Chapter17 The San Diego Way

The San Diego Way

The San Diego plant's mixed US-Japan
management team in front of the main building.
(Kodera is on the extreme right with Morimoto the
second person to his left in the center row).

Kodera left for the Ichinomiya plant the day after Morita's request. Two days later, an historic event occurred. US President Nixon announced that the US would break from the gold standard, cut foreign aid, and levy a 10% tax on all imports. Morita and the Sony management felt the announcement like a tail wind behind the construction of the San Diego plant.

Kodera returned to the US in 1971 as the San Diego plant manager. At the time, Rancho Bernardo still offered many vacant lots, with only NCR, HP, and Barrows maintaining operations in the area. With Masayoshi Morimoto as his deputy, Kodera set to work on preparing the new plant for full-scale operation.

They began by hiring local staff. There were a large number of applicants wanting to interview for positions, proving that Sony's brand recognition had risen substantially. From the many applicants, Kodera and Morimoto chose people who had never done any television assembly work. They wanted inexperienced people due to a concern that any prior experience with a US TV manufacturer might be an obstacle in introducing innovative production systems at the new plant. In order to create a mixed US-Japanese management team, Morimoto and Kodera also hired two American managers. Ron Dishno became production manager and Dick Crossman was put in charge of human resources.

Sony's greatest concerns were the high labor costs, and accusations of dumping right from the factory's initial planning stages even though criteria for products labeled as pictMade in the USA.pict had not yet been specified by the US government. Sony staff searched through every conceivable US law and standard, but they could not find an answer. Eventually, they decided to base it on 50% US sourcing of added value including materials and processing. They took this proposal to the Department of Treasury, but were given no definite reply as the U.S. government was caught in the midst of the Watergate scandal. An inquiry from a Japanese start-up attracted little attention so Sony staff were forced to wait for a reply. The reply never came, but they assumed that since their proposal had not been rejected, it was okay to continue with their plans.

According to Sony plans, assembly right up to the mounting of the chassis board would be done locally. The first production line was for assembly of the pre-fabricated chassis and CRT, both of which would be sent from Japan. It was a very simple pictAssembled in the USApict operation. To ensure a constant supply of Japanese parts, a logistics infrastructure was built to facilitate communication between the plant and the International Division in Japan. Since it was their first attempt at such a venture, everything was on a trial-and-error basis.

On August 3, 1972, the plant was completed and operations began. Soon the first KV-1720 model began to move down the single production line before the eyes of the plant's 35 employees. Production was expanded to include chassis board assembly when the plant began to turn a profit three months later.

An increase in the number of employees and production lines resulted in an increase in production problems as well. Training and quality control were major issues. It was impossible to expect inexperienced local employees to be able to perform perfectly right away, or to pick-up on the type of indirect instruction their Japanese counterparts were accustomed to. Kodera, Morimoto, and the other managers took care to provide detailed instruction on all processes describing exactly how they were to be carried out. They learned not to expect that workers on the line would notice and rectify mistakes. It was Sony's first major attempt at manufacturing abroad, and the managers knew that the first step would be the most important one. During this long period of trial and error, they found encouragement in Iwama's words that pictquality must come before cost,pict and that pictEmployee morale is important to product quality.pict

In the beginning, wages were decided by job description. But the employees were more concerned with moving on to higher paying jobs than settling down and refining their expertise. Also, it was hard to control the rate of defects in production with inexperienced assembly line workers. What Sony needed was a system to encourage employees to stay at their jobs and improve their skills--a system that would contribute to the manufacture of higher quality products. Management was looking for an incentive plan that would boost the employees' efforts. Eventually, the Sony plant implemented a unique salary system. Without abandoning the US practice of linking wages to job description, management decided to introduce the benefits of the Japanese seniority-based system. Although the new system was based on job description, wages would increase according to the number of years one did a particular job.

Kodera and his managers wanted to create an atmosphere at the plant that would encourage employees to exchange ideas freely. The San Diego plant became a comfortable workplace for many, and the employee turnover rate dropped. Employees were treated with respect. Morita and other top management frequently visited the San Diego plant, and sometimes spoke of Sony's principles over lunch to managers and other employees. A system unique to Sony San Diego gradually evolved. In 1974, a CRT factory was built on a connecting lot and comprehensive color TV manufacturing was realized.

The know-how obtained through the San Diego operations was later adopted by plants manufacturing other products, including the speaker plant in Delano, Pennsylvania (opened in 1974); the video cassette tape plant in Dothan, Alabama (opened in 1977); and the audio cassette tape plant in Nuevo Laredo, Mexico (opened in 1979).

An Invitation from H.R.H. the Prince of Wales

Prince Charles(left)addressing Morita(right) and
Sony eimployees and at the inauguration of the
Bridgend plant in Wales(December 1974)

In 1974, when the cathode ray tube factory was completed in San Diego, another color television plant was established in Europe: the Bridgend plant in Wales.

The origins of the Bridgend plant date back to 1970, when Prince Charles visited Japan for the Osaka World Expo. Morita was invited to the British Embassy for a reception held in the Prince's honor. At the reception, Prince Charles asked Morita if Sony had any plans to build a plant in Europe, and that if Sony did decide to do so in the future, that they Please remember Wales. Morita felt that the Prince's interest in promoting direct investments in his country was a sign of his interest in the international business community and of the British Royal family's enthusiasm for creating jobs in Britain.

This was not the only factor that prompted the establishment of a plant in the UK. There were plans to do so even before the British Embassy event. Hiroshi Okochi, who was then president of Sony (UK) Ltd., and his staff had been in the process of choosing a site. Eventually, Okochi reported to Morita, We believe Wales is the most appropriate location after taking transportation and environmental issues into account. He further explained that it was fairly close to London, Manchester, and Bristol, which were their major markets, and that there were plans in the works to construct a highway. This site leaves little to be desired in terms of access to the port of Southampton, he commented. Morita was surprised at the coincidence, but he did not tell Okochi what Prince Charles had said.

Thus, the decision was made to construct a color television plant in Bridgend. Takao Honda, Tetsuo Tokita, and 15 others were sent to Wales from Japan. Tokita later became the plant manager. Production began on June 10, 1974. In December, the plant's official opening ceremony was held with Prince Charles as the guest of honor. Morita stood in front of a commemorative plaque inscribed in English and Welsh that said, Sony's goal is to contribute to the well-being of the international community by combining our technology with the capabilities of all the people working for Sony throughout the world. Thanks to your cooperation, we will produce high quality products targeting a competitive market.

Approximately 50% of the output from the Bridgend plant would eventually be exported to continental Europe and Africa, accounting for roughly 30% of all color TV exports from the UK. In 1980, Sony became the first Japanese firm to be awarded the Queen's Award for Export Achievement for contributing to the promotion of British products.

Starting in the 1970s, new color television plants were built in Barcelona and Stuttgart (the latter through the acquisition of Wega--a German electronics manufacturer).

What happened to France? While building up the sales company, Idei had been busy searching for a way to make Sony a better corporate citizen in a country where strict import restrictions were in force. He felt strong hostility from local importers and had repeatedly pleaded with Morita, In countries like France, where import restrictions are rigid, we need to build a factory and produce goods made in France. He thought that this would enable them to get strong backing from the government and be recognized as a good citizen in the business community. Idei's requests were answered in the 1980s. As sales of audiotapes increased steadily, and Sony planned to introduce Betamax in the US and Europe, the company decided to supply magnetic tapes from a factory close to the market. In 1980, an audiocassette tape factory was constructed in Bayonne, in the Bordeaux region of France. Then in 1984, Sony launched a videocassette tape plant in the neighboring city of Dax. Serving as president of Sony Magnetic Products, Tozawa had also lobbied for the opening of these plants.

Champagne in Hong Kong and Shannon in Ireland

The office at the Sony Shannon Plant

Few people are aware that Sony actually had experience managing foreign plants prior to the San Diego experience. Sony had been forced to close its first two factories just a few years after they opened, but learned many lessons in the process.

Sony's efforts to manufacture products close to markets dates back to the 1950s. Just 15 years after the end of World War II, Japanese firms were still subject to strict foreign exchange laws and other restrictions, including volume limitations on industrial goods exported from Japan. It was not easy for Japanese companies to expand abroad.

In 1959, Sony built a transistor radio assembly plant in Hong Kong through a local legal entity. This was Sony's first overseas production facility, but the Hong Kong firm provided all capital. Production was on a contract basis only and even the management of the plant was left to the local firm. The plant was called the "Champagne Plant," and to be truthful, it was not really a plant at all, but an apartment with two production lines manned by sixty women. With the women assembling transistor radio kits brought in from Japan, it was more like a home business than a factory. The plant assembled the TR-510 and the TR-623, which were then sent to Europe, Australia, Canada, and other Commonwealth countries. The Champagne Plant was only in operation for two years before it was closed down in 1961 due to a disagreement between the local management and Sony.

Although production in Hong Kong was halted, Sony still needed a source of supply for Europe. Once again, Sony resumed the search for a new production site and came across the city of Shannon. Located in the southwest of Ireland, Shannon was surrounded by a natural green landscape and heath. It was an area totally unknown to Sony and most of the Japanese population. The Sony Shannon factory was a wholly owned subsidiary of Sony. At that time, the only other Japanese firm in the region was Brother Industries, Ltd., which operated a typewriter factory in the capital city of Dublin.

Why did Sony choose Ireland and Shannon? First of all, Ireland was a member of the British Commonwealth, so anything manufactured in Ireland could easily be shipped to the United Kingdom and other Commonwealth countries, such as Australia and Canada. Also, the United Kingdom and Ireland were scheduled to join the European Community (EC), so Sony was hopeful that the greater European market would eventually become more accessible through its Irish operations. Furthermore, Shannon was designated as a free port and functioned as a major transit point for air travel in the Western Hemisphere. Transistor radios could be quickly transported by air from Shannon to England, Canada, and countries in Europe, Africa, South America and other regions. Finally, the Irish government was enthusiastically promoting industrialization and frequently solicited Japanese firms, in particular Sony, to establish operations there. In May 1959, Morita, who was then Senior Managing Director, first visited Shannon. Tozawa, who was then General Manager of the Semiconductor Department, followed. Then after a visit by Ohga, who was then General Manager of the Tape Recorder Division, plans to construct a plant in Shannon began to materialize.

Preparations began right away. In October 1959, Sony submitted an application to establish an overseas affiliated firm in Ireland to the Japanese Ministry of Finance and the Bank of Japan. In the process they asked for permission to send money and apply for foreign exchange bonds. Within ten days of the filing, Sony received permission to apply for foreign exchange bonds worth 50,000 pounds as capital for establishing an affiliate company in Ireland. The money was sent at the end of November. At the time, 1 pound was worth approximately 1,000 yen so this amounted to a huge investment of roughly 50 million yen.

Manpo Komatsu, who was stationed at the Sony representative office in Zurich, and other Sony staff arrived in Shannon and began to vigorously prepare for the new company's establishment by investigating the availability of necessary materials.

On December 23, 1959, Sony Ltd. was established in Shannon, and in February of the following year an office was opened. The first items Sony Ltd. bought were two desks, two chairs, a few garbage bins and a typewriter. The opening ceremony for the office was conducted in June, and Akira Suzuki was appointed the first plant manager.

Production of transistor radios began in May. Both Japanese and local staff aspired to eventually make radios entirely from parts sourced in Ireland, but in the beginning, some of the parts had to be brought in from England and the transistors had to be imported from Japan. The plant's main operation was assembly. At its peak, the Shannon plant had close to 100 employees, and an output of approximately 3,000 TR- transistor radio units, such as the 6120/L, per month.

The Silent Radios

Ibuka (at right) visiting the Shannon plant

Along with the success of 3,000 units per month, there were many failures. Production of transistor radios requires precision and accuracy. The easy-going employees of the beautiful farming country around Shannon did not have much experience in manufacturing electronic products, and they often traded positions on the production line without authorization. Locally available parts were often substandard. The six or seven Japanese managers overseeing and training the local staff were obviously concerned about the low yield, but did not know what to do about it.

Another unexpected hindrance was the strikes that often occurred in Ireland. Parts from Japan were often delayed due to strikes at the docks or other stages of delivery.

Other problems also occurred. The Shannon staff would not place more than two or three overseas telephone calls a year to the Japan-based International Division because of high long-distance rates. And the telex lines to Japan were so busy that they would not be available until late into the night. Returning to Japan without a permit was out of the question. It was almost impossible to send for help and guidance to Japan and, even if the message did get through, no one in Japan had any experience in manufacturing abroad so there was no advice to be given. The 50,000 pounds were spent before effective countermeasures could be implemented, and the Shannon plant sank deeper into debt.

Debates about a solution raged on. What had gone wrong? Did Sony launch the plant prematurely, without conducting sufficient research on the feasibility of production in Ireland? Or was the target market wrong? There was a sense of crisis pervading the Shannon operation. Kazuya Miyatake and Mitsuru Nishina left Japan for Ireland to support the local team. They spent years considering ways to increase productivity and yield. They wanted the Shannon plant to survive.

Despite all efforts, in January 1965, five years after its establishment, a decision was made to temporarily halt production at the Shannon plant. The number of employees at the office and plant was reduced by half. For approximately a year the plant continued to fill orders received while providing repairs and customer services. They refused to give up on the hope of returning to full-scale operation, but finally, after all possible solutions had been tried, an order to close the plant was handed down on January 20, 1966. Within days all employees were informed, and the Shannon plant officially closed on January 31. One after another, the Japanese staff was sent home. In April 1966, an overseas affiliated company closure report was filed with the Foreign Countries Section of the Bank of Japan, and the closing of the Shannon plant was finalized.

This attempt at overseas production faced a great number of difficulties. Why did it fail? Had the decision to go forward with the plant been premature? The lessons learned through this attempt later became the foundations of the successful launch of the San Diego and Bridgend plants while enabling the establishment of more plants outside Japan.