Japan: The Chubu Rocks!

rocksThe greatest corporate factor that supports the steady Chubu economy in Japan is the pyramid-shaped industrial accumulation centered on Toyota Motor Corporation, which recorded consolidated ordinary profit of almost 1,500 billion yen in the March 2003 term, its third consecutive year of record profits for a Japanese company. Toyota has concentrated 12 of its 15 main domestic plants in Toyota City and neighboring regions in Aichiken. Moreover, there is a broad range of subcontractor groups in the area. Among these are nine major keiretsu parts manufacturers including Denso Corporation, Aisin Seiki Co. and Toyota Industries Corporation, in addition to the Kyohokai group formed by about 200 parts suppliers with strong business relations.

Keiretsu has been criticized by overseas business as a factor for non-tariff barriers. Recently, Japanese business operators have also seen it as a factor underpinning Japan’s rigid and costly industrial structures, and have tried to break down or restructure some keiretsu groups. In contrast, Toyota has strengthened its keiretsu relations, while rapidly expanding overseas production bases in North America, Europe and in China last year, and building global networks for parts procurement. The ties with keiretsu companies have been strengthened in terms of not only capital but also personnel exchange, and Toyota has attempted to introduce kaizen (improvement of workplace),”just-in-time” and other unique manufacturing methods commonly referred to as the “lean production system” to its affiliates and subcontractors.

The result of this strategy is that Toyota’s industrial system, which integrates a range of technologies for high-quality materials and metal parts with leading-edge electronic components, has become even more firmly entrenched in the Chubu region.

The first practical application in the world of the next-generation technologies with high added value, such as the hybrid driving system combining an engine and motor and the fuel cell automobiles, owe much to the strong ties among the group corporations.

The vital regional economy led by Toyota has also functioned as a buffer to attenuate the anxiety factors that could hinder economic regeneration, such as unemployment and wage cuts. The Ministry of Health, Labor and Welfare announced that the national unemployment ratio for 2002 was 5.4%, the worst figure yet, but the figure for the four prefectures of the Tokai region (Aichi, Shizuoka, Gifu and Mie) was only 4.1%. Moreover, the effective job application-to-opening ratio in the area was 0.7, significantly higher than the 0.54 figure shown for the whole country. While many companies announced during the spring labor talks that they would revise regular wage increases and take other measures that could effectively result in a wage cut, Toyota fully accommodated the labor union’s requests for raises and bonuses.

Conservative?

The strong corporate results and the stable employment and wage situation in the area are reflected in personal spending, too. The Nagoya Branch of the Bank of Japan has revealed that sales by department stores in Nagoya City, as well as the sales by supermarkets and the number of new cars sold and other major spending statistics for the three prefectures in Chubu, showed better results than the national averages. The Chubu region is characterized by a high ratio of owned houses, and the ratio of acquisition of a house by inheritance or as a gift is also higher than the national average. As a result, total household debt related to the land and house is low, and this has prevented dramatic declines in personal spending caused by fluctuations in the economy or disposable income.

The prudent nature of the people in the area is reflected not only in household spending but also in business management styles, which are characterized by high equity ratio without debt. The Chubu Bureau of Economy, Trade and Industry has revealed that the average equity ratio in the Chubu region is 44.7%, significantly higher than the national average of 34.5% (both figures are for fiscal 1999). A questionnaire sent to business owners showed that over 80% named “the technologies and know-how cultivated over many years” as their core competence, while slightly below 20% cited “leading-edge technologies and unique ideas not found in other companies.” These results indicate that steadiness is valued among business owners in the area.

It is true that established industries in the Chubu economy region mostly consist of automobiles, airplanes, cast and forged steel products, metal processing, machine tools, ceramics and other manufacturing industries that involve technologies for machinery and materials. But the conservative corporate culture and industry structure has not stopped business from attempting high-tech innovation or change in direction. On the microeconomic level, the behavior of business shows a decidedly non-conservative nature.

For example, Brother Industries will set a new record consolidated ordinary profit for the first time in 17 terms, in the March 2003 term. Brother is a renowned manufacturer of sewing machines with a long history, but sewing machines comprise only 20 percent of its sales today. The most profitable area has been information equipment, which brings in 60 percent of revenue. In particular, the digital compound equipment that combines the facsimile and printing functions boast the leading share as equipment for small offices/home offices (SOHO) in the United States. Even though it took 10 years for the company to alter its business scope, the machinery technologies cultivated while manufacturing sewing machines had laid the foundation for the change. The mechanisms for paper forwarding and cutting have achieved a level of capacity and a price that no other company can match. Unlike personal computers and other machinery that are made just by assembling general-purpose parts, Brother’s equipment makes use of key element technologies that Asian competitors cannot replicate, and therefore the company has only a very few competitors.

NGK Insulators, which has achieved a high global market share for the insulators used in electric power supply equipment, has found applications for its pottery technologies in the ceramics used to purify automobile emissions and in electronic components, and these applications account for almost 70 percent of the company’s sales. NGK has expanded its network of buyers to include Seiko Epson Corporation, Applied Materials, Inc. (U.S.A.) and others. The company separated from earthenware manufacturer Noritake Co. and became independent. Chairman and CEO Shibata Masaharu has told Nippon keizai shimbun newspaper in an interview that, “It is our motto to diversify our businesses. Even at the most difficult times, 6% of our sales have always been allocated to research and development.”

In all of the above cases, the companies refrained from launching a business not directly related to the mainstay of their businesses, or from real estate investments that would have left serious aftermath following the collapse of the economic bubble. Instead, they were devoted to steady businesses, making use of their high equity ratios and manufacturing technologies. These business strategies have surely enabled the accumulation of innovative technologies and know-how over many years.

Reasons to Be Cautious

Still, the energetic Nagoya economy is not totally free of concerns. The Chubu Bureau of Economy, Trade and Industry has published some interesting estimates. Assuming that the entire automobile industry in the Chubu region was transferred to other domestic or overseas locations, production of the region would fall about 14 trillion yen, while about 260,000 people would be out of a job in the automobile industry alone, and the number of unemployed would reach 590,000 if related industries were included. An industrial structure that depends on the automobile industry for 30% of the regional economy has brought advantages through concentration when attempts were made to improve results and expand market share, but the structure might be vulnerable to a certain degree when medium- to long-range changes in the industrial environment are considered, such as the decline in the domestic market, greater emphasis on overseas production and the tendency among young people to avoid working in manufacturing industries.

And while the region heavily depends on manufacturing industries, initiatives for biotechnology and other latest technological areas have not been active compared to other parts of the country. Although corporate bankruptcies and closures are low, the ratio of venture businesses has been lower than the national average.

There are also special factors to consider, namely the opening of Central Japan International Airport in 2005 and hosting of the 2005 World Exposition, Aichi, Japan, both of which are national projects. UFJ Institute has estimated that the two projects will raise the GDP of Aichi-ken by about 1,600 billion yen ($13.1 billion) during the six years from 2000 to 2005. The economic effects of construction-related production and employment opportunities have indeed brought good effects to the regional economy. However, there may be a drawback after the two projects are completed, as that will mean that the two mainstays of the regional economy have disappeared.

As discussed above, the strength of the Chubu economy derives from a positive cycle that combines various factors: industry structural features such as the existence of the automobile industry as a basic industry, and Toyota as a leading company that has devised unique business models, as well as an accumulation of related industries; and a corporate culture that values technological innovation founded on steady business practices. These companies retained the long-term employment, keiretsu and other traditional Japanese systems in their basic forms, thereby avoiding the dispersion of human resources, know-how and other business resources, at the same time as improving their competencies. These points surely warrant careful consideration and appraisal. But in the future, the economic situation of the region is likely to be governed by whether the companies in the region attain the strength to generate new industries on the foundations they have already built, in addition to the strengths they already possess.


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