Economic Development of Japan

1. Economic Development of Japan No.15 FutureofMonozukuri

2. PP.65, 179-181 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. Akio Morita (Sony’s co-founder)1921-1999 Sakichi Toyota1867-1930 Konosuke Matsushita1894-1989 Soichiro Honda1906-1991

3. Uniqueness of Japanese FDI Strengths: • 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

4. Changing Situation In 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.

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

6. 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.

7. Employees at Manuf. SMEs Number of Manufacturing SMEs X 10,000 X 10,000 Production Index of Manuf. SMEs (1990=100) Compared with around 1990 (peak time) • Establishments 44% • Employees 36% • Production 23% (by 2012-13) Sources: SME Agency estimates, SME Research Organization.

8. 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.

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 タイ (Registration) Number of projects Million baht Number of new projects New FDI Expansion Total Source: Thai Board of Investment.

12. 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).

13. Council for Supporting SME Overseas Business Expansion (National & 9 Regional levels, est. 2010) SME assoc’s: 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 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. 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

14. 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.

15. My NewVietnamProject 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)