social Systems in Asian Countries), Toyo Keizai, 1996, pp. 61-63.
  28. Its questionnaire surveys have been conducted annually since 1986, but unfortunately there have been changes in the questions included. The latest survey, the tenth, was implemented between November 1996 and January 1997. The 1992 survey included a question about whether companies promoted local staff to directors, and whether the percentage of local directors was greater than 50%. In both cases, the country with the highest ratio was the Philippines.
  29. In the case of items (6), (7) and (8), the gap between the results from the Sixth Survey and from the previous surveys was too great, probably indicating some problems. For this reason, these aspects were not discussed.
  30. Matsushita Electric Industrial has introduced a "Senior Executive Development Program" to train foreign employees as future board members for overseas subsidiaries. 15 people are taking part in the first one-year program (Nikkei Sangyo Shimbun, May 18, 1998).
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