Inside
the rows of tin-sided buildings in a beach-side suburb an hour out of
Tokyo, aqua-green machines churn out the most basic of industrial
components: pairs of inset steel rings that spin on a doughnut of balls
or rollers.
The bearings produced by the NSK
factory in Fujisawa may look a lot like the prototypes Leonardo da
Vinci sketched five centuries ago, but the company still has plenty of
costs. Its annual research budget of Y10bn (£64m; €74m; $105m) supports
a team of chemists who concoct recipes for grease – 60 of the 200
varieties NSK uses were developed in-house – and computer engineers
whose software detects impurities in alloys. “You can buy cheap
Chinese-made bearings that look just as good, but I wouldn’t use them,”
says Masatoshi Shirai, the plant’s deputy manager.
Yet for all
their quality, the plunge in global demand and a sharp rise in the yen
have thrown Japanese manufacturers into crisis, and reignited a debate
about the country’s reliance on the sector. That is because it was not
finance that transmitted this recession to Japan – it was manufacturing. In spite of having no real estate bubble or banking trauma to speak of, the slump in exports –
down by half at their nadir in February – helped push output down by 14
per cent in annualised terms during the first quarter, making Japan’s
recession one of the deepest in the developed world.
As
Anglo-Saxon leaders worry that an over-reliance on finance has weakened
their economies, Japan’s problems are a reminder that there are dangers
on the other side of the fence. Economists long warned that domineering
exporters and a relatively puny domestic services sector left Japan
dependent on foreign demand, exposed to the whims of the currency
market and vulnerable to low-cost Asian rivals. The global recession
appears to have proved them right, raising the question: do factories
such as Fujisawa have a future?
In a country where monozukuri,
or making things, is part of the national identity, hand-wringing about
the state of manufacturing is not new. Light-speed industrialisation
shielded Japan from western imperialism in the 19th century and rebuilt
it after the second world war – a war that was itself a demonstration
of the importance of material production. “It wasn’t the US service
sector that defeated Japan,” notes Robert Dujarric of Temple University
in Tokyo. Well-paid blue-collar jobs, he adds, have been a pillar of
Japan’s postwar social equality.
Companies have been quietly
shifting production overseas for three decades, to overcome trade
barriers or take advantage of cheaper foreign labour. Employing one in
10 workers, manufacturing’s share of gross domestic product, at 21 per
cent as of 2006, remains high by developed-country standards – but is
well below its peak of 36 per cent in 1970. The assumption was that
high-skilled work would stay in Japan and ever-growing global sales
would ensure a minimum level of exports.
That view is now being
questioned. As the recession deepened early this year, factories
started to close and workers were dismissed – in many cases with no
promise of rehiring when the economy recovered. Sony
said it would shut four of its 10 domestic electronics plants and
outsource their production. Mikio Katayama, the president of Sharp,
announced a strategy shift, saying that in future “exports from Japan
will not make sense even in the most advanced technological fields”.
For a company that defines itself by its manufacturing prowess, the
comment suggests more than a cyclical malaise.
Even before the
recession, efforts to keep jobs at home were looking strained.
Companies have pushed down on wages, turning productivity gains into
lower prices or higher profits: labour costs as a share of
manufacturing output fell from 73 per cent in 1994 to 49 per cent in
2007. Rather than provide stable employment, factories hire temporary
workers – often Chinese or Brazilians on short-term visas – who get low
pay and poor conditions. Japan has not just moved factories to cheap
labour, it has also brought cheap labour to the factories.
As
manufacturing jobs have been devalued, Japan’s young have increasingly
lost interest in them. According to the Rose project, a
Norwegian-funded global survey of attitudes towards science, Japanese
secondary-school students responded more negatively to the proposition
“I would like to get a job in technology” than their peers in all the
25 countries polled.
Students
looking for the kind of stable lifelong jobs once offered by
manufacturers now increasingly choose public services or utilities. In
a survey this year by Recruit, an employment agency, students ranked
Central Japan Railway, part of the old state rail network, as the most
attractive employer. Sony ranked 89th; Toyota 96th.
That has
exacerbated the problems presented by Japan’s ageing population. “When
you look at the population structure, it’s going to be extremely
difficult to find groups of low-cost labour,” says Tadahito Yamamoto,
president of Fuji Xerox, the office equipment supplier. Eighty per cent
of its manufacturing has already gone abroad, and all that will remain,
he says, are the products with highest value-added – inks; engineering
and development jobs; and assembly that can be totally automated.
Japan’s
response to past manufacturing downturns was often to intervene in the
foreign exchange market to weaken the yen, juicing up the
competitiveness of its exports. Massive intervention earlier in the
decade brought some short-term relief but left the economy as reliant
as ever on foreign demand, and thus more vulnerable when the yen surged
and orders fell. Intervention now would draw howls of protest from
recession-hit trading partners, and the finance ministry has stayed out
of the market in spite of open pleas from the chairman of Canon and the
former president of Honda. Few executives expect relief from the strong
currency soon.
One possible response to the loss of manufacturing
competitiveness is that it is no bad thing to move production offshore:
Japan can keep the company headquarters, which will still provide good
administration, marketing and design jobs. Some that have moved down
this road have managed it: Yamaha Motor employed 11,000 workers in
Japan at the start of the 1980s, when it made three out of four of its
motorcycles locally. Today domestic bike production accounts for just 5
per cent of the total but Yamaha’s Japanese workforce has shrunk only
slightly, to 9,000.
Another, oddly defeatist, response is that
Japan needs manufacturing because its service sector is not competitive
enough. Outside its dismal banks, Japanese service companies are known
for treating their customers beautifully, but not making much money.
“If you were to look at the top 50 companies in Japan based on where
they rank in their industries, I think they’d all be manufacturers,”
says Temple University’s Mr Dujarric.
Yet there is a more
nuanced, and more optimistic, way to look at the future of Japanese
manufacturing. For answers to their dilemmas, many Japanese executives
turn to Takahiro Fujimoto, who runs the University of Tokyo’s
Manufacturing Management Research Centre from a ramshackle office above
a bank.
For him the question is not whether Japan should
manufacture, but in what products it has a comparative advantage. He
argues that Japan’s strengths were forged in the high growth era of the
1960s, when staff and natural resources were in short supply, forcing
companies to minimise waste and to rely on teamwork among multi-skilled
workers rather than a narrow division of labour. From these roots came
practices that caught the imagination of the industrialised world, such
as “just in time” production to minimise inventories, and “kaizen”, or continuous improvement on the factory floor.
Takahiro
Fujimoto asked Japanese manufacturers whether their products needed
customised or off-the-shelf components, and whether there were design
trade-offs, such as between safety and saving energy. The result (above
right) was a spectrum of 170 products, from the ‘integral’ that must be
designed as a complex whole to those with a simple, ‘modular’ design.
It turns out that Japan is most successful at exporting ‘integral’
products – although Prof Fujimoto emphasises the limits of his data.
“We
should be good at products that are co-ordination intensive in terms of
production and design,” says Prof Fujimoto. What is more, this
advantage should be durable, because it was evolved rather than
deliberately created, and so cannot be packaged into a form that is
easy for foreign or domestic rivals to copy. His data suggest that the
more complicated a product is to design and make, the more of it Japan
exports (see chart).
For
all Japan’s reputation, the hard-to-design products where it may have a
sustained advantage are not necessarily high-tech. “We lost
semiconductors but we still keep the toilet bowl,” says Prof Fujimoto,
referring to the success of Toto, a company that makes hydro-efficient
toilets to satisfy demand from water-constrained China.
This
theory also fits the pattern of how companies are responding to the
recession. Hitachi and Toshiba, for example, are playing down consumer
electronics, which use high-tech parts but have simple design, in
favour of the ultimate hard-to-design product: the nuclear power
station.
Apart from products that are globally competitive, two
other kinds of plant are expected to prosper in Japan: “quick
factories”, producing just-in-time goods for the domestic market, and
“mother factories”, kept alongside research centres to provide instant
feedback to product designers.
Takanobu Ito, chief executive of
Honda, says the “broad trend” at his company is away from exports in
favour of localised production, but he sees an important role in Japan
for such keystone facilities. “Our approach is to perfect the newest
and most advanced technologies in Japan before transferring them
overseas . . . These technologies aren’t just products, they’re
connected to the production process itself. That means that without
production [in Japan], our technology couldn’t advance.”
For
NSK’s Fujisawa plant that suggests the future is relatively bright. Its
metallurgists and grease-wizards support nine factories in Japan and 17
abroad, and in some applications, the humble ball bearing is a very
customised product indeed.
Mr Shirai points out a stack of
metre-wide roller bearings used in the gearboxes of North Sea wind
turbines. “Those go 60 to 100 metres in the air. Once you install them,
you don’t want to have to replace them.”
Big changes for the producers of little things
Nothing
symbolised Japan’s ascent in the 1970s and 1980s like consumer
electronics. Companies such as Sony not only grew, they defined the
cutting-edge of technology.
Today they are symbols of a
different kind as competitors from Taiwan and South Korea have gained
the initiative. Pioneer lost Y131bn (£838m; €972m; $1.4bn) last year
and closed its television business in February, JVC was forced into a
merger with its Tokyo-based peer Kenwood in 2007, and Sony has wrestled
with losses in TVs and falling overall profitability. Almost every
consumer electronics company has shut factories in Japan.
Consumer
electronics is an industry that has never stayed for long anywhere. In
the 1960s, US companies dominated in TVs; in the following two decades
it was the turn of the Japanese. More recently Korea and Taiwan have
grown – but their eclipse by China is already on the horizon. “Consumer
electronics is always seeking cheaper capital and labour costs,” says
Kota Ezawa of Nikko Citigroup in Tokyo.
But capital and labour
costs are not enough to explain why so few Japanese companies have
matched the success of Apple, which outsources its production, and has
had a string of hits with devices such as the iPhone and the iPod. Nor
does it explain Japan’s struggles in the related areas of computing and
semiconductors, where US makers such as Dell and Intel have prospered,
but NEC, Fujitsu and other Japanese champions have not.
A large part of the problem is that, in the shift from analogue
to digital electronics, products became more modular. Whereas Japanese
companies made everything from cathode ray tubes to the phosphors of an
analogue TV screen in-house, and that was a source of competitive
advantage, modern digital sets can be assembled using a liquid crystal
panel and chips from a range of suppliers. A retailer such as Amazon
can now make the Kindle book reader because it need not design the
components itself and it can outsource assembly.
The move to
digital also increased the importance of software – an area that,
outside video games, Japan has not had much luck with. All this was
compounded by a slowness to adapt. “Inflexible mindsets meant that
vertical integration and inefficiencies persisted for longer than
necessary,” says Mr Ezawa.
The future is likely to involve fewer
consumer electronics and more business-to-business products: Panasonic
is buying Sanyo to move into solar power and lithium-ion batteries,
while Toshiba and Hitachi are concentrating on power stations and
infrastructure. Sony, meanwhile, is trying to make networked products
for which it can also sell software and media content.
“We’re
trying to make the supply chain into a growth engine for the company,”
he says. “A lot of the time, supply chain management is reactive, or
passive, cost control. But we think there’s also an opportunity for us
also to have the supply chain create top-line growth as well as
bottom-line performance.”
among
the most expensive on the market, it also wins fierce brand loyalty
among purchasers. Mr Solobay says his fire department is paying about
$30,000 more than it would for a vehicle from a rival, but adds that
for a fire truck that is only replaced about every 20-25 years there
are other considerations, such as dependability and the unique features
the company offers. “These are top-quality vehicles,” he says. “We know
that because our other fire trucks are from Pierce.”
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