Mayoshi Ogawa: The Future of Japanese Manufacturing from the Perspective of a Small Factory

2021/12/20

In this article, I will consider the ideal future of Japanese manufacturing by comparing my experiences as a micro-enterprise owner running a small factory in Tokyo with economic statistical data (facts).

The Japanese economy has been in long-term stagnation since the collapse of the bubble economy in 1990 and the financial crisis of 1997, but I feel that the "sense of pricing" in domestic business changed significantly following the Lehman Shock.

After completing a master's degree at the Juku Graduate School of Science and Technology, I was involved in aircraft development at Fuji Heavy Industries Ltd. (now SUBARU CORPORATION). I left the company to take over the family business and, after training at a small factory manufacturing precision parts, joined our company. I have experienced these changes as someone consistently involved in the manufacturing industry.

Our company, which undertakes the production of high-mix, low-volume parts for various industrial fields such as medical/physicochemical, semiconductors, and aviation, primarily serves domestic and international manufacturers and is a typical small factory. The high-mix, low-volume manufacturing process involves many manual tasks by craftsmen and is not something that can be easily automated. In our case, we receive a processing fee of 4,000 to 5,000 yen for one hour of work. This processing fee directly becomes the value of the work—the "added value"—and is a very simple business model directly linked to salaries.

"Added value generated per hour" is referred to as "hourly labor productivity." As of 2019, labor productivity was 6,700 yen in Germany, 8,400 yen in the United States, and 4,900 yen in Japan. Since this index is an average value that includes non-manufacturing personnel, the actual pricing of businesses should be set even higher.

Perhaps the greatest challenge in the Japanese economy is that the "value of human work" is extremely low, and both the "pricing" of work and the "wages" paid to workers, who are also consumers, are cheap.

Our pricing (4,000–5,000 yen/hour) is generally considered "high" in this industry. In fact, many domestic competitors seem to charge 1,500–2,500 yen, and such extremely low pricing has now become "the norm."

Why is it so cheap? One possible reason is that all businesses are steeped in the value of "cheap at any cost." Improving "production efficiency" through automation via capital investment and lowering unit costs is something the manufacturing industry should naturally pursue. "Automated means" are primarily compatible with mass production, and "economies of scale" allow production costs to be reduced to the limit. Many businesses relying on "economies of scale" have sought even cheaper labor through a "race to the bottom," and in Japan, the overseas expansion of the manufacturing industry, in particular, has been heavily promoted.

For this reason, most of the work remaining in Japan should be business that is difficult to pursue through economies of scale, yet "emerging market prices" are demanded for pricing. I feel that in the Japanese manufacturing industry, this economic view based on "economies of scale" has significantly devalued "work that only humans can do."

The Japanese economy has been the only one among developed nations to continue stagnating since the mid-1990s across all major economic indicators, such as average worker income (approx. 4.4 million yen as of 2019, from 4.364 million yen), GDP per capita (approx. 4.3 million yen as of 2018, from 4.337 million yen), and labor productivity (approx. 4,900 yen).

In the 1990s, these indicators were among the highest among OECD (Organisation for Economic Co-operation and Development) member countries. However, since then, their position has changed along with prolonged stagnation, and today all indicators rank around 20th. The decline in worker income is particularly serious. In particular, the average income of male workers peaked at 5.8 million yen in 1997 and has since decreased to about 5.4 million yen in 2019.

While other countries are experiencing steady growth, Japan is the only one where economic growth has stopped for a long period and the income of workers, who are also consumers, is the only one decreasing.

Japan has also experienced prolonged stagnation in prices (GDP deflator), which has barely changed at just under 1.1 times the 1980 level. Meanwhile, other countries have seen continuous price increases; compared to 1980 levels, prices have doubled in low-growth Germany and increased by 2.5 to 3 times in the United States, France, and Canada.

Since price is a comprehensive indicator of sales prices, from a corporate perspective, it can be interpreted as a long-standing situation where selling prices cannot be raised. A characteristic of Japan, in particular, is that the GDP deflator, which includes business-to-business transactions, is lower than the Consumer Price Index.

On the other hand, looking at international price levels, Japan saw a rapid trend toward a stronger yen after 1986, and by 1995, the price level had risen to nearly twice that of the United States. Since the strong yen significantly damages export industries, I believe this, combined with the high price level, led to the accelerated overseas expansion of companies. Currently, this price level has dropped to the average of developed countries. An environment is already being established where exporting from domestic production is advantageous.

However, the overseas activities of Japanese companies continue to grow steadily. While the total sales of domestic companies as of 2018 stagnated at around 1,500 trillion yen (from 1,535.2 trillion yen) and exports at around 100 trillion yen (from 101.2 trillion yen), the sales of overseas subsidiaries of Japanese companies reached the 300 trillion yen scale (from 290.9 trillion yen). Meanwhile, the export dependency (export-to-GDP ratio) of Japan's domestic economy is about 18%, which is very low compared to industrial countries like Germany and South Korea, which exceed 40%. Combined with the fact that many export-oriented industries have already moved overseas, Japan's domestic economy is dependent on domestic demand.

Normally, corporate globalization takes two forms: the expansion of domestic companies into other countries (outflow) and the expansion of foreign companies into one's own country (inflow). Outflow involves conducting production activities (creating GDP) in another country, primarily employing local citizens, paying taxes to the local country, and returning a portion of the profits to the home headquarters. Inflow is the opposite. In other countries, including Germany and South Korea, these inflows and outflows are either bidirectional or inflows are more frequent. In Japan, however, while outflows are at a high level commensurate with the size of the economy, globalization is progressing with extremely low inflows. This one-sided globalization biased toward outflow, which could be called "Japanese-style globalism," also seems to be a factor in the stagnation of added value (GDP) within Japan.

Economic activity is generally evaluated by economic entity: households, corporations, governments, financial institutions, and overseas entities. In particular, the distribution of "net financial assets (liabilities)" for each economic entity reveals the "shape of the economy" in each country.

In normal developed countries, corporations primarily increase their liabilities, while households increase their net financial assets. This trend is seen in the United States, Germany, and the United Kingdom, and can be considered the basic form seen in many countries. However, Japan has a characteristic shape where corporate debt has been decreasing since the mid-1990s, while government and overseas debt have increased, and household net financial assets have grown slowly.

Corporations are essentially entities that increase added value through business investment. Looking at this from a stock perspective, liabilities such as borrowings increase, and tangible fixed assets such as factories and machinery increase accordingly. This is observed in statistical data as "increasing corporate debt." However, since the 1990s, Japanese companies have seen no increase in borrowings or tangible fixed assets, while financial assets such as securities have continued to grow. As a result, corporate debt in Japan is the only one among developed countries that is decreasing. While the added value (GDP) and labor costs generated by companies remain flat, profits and net assets continue to increase.

In other words, Japanese companies have transformed from "entities that increase added value through business investment" to "entities that increase profits and assets through financial and overseas investment." This trend is more pronounced in large corporations, but the same applies to small and micro-enterprises. I believe that behind the stagnation of the Japanese economy lies a distorted situation where only companies are prospering while workers are becoming increasingly impoverished.

The main players in Japan's domestic economy are small and micro-enterprises, which employ about 70% of workers and earn 50% to 60% of the added value. Among them, manufacturing is the largest industry in Japan, but its economic scale (nominal GDP) is shrinking. In manufacturing, while selling prices are being lowered (negative price) and production is increasing (positive real), the industry is shrinking compared to its original economic scale (negative nominal).

The economic view of "economies of scale" seeks efficiency through mass production, as well as cheaper labor and larger markets. It could be said that Japan's domestic economy has been somewhat left behind by "economies of scale" due to Japanese-style globalism. However, I feel that this economic view, which is entirely focused on economies of scale, has permeated the domestic economy as well. In other words, it is the obsession that "it won't sell unless it's cheap."

Companies employ workers cheaply and generate profits while lowering selling prices. These low-paid workers become impoverished, and their consumption decreases. Under the current economic view, this is leading to a "self-fulfilling economic contraction" where falling selling prices and the impoverishment of the people are linked. From the perspective of "economies of scale," the Japanese domestic market, with its shrinking population and market, will not be an attractive market in the future. A shift in economic perspective is inevitably required. In light of the facts discussed here, it is essential to foster an economic view in which small and medium-sized enterprises, the main players in the economy, supply a variety of goods and services at fair prices in niche areas of high-mix, low-volume production and increase distribution to workers.

Isn't it small and medium-sized enterprises that have the power to make Japan prosperous again by practicing this economic view, which could be called the "economics of diversity," while balancing it with economies of scale? In the rapidly changing world of manufacturing, I hope that we, as "small factories" and small businesses, can take the lead in promoting this transformation.

OECD Database

National Tax Agency: Statistical Survey of Actual Statistics for Salary in the Private Sector

Ministry of Finance: Financial Statements Statistics of Corporations by Industry

Cabinet Office: System of National Accounts

Ministry of Economy, Trade and Industry: Basic Survey on Overseas Business Activities