Economic Development of Japan

1
Economic Development of Japan
No.15 Future of Monozukuri
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Monozukuri (Manufacturing) Spirit
PP.65, 179-181

• Mono means thing and zukuri (tsukuri) means
  making in indigenous Japanese language.
• It describes sincere attitude toward production
  with pride, skill, and dedication. It is a way of
  pursuing innovation and perfection, often
  disregarding profit or balance sheet.
• Many of Japans excellent manufacturing firms
  were founded by engineers full of monozukuri
  spirit.

Akio Morita (Sonys co-founder)1921-1999
Sakichi Toyota1867-1930
Konosuke Matsushita1894-1989
Soichiro Honda1906-1991
3
Uniqueness of Japanese FDI

• Strengths
• Manufacturing-centeredinvestments in property,
  trade, and mining are relatively small compared
  with other source countries (Singapore, Taiwan,
  Korea, China, etc.)
• Monozukuri spiritproud of clean efficient
  factories endless pursuit of quality customer
  satisfaction
• Long-term orientationlast in coming to new
  countries but once invested, will stay long even
  with difficulties
• Partner assistanceprovides training to local
  firms and engineers because long-term relation
  trust are important
• Legal complianceobservance of contracts and
  local labor, tax, environment laws
• Weaknesses
• Slow risk-aversedecision-making is slow
  cautious compared with more dynamic investors
  (China, Korea)
• Inward orientationoften stays within Japanese
  ways community not good at global
  networking/marketing or working dynamically with
  foreigners language problem

4
Changing Situation

• In the 1980s-90s, Japan was a leading country in
  car consumer electronics manufacturingbut now
• Electronics is stagnant (Sony, Sharp, etc.) TVs,
  phones, music devices are modularized--designed
  by Apple/Samsung/LG, assembled in developing
  Asia. Galapagos phenomenon. But Japan is still
  strong in key materials components. Panasonic,
  Hitachi, Olympus, etc. shift to other fields
  (energy, medical)
• Car production is still alive and well, but
  technology is shifting auto-drive, electric car,
  fuel-cell car. Will Japan keep the lead?
• Production market shift to emerging economies
• Japanese domestic demand is mature stagnant,
  while demand is growing in developing Asia
  other regions.
• Large assembly firms go abroad SMEs also look
  outward.
• Who will inherit high skills technology?
• Experienced managers engineers are retiring,
  but young people are few and not interested in
  monozukuri or hard work.

5
Overseas Investment by Japanese SMEs (APIR
Research Project 2012-2014)

• Izumi Ohno ed.,
• From a Small Factory in Japan to a Global Firm in
  Asia SMEs Overseas Expansion Strategy Policy
  Support,
• Chuo Keizaisha, May 2015 (Japanese).
• Describe analyze current status of Japanese
  manufacturing SMEs.
• Propose future visions concrete steps for
  Japanese monozukuri in a new global environment.
• Study promote concrete networking efforts by
  local governments, NPOs, business associations,
  etc. in Japan, Thailand Vietnam
• ? Re-create monozukuri relationship between Japan
  Developing Asia

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Manufacturing SMEs

• Competitive SMEs have been a driver of Japanese
  growth in the past, but they now face many
  challenges.
• Aging of SME owners lack of next generation
  engineers
• Rises of Korea, Taiwan China as competitors
• High corporate tax of about 40
• Long-term domestic recession
• Deflation (downward cost pressure)
• Power shortage
• Delayed participation in TPP, FTAs, EPAs, etc.
• High yen
• ( Partly alleviated, reversed, in recent
  years)
• The number of Japanese SMEs is declining sharply
  in every region and sector. The Lehman Shock
  (2008) further accelerated this trend.

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Employees at Manuf. SMEs
Number of Manufacturing SMEs
X 10,000
X 10,000
Production Index of Manuf. SMEs
(1990100)

• Compared with around
• 1990 (peak time)
• Establishments 44
• Employees 36
• Production 23
• (by 2012-13)

Sources SME Agency estimates, SME Research
Organization.
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Evolution of JapansOutward Manufacturing FDI

• 1960s-70s initial FDI, some causing friction
  with workers and host countries in Southeast
  Asia.
• 1980s- trade friction with US EU prompted car
  and electronics makers to produce in market
  countries instead of exporting from Japan.
• Mid 80s 1990s a sharp yen appreciation
  opening of China pushed many large Japanese firms
  abroad, and some of their SME suppliers also
  followed.
• 2000s- relocation of production sites due to
  accelerated integration (WTO, FTAs)
• 2008- Lehman Shock harder competition force
  large firms to go abroad aggressively procure
  parts globally. Japanese SME suppliers have lost
  regular customers.
• Now Long-term production networks in Aichi
  (Toyota), Suwa (Epson) and other industrial
  cities are disintegrating. Manufacturing SMEs
  have to find new customers markets.

9
Disintegration of Toyota Pyramid (Aichi
Prefecture, near Nagoya)

• - Accelerated relocation of factories abroad
• Global part procurement with QCD
  (quality-cost-delivery) no longer committed to
  buy from Toyota City or former suppliers
• Toyota says it will maintain domestic
  production of at least 3 million cars (incl.
  Aichi, Tohoku, Kyushu)

Final car assembler
Toyota
First-tier suppliers
Denso, Aisin etc.
Second-tier suppliers

• Numerous SMEs
• Previously regular captured suppliers to
  Toyota
• High technology and QCD, but no other
  capabilities
• Toyota no longer promises orders in Japan or
  abroad.

Third-tier
Parts components
4th- tier
10
FDI from Japan to Vietnam
(Registration)
Number of projects
100 million
Expansion
New FDI
Number of new projects
Total
Source Foreign Investment Agency/Ministry of
Planning and Investment, Vietnam.
11
??
FDI from Japan to Thailand
(Registration)
Number of projects
Million baht
New FDI
Expansion
Total
Number of new projects
Source Thai Board of Investment.
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Japanese Manufacturing SMEsIssues Policy
Response

• Japanese manufacturing SMEs have high skills
  technology, but other capabilities (business
  strategy, marketing, IT, networking, English..)
  are lackingunlike Taiwanese or German top SMEs.
• Many manufacturing SMEs are considering to invest
  abroad for survival. Most popular destinations
  are Thailand, Vietnam Indonesia.
• From 2010, the Japanese government (METI) began
  to promote SMEs outward FDI. Within Japan,
  national regional support networks have been
  created. JICA, JETRO, HIDA, SMRJ, local
  governments, etc. are mobilized.
• Abenomics also promotes (allocates additional
  budget for) SMEs outward expansion (export
  FDI).

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Council for Supporting SME Overseas Business
Expansion (National 9 Regional levels, est.
2010)
SME assocs Japan Chamber of Commerce
Industry, CFSCIJ, SME Chuokai
Government METI, MoFA, MOAgr, Finance Services
Agency
Official agencies JETRO, SMRJ, MEXI, JICA
Financial institutions Japanese Bankers Assoc.,
other bank credit assocs, Japan Finance
Corporation, Shoko Chukin
Other Japan Federation of Bar Assocs, Overseas
HR Industry Dev. Assoc. (HIDA)
Policy document Guideline for Supporting SME
Overseas Business Expansion with METI
leadership Approved Jun. 2011 Revised Mar. 2012
Council meetings (central level) Oct. 2010
Feb. 2011 Jun. 2011 Mar. 2012 Followed by
working level meetings

• Key issues
• Providing support for
• Information
• Marketing
• Human resources
• Finance
• Trade investment environment

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Our Policy Recommendations

• Classify SMEs and support them selectively not
  all SMEs need to go abroad for survival or
  expansion.
• Support should be given by linking networking
  various support organizations and services.
• Technology-only factories should be transformed
  into global manufacturing firms with all-round
  abilities in management, marketing, HR, IT, RD,
  IPR, etc.
• Japanese monozukuri should be expanded both in
  Japan abroad. Core skills technology should
  be transferred to selected developing countries
  (not just labor-intensive processes).
• Thailand Vietnam are top candidates. Japan can
  promote monozukuri abroad while these countries
  can overcome middle income traps by learning the
  core of Japanese technology.

15
My New Vietnam Project with JICA(Province-based
Economic Growth)

• Vietnams engineers workers have high
  potential, but this potential remains unutilized.
• Vietnams industrial policy did not improve in
  the last 20 years despite inflows of ODA FDI
  and better infrastructure.
• Instead of central government, select a few
  provinces with good mindset, leadership
  industrial potential. Concentrate Japanese ODA
  FDI so they will be industrialized with
  high-quality policy, human resources
  enterprises.
• Start with Ha Nam Province
• Preliminary survey by Vietnamese researchers
  (July 2015)
• One-week intensive GRIPS-JICA mission to identify
  Ha Nams goals issues draft report (August
  2015)
• Discuss agree on concrete cooperation (by early
  2016)
• Implement proposed measures FDI attraction (3
  years)