The purpose of this paper is to clarify the features of subcontracting in the automobile industry during the high growth period, using Toyo Kogyo as an example. Toyo Kogyo reallocated its management resources from three-wheeled to four-wheeled vehicles in the era of high growth, and was number three in production of four-wheeled vehicles after 1960.
From the late 1950s to the early 1960s, Toyo Kogyo expanded its use of subcontractors. The subcontractors were small firms located in Hiroshima. They had high sales dependence on Toyo Kogyo, and performed processing after receiving drawings and materials from Toyo Kogyo. In the process of expanding its use of subcontractors, Toyo Kogyo developed a department to manage subcontractors, and built an institution for adjusting order quantities to suit the management efforts of subcontractors. In addition, in transactions between Toyo Kogyo and its subcontractors, the ownership of dies and tools reverted to Toyo Kogyo. Toyo Kogyo selected governance mechanisms to promote ex post competition.
After 1960, the wage differentials between automobile manufacturers and subcontractors exhibited a sharply declining trend. This reduction in wage differentials was brought about by a relative increase in wages at small subcontractors. One cause of this payment of wages was the realization of efficient management at subcontractors. As indicated by Shinei Kogyo (treated in this paper), there were also subcontractors who booked a higher return on total assets than Toyo Kogyo because they increased total asset turnover by using machines efficiently. Part of the development of the Japanese automobile industry was achieved by the automobile manufacturers developing diverse institutions to inhibit opportunistic behavior, and suppliers deploying efficient management over a broad range.