Japan’s manufacturing industry has survived and increased exports by concentrating on its strong sectors
Since the 1990s, the industry has faced high costs due to the appreciation of the yen and intense competition from low-cost manufacturing overseas. Japanese companies that have managed to survive these challenges have strengthened their competitiveness in the face of adversity. Recently, the environment has changed significantly, and the weak yen has become a tailwind. Japan’s trade deficit is often highlighted, but this is due to increased import values resulting from rising energy costs and other factors. In fact, Japan’s manufacturing industry has been doing well, with exports at an all-time high.
For example, the steel industry is said to have peaked around 1980, but its production volume has remained flat. Approximately 40 to 50% of produced steel is exported, which allows the industry to stay highly competitive in the global market. With latecomer competitors like South Korea, China, and India closing in, Japan shifted away from general-purpose construction steel and instead specialized in high-value-added products unique to the Japanese steel industry, such as industrial steel with distinctive structural characteristics. In other words, by stepping away from low-price competition and focusing on sectors that make the most of its technical strengths, Japan’ steel industry has managed to survive and become a global leader in the field.
To discuss the competitiveness of Japan’s manufacturing industry, we need to focus on more narrowly defined and specialized fields, rather than broad sectors like the steel industry. Although the textile and shipbuilding industries as a whole have lost their competitiveness to other countries, some companies remain global leaders in specialized fields.
Some industries are operating behind the scenes, demonstrating strengths in manufacturing equipment and materials. In the LCD industry, Japan held a 100% share of the industrial LCD panel market around 1990, but by 2002, South Korea and Taiwan had overtaken this share. However, some Japanese companies still hold top positions worldwide. Rather than producing LCD panels themselves, these companies manufacture the equipment used to make the panels, the liquid crystal materials and the specialized film applied to screens to widen the viewing angle. In other words, despite their strengths in the fields of manufacturing equipment and materials, Japanese companies have fallen behind in the panel manufacturing business that relies on their products.
One contributing factor is that the high-quality equipment and materials were also sold to companies in Korea and Taiwan. If Japanese companies had purchased them, they could have built a solid foundation in the panel manufacturing industry at an earlier stage. However, the manufacturing equipment was very expensive. Korea and Taiwan provided preferential tax treatment and depreciation benefits for its purchase. According to my colleague’s estimate, even with the same investment of 300 billion yen, there is a real cost difference of about 100 billion yen between Japan and the other two countries. The differences in national systems are a significant factor that have led Japan’s industry to be overtaken.
Japan used to lead the way in solar panels, but now China leads the world. Although lithium-ion batteries were originally developed in Japan, China holds the largest share in the electric vehicle market. These industries require huge capital investment. China provides substantial preferential treatment to support industrial development, which goes far beyond the level of subsidies available in Japan. It is often said that “we win in technology and lose in business,” but it could also be argued that our losses extend beyond management to include national policies and systems as well.
Creating a resilient supply chain that survives disasters or conflicts
The globalization of production has advanced in many industries. Japanese automakers, with factories around the world, also source many of their materials and parts from Japan. On the surface, it appears that 90% are locally sourced and 10% are imported from Japan. However, in many cases, local companies purchase parts from Japan, add values and then supply them. If you look across the stages of primary, secondary, and tertiary suppliers, Japanese companies are involved at some point, bringing the actual rate of local procurement to about 70%. Actually, this fact highlights the strength of Japan’s industries exporting those parts and materials.
As global supply chains grow more complex, disruptions from natural disasters, epidemics, political conflicts, and other events have become major issues, often halting supplies and significantly impacting the production, supply, and sale of products.
It is still fresh in our memory that gas water heaters were unavailable for nearly a year owing to COVID-19. Although the heaters were assembled in Japan, lockdowns in Vietnam shut down wiring factories, leading to a shortage of necessary parts in Japan. A few months later, the factories in Vietnam resumed operations, but then wiring connecters produced in Japan could not be shipped to Vietnam, halting their work once again.
As this example shows, complex global supply chains, spanning various industries across many countries, cannot maintain production if a single sector stops operating. When a disaster or conflict occurs somewhere, it is not immediately clear which sectors will be affected. How will Japanese companies reevaluate their production systems, developed within the free trade framework after the end of the Cold War, the fall of the Berlin Wall, and China’s reform and opening-up? A resilient supply chain ― that is, a supply chain that can withstand various shocks ― needs to be built.
Globalization should be viewed not only for rationalization but also from a risk management perspective. However, having multiple supply bases is costly. Even if risks are mitigated, it becomes meaningless if companies lose their competitiveness, leading to bankruptcy. A key challenge for every manufacturing industry in the future is managing risk without significantly increasing costs.
Establishing a circular economy for the manufacturing industry is a major international challenge
A circular economy needs to be established, also from the perspective of SDGs, including global environmental issues. Currently, as a project of the Ministry of Economy, Trade and Industry, I have been exploring the ideal circular model in the apparel industry. However, in order to realize a circular system, there are many issues to discuss, such as the collecting, sorting and recycling of used clothes, environmentally-friendly design, sales methods, and fostering consumer awareness.
In the apparel industry, a huge amount of unsold products are still discarded and burned. Products that once belonged to customers can be sold as second-hand clothing, but only a small portion of them. There are also projects to send used clothes to developing countries, but I am not sure how effectively they are utilized.
Plastic bottles are relatively easy to recycle, but clothes are difficult to recycle back into raw materials. While clothing made from 100% polyester can be recycled easily, garments mixed with cotton or other materials need to be separated in some way. The technology to separate and recycle materials using chemicals is gradually being established. Still, for this technology to be widely adopted, both the volume of collected clothing and the processing line capacity must be expanded.
Additionally, it is important to utilize recycled threads. For example, cotton made from recycled threads does not turn out pure white and it is also more expensive owing to the recycling costs. The recycling system can function only in a society where many people want to buy products made from recycled materials for the sake of the global environment or find the look fashionable.
Furthermore, today’s growing complexity of global supply chains makes it challenging to create a circular business model. For example, in the apparel industry, 97% of clothing products sold in Japan are now produced in China and other countries. Unless manufacturing processes can be completed domestically without heavy reliance on other countries, creating a circular economy that recycles resources is challenging.
In the future, all industries will be required to build a circular economy. To raise broader awareness, I believe that it is important to consider this issue in the apparel industry, as it is a part of everyday life for many people. To establish a more sustainable system, the manufacturing industry, including sectors like steel and apparel mentioned earlier, must now consider an ideal model for global supply chains, including looking into restructuring them. What steps should be taken to achieve substantial results in the future? It is a question that not only the Japanese manufacturing industry, but the entire nation has to answer.
* The information contained herein is current as of July 2024.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
Information noted in the articles and videos, such as positions and affiliations, are current at the time of production.