As global supply chains buckle under Covid-19 stress, those in Japan remain sturdy, free of inflationary pressures and fitful economic activity. Container shipping costs aren’t spiking and delivery times aren’t delayed. Industrial activity is humming along while manufacturers’ sentiment is at its highest in almost two years. Overseas orders are recovering. It’s all the product of hard lessons learned — and could teach a thing or two to US President Joe Biden as his administration looks to rebuild American manufacturing capacity.
Japan’s industrial network became more resilient after the tsunami and meltdown catastrophes of 2011, which inflicted more than $200 billion in damage to businesses. Supply chains are now carefully crafted and closely monitored. Capital expenditures are strategically timed. The production processes of most industries have been kept within the country, with only a few offshored.
In the wake of the cataclysms of 2011, firms faced severe shortfalls and struggled to restore operations. Across the board, production fell over 15%; in the transportation equipment sector it fell more than 46%. Government surveys from the time show most companies in the basic materials and processing industries didn’t expect to get close to just-enough-supplies till at least seven to nine months out.
Companies reacted to immediate needs but, instead of throwing cash at the problems, they waited for the dust to settle to assess the imbalances in their supply-demand equations. There weren’t sudden spikes of spending or investments or big promises.
Since then, industrial firms have consistently invested in their future. Capital expenditure as a portion of sales has averaged over 5% in the last decade, touching 5.9% in the last fiscal year. In other so-called industrial headquarter economies, like the US and Germany, the average is more like 3%.
This month, Fanuc Corp., known for its conservative spending, made its largest investment in China to date, putting up 26 billion yen ($240 million) to upgrade a manufacturing plant in the country. Fanuc is one of the world’s largest makers of industrial robot and its machines populate factory floors across world. The automatons’ bodies are still made in Japan but robotics investment is rising in China where Fanuc makes some parts. The new spending underwrites its future competitiveness.
The tight relationships that Japanese companies have with their suppliers help the corporations make frugal but precise investments. That’s allowed the likes of Toyota Motor Corp. to have a lens into layers of their production and procurements processes — and to spot deficiencies quicker. When gaps emerge, Japan Inc. manages to fill them. Manufacturers are well-stocked with the material and equipment needed to produce goods. The ratio of that inventory to final products shipped out has averaged about 15% higher in the years following the 2011 disaster than the decade before, according to Capital Economics.
Meanwhile, inventories are higher for key equipment that require longer lead times — these are the machines and products without which companies would be hamstrung. In 2019, inventory-to-sales ratios for general and electrical machinery in the US was 1.8 months to 1.4 months. In Japan, they were at a higher level of 2.2 months and 1.7.
Building production at home doesn’t mean Japan’s companies are shutting out the world. Firms have expanded their supplier networks, including — as Fanuc has done — offshoring to China. Managers with technical know-how that they’ve sent overseas have maintained strong ties with their parent companies. Over a third of the goods needed by Japanese affiliates in China are still procured from corporations in the home country.
As a result, Japan’s participation rate in the global value chain is high and it has moved more towards importing foreign parts to make products with high technological capabilities that are then exported. Relative to other large economies, Japan is less reliant on imported components in crucial sectors like electronics and machinery.
The companies still face the risk of disruption. Renesas Electronics Corp, a major supplier of semiconductor chips, a sector already plagued by global shortages, was hit by a fire at its main manufacturing plant on Mar. 19. The facility is expected to be offline for a month, which will mean a loss of around 17 billion yen. For some machines, Renesas has already determined it doesn’t have alternatives and won’t be able to make certain semiconductors. But those account for less than 15% of volume. Renesas’ quick and exacting assessment will mean that it will be able to put a good estimate on when it will get production back in train. In addition, the Japanese government along with other companies, is mobilizing to get the company’s plant up and running.
All this is not Beijing-style industrial policy, which is laid out on paper with bold statements. But Japan’s goals are clear: protect the supply chains, at all costs. It’s learned the hard way.
Bloomberg
