Tuesday, October 11, 2011
As Manufacturers Leave Its Shores, Japan Watches a New Era Unfold
Struggling to recover from the massive earthquake, tsunami and nuclear meltdown in March, government officials and many owners of Japan’s small and medium enterprises have fanned out across Asia in recent weeks, seeking new locales for their manufacturing operations. But more than a simple response to a disaster, the moves could accelerate long-term changes in the industrial supply chain. Beyond killing an estimated 25,000 people and displacing 160,000 others, the March events, now termed 3/11, could have an impact on Japan’s manufacturing sector that goes beyond a temporary disruption. Acceleration of the offshoring of manufacturing is set to hollow out the country’s industrial base.
“They are not out of business, they are still running,” said Masaki Uehara, a government official in the Tokyo ward of Oto, home of many manufacturing firms. “But they are thinking of what their next move should be.”
The aftershocks the March earthquake delivered to the global supply chain have rattled multinationals, which can no longer rely on single suppliers for key components in Japan, Uehara said. Thus, suppliers are looking to base their operations in other countries in Asia.
The disaster is only one reason for the changes. A confluence of other factors includes the persistently high yen as well as high labor costs, environmental restrictions to combat global warming and rising energy costs exacerbated by what may be long-term restrictions on power generation.
Japan’s nuclear industry looks to be permanently damaged. At last count, 44 of Japan’s 54 nuclear plants remain closed, either because of direct damage or for maintenance. The electricity supply has been cut by 25 percent — and no one knows how long that will last.
“The hollowing out of Japanese industry was launched 15 years ago,” Uehara said. “The recession has continued for 15 years and with the bad effect of the strong yen for these years. But the earthquake was one of the triggers for Japanese companies to invest overseas. I expect that more companies will go out of Japan in the next three years.”
Uehara himself led a delegation of business leaders to Thailand in mid-September in a hunt for possible new locations. He was not alone. In India, Tadashi Okamura, the chairman of the Japanese Chamber of Commerce and Industry in India, accompanied a visiting business delegation to Tamil Nadu to encourage investments by Japanese small and medium enterprises, or SMEs, according to Business Line. In Hong Kong, Daniel Shao, the managing director of the Van Yu Group of Companies in Hong Kong, said he has been working to assist Japanese SMEs wanting to move to China, mainly Dalian in northern Liaoning province. Thus the projected SME exodus is happening with the assistance of Japanese government officials.
Yukio Tada, president of Sojitz Research Institute in Tokyo, said in a telephone interview that as many as a third of the SMEs in Japan are thinking of ultimately departing for other countries, primarily to Southeast Asia.
Just how deep the migration will go or where it will concentrate is uncertain. Tada’s estimate of a third of SMEs — of which there are hundreds of thousands in Japan — probably is high. These are family-owned companies typically with 50 to 100 employees. Given family ties and other issues, moving them offshore would theoretically be much more wrenching than for the multinationals.
The current migration follows the previous departure of manufacturing operations of Japanese multinational car and electronics companies to elsewhere in the region that began in the mid-1980s. This followed the Plaza Accord that effectively revalued the yen, making Japanese products more expensive. “Japanese firms lost their price competitiveness and responded by shifting labor-intensive assembly operations to other Asian countries,” Willem Thorbecke and Nimesh Salike wrote in a recent research paper.
In fact, the Plaza Accord helped drive down the value of the US dollar against the yen by 51 percent between 1985 and 1987. The effect of the mid-1980s migrations to Southeast Asia was dramatic. At that time the region was mired in an economic downturn. The arrival of the first-line Japanese companies, particularly in Singapore and Thailand, sparked the first “miracle” development in Southeast Asia.
Although the earthquake may have hastened the current round of departures, SMEs for two decades have been following the multinationals offshore because of the necessity of being close to the companies they supply — with components, car parts, sheet metals, specialized chemicals and more.
Tada adds: “In case of minor parts production that can be supplied to tier-one and tier-two companies, these SMEs can be transplanted to their own main suppliers, the buyers of these kinds of products.”
Despite the alacrity with which the multinationals moved overseas in the wake of the Plaza Accord, Van Yu’s Daniel Shao suggests the Japanese are reluctant to move overseas: “I don’t think it’s going to be a dramatic migration. But maybe in phases they will come out, encouraged by the big managers for supply chain security.” The Japanese, he says, “are risk-averse.” Nor does the decision to go overseas extend across lots of industries. Plus, lots of the countries in Asia, including China, are suffering from increasing inflation, “so the Japanese SMEs have to think of the total cost in the future.”
The question is what happens to Japan itself. Will its industrial base wither, hollowing out the economy, as has happened in the United States? There, manufacturing as a percentage of GDP has fallen from 21 percent in 1980 to just 11.7 percent in 2010, according to the US Bureau of Economic Analysis. In Japan, manufacturing as a percentage of GDP has fallen from 28 percent to around 20 percent today, according to the Statistics Bureau of the Ministry of Internal Affairs and Communications.
“Japanese industry still has much deeper or higher technology than other countries,” said Uehara, the Tokyo ward official. “I believe that the number of Japanese companies will decrease more but the level of Japanese technology will remain with the higher and highest companies being successful.”
As with Germany, Japanese industry depends on quality and high technology, said Sojitz’s Tada. Its technological development is largely ahead of the world in consumer electronics, optical fibers, optoelectronics, car manufacturing and many other high-quality technologies that other countries so far cannot match. Given that technological lead, both Uehara and Tada say that Japan will continue its industrial mastery. Tada describes the departing companies as “obsolete” in terms of the R&D Japan will need for the next leap up the technological ladder.
“We have been counting on this as long ago as 1963,” Tada said. “There will be a new trend. It may take a bit of time, but in five years you will see a new face of Japan. In Japan, 90 percent of R&D is by the private sector. There is a huge effort now underway.”
So the country may well make the leap without an unknown number of SMEs opting to go overseas. Those currently departing for elsewhere may spur still more growth in already dynamic regions. Perhaps Japan has one more miracle up its sleeve. By John Berthelsen editor of Asia Sentinel.