Where Mold Replaces Gold

It is known to many as “Panel Bay,” that Japanese coastal region near Osaka where flat panel manufacturers grew fat building a new generation of televisions to replace the fat boxy sets of old. The Fukushima meltdown may have accelerated the process, challenging the notion of where electrical power to support Japanese industry will now come from, but competition from cheap technology manufacturers in China, Taiwan and Korea have pretty taken most of the going-forward business in routine-assembly technology manufacturing. Even on this side of the Pacific, we are relying increasingly on plants in Mexico for much of this kind of labor. Japan has long prided itself on excellence in “making things” – monzukuri – but routine quality manufacturing has slowly moved elsewhere, eroding the entire Japanese economy. That the population is both aging and contracting has only made the problem worse, since social and retirement benefits for the elderly, are generally supported by a younger vibrant workforce, a factor that is evaporating rapidly in Japan. Panel Bay is becoming a footnote in history; time is simply passing it by.

“The demise of Panel Bay is the latest sign of what many Japanese fear is the hollowing out of their heavily industrialized economy, which has been in a gradual but relentless decline since the bursting of its twin real estate and stock bubbles in the early 1990s. The decline is largely a result of growing competition from Asian rivals, an aging work force and merciless gains by the yen. ‘We already had a sense of crisis about the loss of manufacturing and manufacturing jobs,’ said Tetsuya Tanaka, a director of manufacturing promotion at the Ministry of Economy, Trade and Industry, or METI. ‘Now we are afraid the concerns about electricity could give manufacturers the excuse they need to move offshore.’

“The increased price pressures have wounded many of Japan’s corporate giants. [In early April], Sony — the Apple-like innovator of the 1980s — forecast a $6.4 billion loss amid reports it may cut 10,000 workers, a drastic step in a nation where layoffs are still seen as socially unacceptable. Even Japanese carmakers like Toyota, which last year handed back the title of world’s largest auto company to General Motors after the supply disruptions from the tsunami, fear that they are becoming vulnerable to game-changing competition in electric cars or just lower-cost producers in South Korea and elsewhere…

“It is a similarly bleak story for many of the small factories that were the loyal foot soldiers of Japan’s postwar export machine. According to METI, the number of manufacturing companies in Japan dropped by a third, to 540,000, in the 10 years up to 2006. The share of manufacturing in Japan’s overall economy has also shrunk to 18 percent in 2009 from about 35 percent in the 1970s, according to the Cabinet Office… By comparison, while the United States is still the world’s largest manufacturing country, such industry accounts for just 9 percent of its overall economy.” New York Times, April 15^th. In Late February, Elpida Memory, Inc. – a major supplier of DRAM computer/mobile chips (the only such maker in Japan) – filed the largest manufacturing bankruptcy in Japanese history.

So Japan is facing a similar crisis that impaled many American companies in the last decade or two: if “stuff” can be made less expensively elsewhere, where was American job growth to come from? The United States shifted its focus to information, software, content and financial services, leaving traditional military technology and agriculture as continuing industries that were not impacted by the job shift. Germany reinvented itself by shifting into the highest end of making “stuff,” creating jobs at the top end of manufacturing, where precision, complexity and reliability were essential. But can Japan change gears and implement the American or the German model? In a service economy, how does the esoteric, unwieldy Japanese language (spoken by a very small percentage of people on earth) impact that reality? And what does Japan do with that large body of trained engineers, who are not so much in demand anymore?

With massive layoffs becoming a new fact of life in Japan, engineers not old enough to receive their pensions have to scramble to survive until retirement age, a reality that has proved to be a boon to technology-hungry China: “Their technical skills helped Japan’s corporate giants sweep all before them in the 1980s, and now thousands of aging Japanese engineers are finding a new lease on life in a booming China…. Japan suffered its first technology brain drain about 20 years ago, when South Korean companies like Samsung Electronics and LG Electronics poached scores of front line semiconductor and white goods engineers from big Japanese electronics firms… Since then, South Korean electronics manufacturers have bounded into the global top ranks, helped along by that transfer of technical knowledge… Japanese technology giants, meanwhile, have floundered…

“‘People aren’t making products in Japan anymore,’ said [Masayuki Aida, a 59-year-old who made molds for a Tokyo-based company for 30 years], who [now] makes molds for products like toys, earphones and coffee machines [in Dongguan, a manufacturing hub in the Pearl River Delta in southern China]. ‘I wanted to pass on to younger generations all the knowledge and technology about molds I had obtained.’… For Japan, marred by two decades of economic stagnation, the little-reported exodus of engineers means rival Chinese firms are getting an injection of the technology and skills behind ‘made in Japan’ products… Japanese government data show that 2,800 Japanese expatriates live in Dongguan, a city of more than eight million.” New York Times, April 17^th.

But Japan must change, maybe at the expensive of a continuation of bad economic news and a downward-pointing standard of living – perhaps just until the new Japan emerges. Policy planners and educators are struggling with the next direction in job growth for this tiny island nation. Its people are highly educated and have one of the strongest work ethics on earth. With large budget surpluses and currency reserves generated from decades of productivity, Japan has a reasonable cushion to moderate the blow. And its tradition of manufacturing quality would seem to be a giant arrow pointing in an obvious new direction, a strong sign that this part of the Japanese economy should not be abandoned, just upgraded. Japan needs more start-ups and a greater entrepreneurial spirit to enter a new era.

Still, the developing world may soon step into these higher reaches of manufacturing complexity, but perhaps by the time they reach that pinnacle, they will no longer have the labor cost advantage they enjoy today. Indeed, in just a few years, Chinese labor costs – corrected for productivity – may not be much different from comparable costs in either Japan or the West. Change is the only constant! We all must accept its ravages and its opportunities.

I’m Peter Dekom, keeping it real and looking at how others are grappling with change.