Economic Development of Japan

No.15 Future of Monozukuri

Monozukuri (Manufacturing)

Spirit• 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 Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit.

PP.65, 179-181

Sakichi Toyota1867-1930

Konosuke Matsushita1894-1989

Soichiro Honda1906-1991

Akio Morita (Sony’s co-founder)1921-1999

Uniqueness of Japanese FDIStrengths:

Manufacturing-centered—investments in property, trade, and mining are relatively small compared with other source countries (Singapore, Taiwan, Korea, China, etc.)

Monozukuri spirit—proud of clean & efficient factories; endless pursuit of quality & customer satisfaction

Long-term orientation—last in coming to new countries but once invested, will stay long even with difficulties

Partner assistance—provides training to local firms and engineers because long-term relation & trust are important

Legal compliance—observance of contracts and local labor, tax, environment laws

Weaknesses: Slow & risk-averse—decision-making is slow & cautious

compared with more dynamic investors (China, Korea…) Inward orientation—often stays within Japanese ways &

community; not good at global networking/marketing or working dynamically with foreigners; language problem

Changing SituationIn the 1980s-90s, Japan was a leading country in car & consumer electronics manufacturing—but 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.

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).

1.Describe & analyze current status of Japanese manufacturing SMEs.2.Propose future visions & concrete steps for Japanese monozukuri in a new global environment.3.Study & promote concrete networking efforts by local governments, NPOs, business associations, etc. in Japan, Thailand & Vietnam Re-create monozukuri relationship between Japan & Developing Asia

Manufacturing SMEsCompetitive 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.

Sources: SME Agency estimates, SME Research Organization.

Number of Manufacturing SMEs Employees at Manuf. SMEs

Production Index of Manuf. SMEs

Compared with around1990 (peak time)

• Establishments 44%• Employees 36%• Production 23% (by 2012-13)

X 10,000 X 10,000

(1990=100)

Evolution of Japan’sOutward 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.

Disintegration of Toyota Pyramid (Aichi Prefecture, near Nagoya)

Toyota

Final car assembler

First-tier suppliers Denso, Aisin

etc.

Second-tier suppliers

Third-tier

4th- tier

- 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)

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.

Parts & components

FDI from Japan to Vietnam

2.243 4.3710.565 9.652

76.537

1.383

20.40118.493

43.71

14.06 13.375.6 4.76

3.5533.389

3.82

2.344

1.695.892

12.22

44.70

9.62

0.763.33 11.3

5.91 6.57

1.08 0.62 0.81 1.64 1.02 115

27

47 5465

12 14 2640

48 5361

107

146154

147

77

114

208

317

352

342

0

50

100

150

200

250

300

350

400

0

10

20

30

40

50

60

70

80

90

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

（件）

（年）

新規投資額 拡張投資額 合計投資額 新規件数

（億ドル）日本の対ベトナム直接投資（認可ベース）

Source: Foreign Investment Agency/Ministry of Planning and Investment, Vietnam.

(Registration)$100 million Number of projects

New FDI Expansion Total Number of new projects

タイ

86 93

129 130147

130

94

111

231218 219

119

0

100

200

300

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

（年）

（百万バーツ） （件）日本からタイへの直接投資推移

新規投資額 拡張投資額 合計投資額 新規件数

FDI from Japan to Thailand

(Registration)Number of projectsMillion baht

New FDI Expansion Total Number of new projects

Source: Thai Board of Investment.

Japanese Manufacturing SMEs:Issues & Policy Response Japanese manufacturing SMEs have high skills &

technology, but other capabilities (business strategy, marketing, IT, networking, English..) are lacking—unlike 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).

Council for Supporting SME Overseas Business Expansion

(National & 9 Regional levels, est. 2010)

Government: METI, MoFA,

MOAgr, Finance Services Agency

Official agencies:

JETRO, SMRJ, MEXI, JICA

SME assoc’s: Japan Chamber of

Commerce & Industry, CFSCIJ,

SME Chuokai

Financial institutions:

Japanese Bankers Assoc., other bank & credit assoc’s, Japan Finance

Corporation, Shoko Chukin

Other: Japan Federation of Bar Assoc’s, Overseas HR & Industry Dev. Assoc. (HIDA)

Policy document:“Guideline for Supporting SME Overseas Business Expansion”with METI leadership;Approved Jun. 2011Revised Mar. 2012

Council meetings (central level): Oct. 2010 Feb. 2011 Jun. 2011 Mar. 2012Followed by working level meetings

Key issues:Providing support for1.Information2.Marketing3.Human resources4.Finance5.Trade & investment environment

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, R&D, 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.

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

Vietnam’s engineers & workers have high potential, but this potential remains unutilized.

Vietnam’s 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 Nam’s

goals & issues; draft report (August 2015) Discuss & agree on concrete cooperation (by early 2016) Implement proposed measures & FDI attraction (3 years)