To Offshore or Not

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Seminar report: To offshore or not to offshore?

LANG1009 T02
Wang Jiarui (Rachel)

Background:
Offshore is a business strategy to hire foreign labor and produce in other countries. Toyota has benefited from this strategy a lot since it began to use in 1957. In 2009, the vehicles produced by overseas companies brought Toyota approximately 9000 billion yens profits (Toyota-global, 2011). However, due to poor the quality of oil pedals and brakes made by a US company CTS, the Toyota mass recall crisis happened in 2010, which cost the company up to 2 billion USD for compensation(JR.Healey,2010). This typical example manifested some serious weaknesses of the offshore production. Toyota is currently in a dilemma about whether to continue using this strategy or not. This report will analyze the advantages and disadvantages of offshore production from Toyota’s perspective.

Analysis:
Reducing cost is the first strength of offshore strategy. Car manufacturing sites are expensive, requiring high fixed cost investment. Toyota has moved its manufacturing sites to where factors cost are lower. The costs of materials and labor force are the two significant factors. For example, in China steel as the main material for car factories is cheaper, where the price is one thirds less than in Japan (Steel-home,2012). In addition, the average monthly salary of a Toyota worker in China is 200USD. But in Japan one worker can earn more than 2700USD per month (Glassdoor, 2012). Toyota has been particularly successful at gaining cost efficiencies and compared to the manufacture of cars only in Japan.

Another benefit is helping operate the whole production line, if some disasters happen in one location. Toyota has standardized component design and production across the different suppliers. Therefore, it is easier for Toyota to deal with the unexpected disruptions. In the case of 2011 Great East Japan, the Toyota factories were damaged seriously (The Guardian, 2011). Nevertheless,...
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