Not made in Japan
By Robin Harding and Jonathan Soble in Tokyo
Published: July 20 2009 19:04 | Last updated: July 20 2009 19:04
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.
Copyright The Financial Times Limited 2009
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