Economy, No.10  Feb. 5, 2012


Photo : Fujimoto Takahiro

Fujimoto Takahiro

(i) Japanese firms have become extremely pessimistic about the outlook for their businesses, reflecting concerns over the effects of the Great East Japan Earthquake and the unprecedented strong yen. Managers often make the wrong decisions when they are in excessively bearish mood. If they start developing dual supply chain systems, which will result in higher costs, or if they make hasty decisions to shut down domestic plants only in the pursuit of short-term gains, companies may lose the capability of long-term balanced growth. When facing emergency situations, it is necessary to minimize additional costs, transfer design information to other plants, and develop structures in which the status of suppliers can be monitored efficiently.

(ii) Solar panels that are expected to substitute for nuclear power generation are modular products. For this reason, unless strict quality regulations are imposed, solar panels will not become the kind of integral products in which Japan excels at. To link environmental and energy policies and other industrial policies, government organizations that focus on specific policies across ministries and agencies need to be established.

(iii) Japan’s strength lies in manufacturing genba (manufacturing sites) that are supported by the teamwork of selected multi-skilled workers. The headquarters needs to share goals with its genba, and aim at developing management that is based on simultaneously strengthening both domestic and overseas operations.

Japan’s strong manufacturing genba can weather even an unprecedented strong yen

Japan’s manufacturing genba have approached production with the aim of protecting employment and competing successfully. The exchange rate of the yen against the U.S. dollar has risen from 360 yen to the current high 70s range. Despite this, a number of Japan’s manufacturing genba still continue to produce and export products. They have shaken off the appreciation of the yen, high factor inputs, and other handicaps by improving productivity. Excluding these adverse factors, Japan’s manufacturing genba for tradable products appear to have reached a position of their greatest strength ever from the perspective of the absolute superiority. When I recently visited these manufacturing genba, although performance varied depending on the sector and region, I noticed that certain manufacturers even posted record earnings last year. Every time I have visited these genba over the past thirty years, local manufacturing representatives would usually tell me that the prevailing exchange rates would be unfavorable for their business in the future. Yet each time they faced a challenge, they builded up new capabilities to deal with a hike in the yen, and many of them have survived. Japan’s strong manufacturing genba are also globally recognized.

Of the approximately thirty small and midsize manufacturers in Hamamatsu, Shizuoka Prefecture that I surveyed approximately thirty years ago, all are still operating now, with just one exception that went bankrupt. A manufacturer of motorbike parts, whose sales halved in 2009 due to Lehman Shock, is now expecting to return to profitability this year. This performance reflects the steady initiatives it has adopted. First, this manufacturer diversified its operations and made every effort to win orders for automobile parts. Second, the location for its overseas operations was carefully selected, and the manufacturing subsidiary of motorbike parts it established in Indonesia has begun to generate profits. Third, it took comprehensive steps to restructure the production capability of domestic plants. With these three initiatives, it is confident of moving into the black in 2011.

There is also a plant in Japan that runs a production line for the surface mounting of substrates, and it has caught up with plants in China in terms of cost competitiveness. In China, one person generally took care of one machine in the past, but now one person handles two or three machines, mainly as a result of technical assistance from plants in Japan. However, plants in Japan have improved their productivity by a factor of five over the last five years, and one person now deals with two production lines. Thanks to these improvements, the plants in Japan have achieved the same unit costs as those in China. As this example illustrates, although overseas plants have achieved reasonable results in training multi-skilled workers, Japan’s sophisticated facilities manufacturing tradable products often maintain superior productivity that is, for example, twice or three times more efficient than that of their equivalents in China. Until a few years ago, there was a school of thought that no matter how much Japan’s plants improved their productivity, they were not able to compete with their counterparts in China, which were paid wages only in one tenth or one twentieth those of Japan. Others argued that production costs could be only determined by wages. However, it has become higher wage in China. As a result, some managers who have an extensive knowledge of manufacturing facilities have begun to comment that China has now become a target within reach in terms of unit costs, if Japanese plants can make further efforts to bolster their productivity.

Excessively Bearish managers make the wrong decisions

The Great East Japan Earthquake and the recent unprecedented strength of the yen have had a significant impact on Japan’s managers. Consequently, I am concerned about the possibility that managers have become so negative about the future that they will make self-destructive decisions. For example, to prepare for future devastating disasters, some managers may decide to set up additional production lines in other locations, despite the fact that production volumes have not increased. Other managers may make the decision to stop domestic operations and go too far shifting operations overseas. Most of these decisions contradict the basic concept of global long-term, comprehensive optimization, and are wrong. The point which needs to be emphasized is that the Great East Japan Earthquake was a colossal disaster across a large area and was unprecedented for a country with high production costs (a developed country) in the context of global competition. Facing an extremely strong yen, manufacturers in Japan have been competing effectively with their global counterparts. In this environment, if manufacturers construct additional production lines that will further increase costs in preparation for unpredictable disasters, the utilization rates of their plants will fall, and their performance may deteriorate even before another disaster occurs. Managers need to squarely face these challenging times with a firm belief in the logic of competition, which will overcome the negative psychology stemming from the disaster.

The same applies to overseas development. Some observers have argued that manufacturing in Japan has now ended. However, exports as a share of gross domestic product (GDP) in 2009, the year following the Lehman Shock, stood at 13.5%. This is the same level as that in 1985, the year of the Plaza Accord, when the exchange rate of 240yen per U.S. dollar and trade disputes were being hotly debated. This fact confirms that Japan is still exporting goods worth tens of trillion of yen. Although figures for 2011 are distorted, because imports related to the disaster increased, in 2010 Japan recorded a trade surplus of several trillion yen. It sounds Japan’s manufacturing remains continue the initiatives to develop and bolster the capabilities of its manufacturing genba. Consequently, the management and headquarters of Japanese manufacturers need to fully appreciate the strength and the potential of their domestic manufacturing genba. It must be noted that if they make decisions based on prevailing trends, psychology negatively affected by the strong yen, aspirations only for short-term gains, or the theory of the de-industrialization that has been superficially discussed in certain media outlets, then their decisions are likely to be wrong from a long-term perspective.

Making design information portable

Japan will inevitably experience a Great Kanto Earthquake or a Great Tokai Earthquake sooner or later. It is true that companies need to prepare for these disasters. However, they need to do so without compromising on their competitiveness. This is a very difficult task, but drawing lessons from the steps taken to deal with the Great East Japan Earthquake, Japanese companies now have the opportunity to develop world-class crisis-response capabilities. This will require rebuilding supply chains by adopting strategies on a priority basis that are most effective in dealing with global competition. The key is that companies need to evolve these new supply networks into themselves that can withstand major natural disasters, without compromising their competitiveness. The priority is not responding to disasters.

There are at least two hints for the supply chains in dealing with large natural disasters. One is the portability of design information and the other is the understanding (visibility) of the supply chain as a whole. After the Great East Japan Earthquake, it took about three months for many companies to restore their production lines (although the length of the restoration period was significantly shortened from what was originally expected). This was attributable to the fact that part of the design information, a key for manufacturing, was implanted in certain lines and could not be removed. Another factor was that, because companies could not grasp the overall production information of the supply networks, it took some time for companies to accurately understand the status of the damage and to respond it accordingly. Going forward, it will be necessary for companies–and particularly those that have a high concentration of specific suppliers or have parts or processes with no substitutes–to take action to improve the portability of their design information and the visibility of their supply chains.

When the Kashima Plant of Kaneka was hit by the tsunami, at the behest of the plant’s general manager, it adopted a basic policy of restoring production lines, and actually managed to restart production by the end of March with support and cooperation that were generally provided smoothly from other plants and headquarters. However, because restarting the supply of certain medical products was a matter of urgency, the production of these products was promptly transferred to an alternative plant in Takasago, Hyogo Prefecture, which effectively stepped in and maintained supply. This is a good example of the virtual dual method that I will refer to below. Developing a backup supply system for the event of an emergency is important. In fact, there was already a good example of this kind of emergency alternative production. Alternative production operated effectively when the brake plant of Aisin, a Toyota Group company, had to be shut down following a fire in 1997.

With respect to the visibility of the overall supply chain, for example, an auto manufacturer tries to understand when the production situation of secondary or tertiary suppliers will be in violation of a supply agreement. However, it is still possible to include a clause in the agreement that, in the event of an emergency, the auto manufacturer can promptly obtain production information (the production BOM).

Meanwhile, for alternative production, it would be unproductive if competitiveness were compromised by constructing unrealistic additional production lines or increasing inventory. The existing production lines should be used as the first choice for alternative production. Companies meanwhile need to designate in advance production lines that can be used for alternative production, and be ready to smoothly switch to alternative production in an emergency by transferring design information. (This preparation includes the acquisition of production approval and the implementation of regular drills involving the transfer of design information.) It is also necessary for the companies to inform customers that they have made this preparation. Even facing unreasonable demands from overseas customers and other parties who are panicking, and even while suffering from disaster psychology, managers should not make any unwise decisions. Such decisions include constructing additional production lines that will only lower utilization rates, transferring production lines overseas for reasons that are not related to competitiveness, and increasing buffer inventory even by slowing inventory flows. The priority must be placed on competitiveness.

In dealing with the strong yen, managers must also focus constantly on global long-term comprehensive optimization, taking into account the long-term situation of wages, costs, and the productivity of their manufacturing bases in Japan and overseas, trends in foreign exchange rates, and other factors. There are managers who are pessimistic because of the Lehman Shock, the Great East Japan Earthquake, and the extremely strong yen. If these managers start shutting down domestic plants that should really be maintained from a long-term perspective, based on the rootless theory of the unavoidable hollowing out of the industry (I would say the definition of “hollowing out” itself is unclear) or the suspect theory of the end of manufacturing, they may eventually face an even worse scenario.

Actively establishing overseas plants in emerging economies is not, in fact, the same as closing domestic plants. If a company rapidly increases the capacity of overseas plants, strengthening the quality of its domestic plants to support overseas production will be essential from the perspective of comprehensive optimization. In contrast, if a company hastily closes strong domestic manufacturing genba that have continually improved their productivity to counter the rising yen, merely on the grounds of pursuing short-term gains, it will ultimately face difficulties competing in emerging economies through operations of overseas plants alone. This is the harmful effect of hollowing out, and it becomes a reality not because of the strong yen or a natural disaster, but because of the pessimism of Japanese business managers.

When a head office is pessimistic, the company or, for example, meetings of officers often find it difficult to oppose ideas designed to generate short-term gains. If the managers of a company are psychologically defeated by the Great East Japan Earthquake and the strong yen, and if the company subsequently ends up losing its highly productive mother plants and development plants in Japan, the risk that its facilities in emerging countries end up losing in local competition to boost productivity in response to rising wages will increase. Moreover, if the yen does collapse due to Japan’s fiscal deficit problems, a company that has irrevocably lost its mother factory in Japan will not be able to reorganize domestic plants as export bases. It will not be able to pursue an export drive then, and will face total crisis. In addition, if Japan is to see a significant loss of productive domestic manufacturing genba as described above, it will not be able to offset the effects of the collapse of the yen by boosting exports, and will face the same problems that Greece is experiencing now. If Japan can maintain strong manufacturing genba that can be restored when necessary, it will be able to recover through buoyant exports in the same manner that South Korea did following the Asian Financial Crisis. The next several years are critical for this long-term fate.

In summary, in the medium-to long-term perspective, it is not certain whether the current strong yen will continue in the future. In such an uncertain business environment, concentrating on either domestic manufacturing or on overseas manufacturing is not productive global management. Rather, the balance between domestic and overseas operations is important. Managers must make decisions in light of long-term comprehensive optimization from a global perspective.

Moreover, there still is scope for improvement at a number of manufacturing genba in Japan. In this era of globalization, managers must understand not only indicators of operating results for the immediate term, but also the competitiveness and organizational capabilities of manufacturing genba in a more comprehensive manner. For example, under Toyota’s production system, one of the most important indicators is the ratio of value-added time (copying the time of design information) in actual working hours. This is, in other words, the net working hour ratio. Generally speaking, managers accurately understand the level of the net working hour ratio in the production of mainstay products in their main plants. Without knowing this ratio, decision on a location for global production genba will be all but impossible, because this ratio gives managers an insight into the extent to which plants in Japan and overseas can improve their productivity in the future. The ratio of most domestic plants is 10% or lower (despite the fact that the productivity of the domestic plants is significantly higher than that in emerging economies). Therefore, if this net working hour ratio can be improved to between 20% and 50% through improvement initiatives, the physical labor productivity of the plants in question will improve, in theory, by two to five times that much, assuming other conditions remain unchanged. In fact, there are many examples of significant improvements in productivity being achieved even after the global financial crisis. If the management team of corporate operations fully understands this fact, their thinking on global location strategies may also change.

As I have explained above, even if a company has a manufacturing genba with production costs that are not competitive in the short-term with those of facilities in emerging economies, if that genba has superior productivity and growth rates in the long-term, managers should elect to maintain the quality manufacturing genba as the core for developing production capabilities and as an operating mother plant that actually participates in competition. To maintain both the strength to counter natural disasters and global competitiveness, companies must make rational decisions from the perspective of global long-term comprehensive optimization, without being affected by transient trends.

Stricter regulations will give Japan a chance to succeed in solar panels

Another important issue that Japan will confront in the future is the need to reduce greenhouse gas emissions by 25% by 2020 compared with those in 1990, as announced at the 15th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 15). This announcement was made based on the assumption that Japan would increase nuclear power generation. However, the future course for Japan appears to be inevitably in favor of reducing the dependence on nuclear power, and for this reason, Japan’s targets of cutting emissions by 25% will be difficult to achieve. That said, even if Japan cannot achieve these targets, it will still be able to make a significant contribution to the international efforts to tackle global warming. Based on a flexible approach that focuses on operating facilities, we should position future energy policies as a critical issue for Japan’s industry and for the international community. It is important to note that discussions of these energy policies may possibly once again be plagued by bias, as we have lost our open-mindedness with the shock from the Great East Japan Earthquake and the accidents at the nuclear power stations.

For example, with overwhelming public support at present for antinuclear power policies, the consensus is to strengthen the system for supplying green electricity as an alternative source of power. Examples of green electricity include solar photovoltaic power and wind power. However, from industry’s perspective, it is questionable whether Japan’s manufacturing genba have a competitive edge in conventional solar panels. Solar panels are originally modular products, and their modular design concepts are even more advanced than those of liquid crystal panels. They are not the kind of integral products in which Japanese industry excels at. Consequently, if the Ministry of the Environment fails to strictly monitor the potential serious effects on the environment of aging solar panels, for instance, and does not introduce rigorous environmental regulations on the quality and durability of solar panels, then when solar panels become popular in Japan on the back of official support, the majority of them will be imported from China. This will be a repeat of the eco-point system, which simply ended up increasing sales of television sets with larger screens and boosted imports of sets manufactured overseas, despite benefiting from several hundred billion yen in public funds. We also need to learn the lessons from Green New Deal in the United States, which is increasingly considered to have failed.

I am not opposed to the wider use of photovoltaic power generation or to the smart grid. I just want to make the point that policies pursuing these energy issues can abruptly falter in the face of unforeseeable developments, if the Ministry of the Environment, the Ministry of Economy, Trade and Industry, the Ministry of Finance, and other relevant organizations act in an uncoordinated manner without forging effective cooperation on the issues with a forward looking mindset.

The government must ensure that the ministries involved share a common opinion on the impact of introducing strict safety and environmental regulations, in the same manner as in the auto industry, to industries related to photovoltaic power generation and the smart grid, taking into account the global competitiveness of each industry, which has its own unique design concepts. Based on this common opinion shared by each ministry, the government should link environmental, industrial, social, consumer, financial, and other policies. The key is to be aware of the general tendency that the more customers demand safety, environment, and energy saving, and the more regulations focus on these areas, then the more the products in question are likely to have integral architecture. If this point in the design concept is shared by government organizations, the direction of future electricity policy will become clearer.

For example, if solar panels with rapidly deteriorating quality are installed extensively in Japan, then the panels themselves may cause environmental issues. Based on this concern, if the government and the Ministry of the Environment introduce a policy under which official subsidies will only be provided to products whose quality will not deteriorate by any more than 5% in ten years, then that would perhaps exclude all manufacturers in both Japan and China. However, I expect that a Japanese company would ultimately be able to comply with those regulations. The purpose of this policy is not to promote protectionism. The products of any country would be treated equally as long as they meet all the requirements. Nevertheless, Japanese industry will have a better chance of controlling the market for products subject to strict regulatory conditions. As a taxpayer, I hope that the Ministry of the Environment will introduce policies to protect the environment, that the Ministry of Economy, Trade and Industry will adopt energy and industrial policies, and that the Ministry of Finance will determine the budgetary allocations.

To develop this line of thinking, the Ministry of Economy, Trade and Industry and the Ministry of the Environment need to draft their policies through inter-ministerial communication and cooperation. This example applies to other cases as well. The government will fail to properly address the complex issues arising during the reconstruction from the Great East Japan Earthquake if the vertically structured organizations of ministries and agencies act individually. To avoid this, the government should adopt a matrix organization, tapping private-sector know-how, and develop cross-ministerial (inter-organ functional) project organizations by recruiting competent young and mid-ranking bureaucrats who can commit themselves to the service of the nation. The government can then have these organizations develop policy proposals for each broad theme. Based on the lessons of history, however, policies are more successfully implemented by the vertically structured administration of individual ministries or agencies. If the cross-ministerial project organizations start implementing policies, exceeding their duties of planning and proposing, ministries and agencies who regard the executive authority as their lifeline will resist, and the project organizations may be effectively broken up by the vertically structured organizations and cease to function. The Cabinet Office of the British government has reportedly established these sorts of cross-functional organizations and has successfully developed plans and proposals using the system adopted by Toyota U.K. The reconstruction programs from the Great East Japan Earthquake are a good opportunity for Japan’s bureaucracy to try them out.

As I mentioned above, in pursuing the post-disaster reconstruction programs, under the current system in Japan, cross-border cooperation among government (and municipal) organizations that should act as a control tower is so weak that the government cannot even make decisions promptly or effectively. In this regard, based on several examples from my experience, the bureaucracy of South Korea is handling matters somewhat more efficiently than its counterpart in Japan is doing. In any case, I believe that both Japanese national and municipal governments must not fail now in learning from successful examples in the private sector and other countries, and develop cross-functional organizations within the government.

Gathering the know-how of both the public and private sectors in a reconstruction issue solution center

Another important point is that the government at the front-line operations of the reconstruction projects should work closely with the private sector and gain operating know-how. For example, to promptly transfer several hundred tons of boats that were washed up by the tsunami in Kesennuma, I imagine that the government could instantly tap the operational know-how of large-scale domestic shipyards that transfer bricks that weigh several hundred tons on a daily basis. Moreover, companies that developed new equipment, facilities, materials, systems, software, and other products to respond to the needs of the recent reconstruction programs may be able to create internationally competitive new products, businesses, and industries by introducing new products as mentioned above to both the domestic and overseas markets.

The most significant feature of the Great East Japan Earthquake is that it affected a very large area stretching several hundred kilometers. To carry out complex tasks (of developing several hundred kilometers of infrastructure), in addition to the matrix organization described above, network organizations will work effectively. These organizations in any case supplement the existing vertically structured organizations. Ideally, such an organization would be set up as a reconstruction issue solution center in the Tohoku region. The center would directly hear about issues and problems from people engaged in reconstruction efforts, and would turn them into specific requirements so that engineers could respond. It would then send out information about these requirements to nationwide manufacturers with the ability to fulfill the requirements. Problems identified through reconstruction efforts will be addressed in this way by linking needs from the reconstruction sites to nationwide manufacturing genba. The reconstruction issue solution center would play a central role in this link as a hub in an information relay. One or more such centers should be established in the Tohoku region. The center may be able to recruit competent voluntary specialists from retired workers who graduated from technical colleges soon after they were established in the Tohoku region.

In all events, I hope that the electricity policies and reconstruction measures described above will accurately reflect the evolution and competition of the industry. Any policies that are adopted only for dealing with future disasters and that significantly weaken the industry’s competitiveness will only lower Japan’s long-term industrial competitiveness and living standards.

Headquarters and manufacturing bases must work jointly

As I have explained above, there were and still are a number of manufacturing genba in Japan that made competing successfully their clear goal. Broadly speaking, I believe that the teamwork that has supported the strength of the genba has been developed down through history after World War II. During the high-growth period when overall supply was generally insufficient, manufacturing genba in Japan that could not rely on immigrants of foreign workers faced a chronic workforce shortage. As a result, to respond to high switching costs, workers and engineers acquired diverse skills. These multi-skilled workers strengthened cooperation as a team and successfully overcame a lack of workers, enabling continual growth. Since the mid-1970s, however, with an environment of insufficient demand and severe competition, manufacturing genba have sought to survive by continually strengthening their capabilities and developing new ones. Meanwhile, Japan’s long-term employment system is often cited as a negative feature of the industry. However, Japan’s unrivaled manufacturing genba have also been developed based on a determination to maintain this employment system, while they have been strengthened by the determination to survive. In this way, Japanese manufacturing has a very different history from that of the United States, a country of immigrants. This unique historical development of Japan’s manufacturing genba has become one of their unique characteristics.

In contrast, an increasing number of headquarters of major companies appear to have become incompetent, lacking major long-term direction ever since they achieved their goal of catching up with the West. Obviously, there are many companies in Japan whose headquarters still have the ability to lead companies to their goals, as top management continues to make clear long-term corporate goals, missions, challenges, visions, and other signposts. Therefore, I am not going so far as to state that all headquarters in Japan are incompetent. Rather, what I am saying is that the strength of the headquarters of Japanese companies varies dramatically from company to company. This is to say that, compared with the manufacturing genba of tradable products, which have at least generally maintained their competitiveness and determination, the strength of headquarters has possibly varied to the extent that differences in the performance of individual companies can be almost ascribed to differences in the strength of headquarters.

At headquarters, as employees are also working in large organizations under the long-term employment system, they are like experienced footballers who can see each other’s jobs clearly, as in the manufacturing genba. The difference is that the manufacturing genba have clear goals of surviving the strong yen and the economic slowdown. They are in a way like the players on the women’s national football team, Nadeshiko Japan, who can see the ball, the goal, and other players around them at the same time. In contrast, the headquarters of companies that have problems often show such symptoms as a loss of major goals, a loss of confidence, and loss of morale. For example, the employees of such companies can read each other’s intention too clearly and start following the prevailing mood at meetings of officers or staff. As a result, the number of direct comments setting out the substance of issues tends to decline, and action is often just postponed. Using the football analogy once again, when Japan’s national team is defeated, it often comes in for criticism: it doesn’t have enough drive to move forward, it lacks the ability to score, it wastes time by passing the ball unnecessarily, players are relying on the abilities of others too much, or there are no on-field leaders. Unfortunately, these criticisms appear very relevant to incompetent headquarters. Such headquarters are not able to use manufacturing genba in Japan and overseas. As distrust in headquarters from manufacturing genba rises, companies will find it ever more difficult to hold their own with global competition.

Having said this, even in 2011, when Japanese companies faced serious challenges imposed by natural disasters and the rising yen, there were some positive developments too. One of them was the very impressive maneuvers by the headquarters of certain companies in their restoration efforts. As a rule, during a period of restoration and reconstruction, the goals of both headquarters and manufacturing genba are clear. As a result, a number of headquarters that awoke when they were given clear goals have shown their strength in team play for the first time in a long while. They cooperated with manufacturing genba immediately after the Great East Japan Earthquake, and issued accurate and prompt instructions. They also immediately accepted the judgments made by the leaders of manufacturing genba and promptly provided the necessary support. As a result, despite the many issues they needed to rectify, Japanese companies restored their operations at a speed that surprised the world. When clear goals are given, based on teamwork through consideration for other people and the extensive division of labor, Japanese companies bring into play their characteristics of achieving strong performance through cooperation. What is now important is whether the companies can demonstrate the same cooperation between headquarters and manufacturing genba that was achieved after the earthquake, when they face global competition in the future. Since relations between headquarters and domestic manufacturing genba have finally improved, I hope that headquarters will fight against global competition based on the cooperation described above, instead of taking retrogressive actions, damaging the newly restored relationship.

As a conclusion, I would like to note once again that, in this present severe management environment and global competition, the challenges that companies need to tackle on a priority basis are developing long-term abilities that are both optimal and comprehensive, selecting products and locations, and maintaining their overall global competitiveness. It is true that, considering the unprecedented strong yen, it is not realistic for many companies in Japan at present to choose to increase the scale of manufacturing genba in Japan. However, Japanese manufacturers need to continue to improve the quality of their domestic genba, which have remained highly productive, and use those genba as productive mother plants. In this way, domestic manufacturing genba will be firmly maintained so that they can be transformed into major export bases should the value of the yen crash or should any other emergency arise. This is the responsibility of headquarters management, who aim to develop global comprehensive optimal management with their ten-year visions. I would say that the de-industrialization is not caused by the rising yen or other irresistible forces, but by the misjudgment of managers who are upset by psychological warfare or by the opinion of certain segments of the media. The main cause resides within the hearts of managers, and managers are also accountable for consequences. Managers must not allow themselves to be influenced by the negative psychology stemming from disasters or the strong yen, or to succumb to psychological warfare. Instead, managers must successfully deal with reconstruction while facing future global competition, drawing on logical competition theories and sincere aspirations to contribute to both Japan and the world through their activities.

In doing this, to secure the so-called volume zone (the growth sector in volume terms) in emerging economies, it is true that some industries may need to actively develop overseas product development teams and establish a system in which overseas manufacturing genba can also engage in basic design. This does not mean that these industries should abandon businesses in the high-function and high-value markets in developed nations, in which Japan has excelled, and allocate all their resources to the overseas volume zone. Strategies to allocate all resources to overseas operations are dangerous, and there are in fact examples of major overseas companies who faced management crises after committing themselves too heavily in the volume zone. Therefore, sound Japanese manufacturing companies should aim to develop global management based on operations both in Japan and overseas by maintaining strong manufacturing genba in Japan in conditions that allow for restoring, even if the operations may have been scaled down, while actively developing overseas business.

The true value of Japanese companies is being tested by the reconstruction from the Great East Japan Earthquake and the rising yen. Some overseas observers often praise Japan’s strong manufacturing genba, while criticizing the ambiguous actions taken by headquarters. Looking at overseas media coverage in the aftermath of the Great East Japan Earthquake, in particular, it appears that the world has come to witness once again Japan’s characteristics of strong manufacturing genba and incompetent headquarters. In particular, the disorganized structure of the central organizations of the government and the bureaucracy–the headquarters of Japan in a very real sense–and certain municipal governments and public corporations still look far from reliable. Yet, all these parties will have numerous opportunities to regain lost ground in the future. At any rate, the fact is that headquarters of Japanese companies have both strengths and weaknesses. So, to overcome their weaknesses, Japanese companies need to learn from strong headquarters in the United States, Europe, Taiwan, South Korea, and other nations, which have the ability to make quick decisions based on a clear philosophy and strong leadership. Japanese companies should actively develop this ability and use it to regain their lost ground. It is important for them to do this first and then focus on maintaining the competitiveness of their manufacturing genba.

The last point I would like to emphasize is the training of human resources at headquarters. I do not approve of the situation of domestic manufacturing genba being full of unskilled overseas workers. If the situation has to come to that, I think that we would be better off establishing a plant in the relevant country, so that the workers can continue to live happily with their families. However, headquarters are different. It will be increasingly important for a variety of industries to promote global headquarters management by accepting foreigners into the heart of operations and appointing a foreign president, if necessary. Just as Japanese football players eventually started to find success overseas after they were given training by foreign players and coaches in the J League, I would like Japanese companies foster people who can operate overseas in the future.

In the meantime, large companies should recruit a certain number of people who can reliably work in emerging and developing countries and in other countries with an adverse working environment, just like footballers who can perform strongly in an away match. They should also hire people who can work flexibly in an emergency, or those who can deal with disorganized situations as if engaging in guerilla operations. (Recruiting only these types of workers would destroy the company, though.) After recruiting these human resources, the companies should actively encourage them to work in emerging countries, developing new businesses and operations that are in similar environments to those away matches. It will be good if the companies can develop next-generation staff able to handle difficult situations. In ordinary times, a president can be selected from the mainstream group in a natural order, but in times of emergency, a president can be selected from the leaders of this guerilla group. A company that has a choice like this has an advantage. There are already some cases that are similar to this in certain companies with strong headquarters in which a president can envision the company’s future ten years ahead. This use of human resources resembles the occasion when Queen Elizabeth I appointed Sir Francis Drake, a former pirate, as commander of the English fleet, and he successfully destroyed the Spanish Armada to establish the foundations of the British Empire.

In the wake of the Great East Japan Earthquake, headquarters and manufacturing genba of many companies shared common goals and worked together to promptly restore their operations. This successful experience now needs to be used in the global competition that these companies face every day. Based management on cooperation between headquarters and manufacturing genba, Japanese companies need to overcome the challenges stemming from global competition, the extremely strong yen, disaster reconstruction efforts, and the problems at nuclear power plants. It will not be an easy task, but nor will it be an impossible one.

Translated from “Gurobaruka to nihon no monodukuri no kadai(Globalization and Japan’s Manufacturing Challenges): Choki zentai saiteki no kyosoryoku iji wo saiyusen ni — Tsuyoi genba, nihon ni nokose,”, Lecture text for Japan Center for Economic Research’s Seminar on December 7, 2011 (Courtesy of Japan Center for Economic Research).