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

In this article, I will consider what the future of Japanese manufacturing should look like, comparing my actual experiences as a small business owner running a factory in Tokyo with economic statistical data (facts).

The Japanese economy has been in long-term stagnation since the turning points of the bubble burst in 1990 and the financial crisis in 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 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, I moved to our current company. I have experienced these changes as someone consistently belonging to the manufacturing industry.

Our company, which undertakes the production of high-mix, low-volume parts for various industrial fields such as medical/physical and chemical, semiconductors, and aviation, primarily serves domestic and international manufacturers and is a typical small factory. The high-mix, low-volume manufacturing process involves many analog 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 extremely simple business model directly linked to wages.

The "added value created in one hour" is referred to as "hourly labor productivity." As of 2019, the most recent labor productivity values were 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 business should be set even higher.

The biggest challenge in the Japanese economy is likely that the "value of human work" is extremely low, and 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 said to be "high" in this industry. In fact, many other domestic companies in the same industry 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 background is that every business operator is immersed in the value system of "cheap at any cost." It is natural for the manufacturing industry to pursue "production efficiency" through automation via capital investment to lower unit costs. "Automated means" are mainly compatible with mass production, and "economies of scale" allow production costs to be reduced to the extreme. Many businesses relying on "economies of scale" seek even cheaper labor through a "race to the bottom," and in Japan, the overseas expansion of the manufacturing industry has been particularly promoted.

For this reason, many of the jobs remaining in Japan should be businesses where it is difficult to pursue economies of scale, yet they are required to have "emerging market prices." In the Japanese manufacturing industry, I feel that the value of "work that only humans can do" has been considerably lowered due to this economic view based on "economies of scale."

In all major economic indicators such as average worker income (approx. 4.4 million yen as of 2019), GDP per capita (approx. 4.3 million yen as of 2018), and labor productivity (approx. 4,900 yen), Japan is the only developed country that has continued to stagnate since the mid-1990s.

Among OECD (Organisation for Economic Co-operation and Development) member countries, these indicators boasted top-class levels in the 1990s. However, since then, along with prolonged stagnation, the position has changed, and currently, all indicators are around 20th place. The decline in worker income is particularly serious. In particular, the average income of male workers decreased after peaking at 5.8 million yen in 1997 and was around 5.4 million yen in 2019.

While other countries are growing steadily, Japan's economic growth alone has stopped for a long period, and it is the only country where the income of workers, who are also consumers, is decreasing.

Japan has also seen prolonged stagnation in prices (GDP deflator), which has hardly changed at just under 1.1 times the 1980 level. On the other hand, prices in other countries have continued to rise; compared to 1980 levels, they have risen about 2 times in low-growth Germany and about 2.5 to 3 times in the United States, France, and Canada.

Since price is an indicator that aggregates selling prices, from a corporate perspective, it can be interpreted as a situation where they have been unable to raise selling prices for a long time. A characteristic of Japan is that the GDP deflator, which includes inter-company transactions, is lower than the Consumer Price Index.

On the other hand, looking at international price levels, the yen trended sharply higher after 1986, and by 1995, the price level in Japan had risen to nearly twice that of the United States. Since the strong yen significantly damages export industries, the high price level likely 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 there are advantages even in exporting from domestic production.

However, the overseas activities of Japanese companies continue to grow steadily. While the total sales of domestic companies stagnated at around 1,500 trillion yen as of 2018 and exports were around 100 trillion yen, the sales of overseas subsidiaries of Japanese companies reached a scale of 300 trillion yen. Meanwhile, the export dependency (export-to-GDP ratio) of Japan's domestic economy is around 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.

Generally, the globalization of companies takes two forms: the expansion of domestic companies into other countries (outflow) and the expansion of foreign companies into the home country (inflow). Outflow involves conducting production activities (creating GDP) in other countries, mainly employing local citizens, paying taxes to the local country, and repatriating part of the profits to the home headquarters. Inflow is the opposite. In other countries, including Germany and South Korea, this inflow and outflow are either bidirectional or there is more inflow. Japan, on the other hand, has a high level of outflow proportional to its economic size, but globalization is progressing with extremely little inflow. This one-sided globalization, 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, government, financial institutions, and overseas. In particular, the distribution of "net financial assets (liabilities)" by economic entity reveals the "shape of the economy" of each country.

In normal developed countries, corporations mainly increase liabilities, while households conversely increase net financial assets. This trend is seen in the United States, Germany, and the United Kingdom, and can be said to be 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.

Originally, corporations are 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, neither borrowings nor tangible fixed assets have increased for Japanese companies, while financial assets such as securities have continued to increase. As a result, corporate debt in Japan is the only one among developed countries that is decreasing. While the added value (GDP) and personnel costs generated by companies have remained flat, profits and net assets continue to increase.

In other words, Japanese companies are transforming 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 prominent in large corporations, but the same applies to small and medium-sized enterprises. I believe that a distorted situation where only companies are prospering while workers are becoming impoverished is hidden behind the stagnation of the Japanese economy.

The main players in Japan's domestic economy are small and medium-sized enterprises, which employ about 70% of workers and earn 50% to 60% of added value. Among them, manufacturing is the largest industry in Japan, but its economic scale (nominal GDP) is shrinking. In manufacturing, although they are lowering selling prices (negative price) and producing more (positive real), the situation is shrinking compared to the original economic scale (negative nominal).

The economic view of "economies of scale" seeks cheaper labor and larger markets along with efficiency through mass production. It might be fair to say 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 focused solely 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 are in a situation where they employ workers cheaply and make profits while lowering selling prices. Those workers who have become cheaper become impoverished, and their consumption also decreases. In the current economic view, this is leading to a "self-fulfilling economic contraction" where the fall in selling prices and the impoverishment of the people are linked. From the perspective of "economies of scale," Japan, where the population is declining and the market is shrinking, will not be an attractive market in the future. Inevitably, a shift in economic perspective is required. In light of the actual situation described here, it is vital 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.

I believe it is small and medium-sized enterprises that have the power to practice this economic view, which could be called an "economy of diversity," while balancing it with economies of scale to make Japan wealthy again. In the world of manufacturing, which is undergoing significant transformation, I hope that we, the "small factories" that are small and medium-sized enterprises, can take the lead in promoting this shift.

OECD Database

National Tax Agency: Statistical Survey of Actual Status of 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