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What the World Can Learn From Japan's Factories

Dec. 20, 2017
Japan's manufacturing competitiveness rank has jumped from 10th to fourth place since 2013, boosted by its traditional strengths, something the rest of the world may want to emulate.

Reviving manufacturing has become a prime policy objective for national leaders from Washington to Beijing to New Delhi. We can debate whether chasing factories is worth the effort in the 21st century, but not the difficulty of building and maintaining a robust industrial sector in the face of relentless global competition and technological change.

At least one country seems to have figured out how to do just that, however, and a highly unexpected one: Japan.

Factories churning out cars, chips and Walkmans were the engines of Japan’s storied growth miracle back in the 1970s and 1980s. But like most other advanced economies, the importance of manufacturing in Japan’s economy has declined sharply over the past two decades. Shunning their aging, expensive home country, Japanese firms invested in new plants in China, the U.S. and elsewhere in search of lower costs or new consumers.

Recently, Japan’s factories have come to life again. Manufacturing as a%age of gross domestic product has stabilized in recent years -- it’s even ticked up a bit. Employment in the sector looks to be rising as well. Though wage stagnation continues to plague Japan’s households, workers engaged in manufacturing are better off than most. While total compensation in October for all workers rose 0.6% from the year before, manufacturing employees enjoyed a more respectable 1% bump.

The resurgence is part of Japan’s overall strengthened economic performance in recent quarters. And a cheap yen, depressed by the Bank of Japan’s radical monetary policies, has also given the sector a perhaps temporary boost.

But that’s far from the whole story. Japan has gained a tremendous amount of manufacturing competitiveness. A 2016 study by consulting firm Deloitte ranked Japan the fourth-most competitive country for manufacturing, a huge leap from the No. 10 position it held three years earlier.

Deloitte credits Japan’s traditional strengths as a manufacturer for bolstering its standing today. Low-cost emerging countries such as China have had an edge over high-wage advanced economies in manufacturing for several decades, allowing them to vacuum up assembly lines from Japan, the U.S. and Europe.

More recently, however, as Michelle Drew Rodriguez, manufacturing leader for Deloitte’s Center for Industry Insights, explains in an email, technology and talent are becoming more critical to manufacturing competitiveness. That’s redrawing the global industrial landscape in favor of richer nations again. “As the manufacturing industry becomes increasingly more advanced and sophisticated, traditional powerhouse manufacturing countries of the 20th century that have continually invested in developing advanced manufacturing technologies are now seeing a resurgence in their competitiveness,” she writes.

The trend especially favors Japan. Recall that it was Japanese managers who rewrote the rules of mass production by inventing “lean manufacturing.” As Deloitte points out, its government and companies continue to invest heavily in manufacturing innovation, automation and job training. The Deloitte study notes that the executives surveyed considered the level of talent in Japan second in the world, behind only Germany. Rodriguez highlights that the Japanese government also funds research specifically targeted at improving the manufacturing process.

There are many lessons here for the rest of the world. For the U.S., Japan offers a warning to focus more on upgrading education and worker skills and less on restoring assembly-based supply chains, like iPhone factories -- a recent White House fixation. For China and other emerging economies that have risen to manufacturing prominence mainly due to low wages, Japan stresses how imperative it is to improve factory technology and worker productivity. Chinese planners are trying to do just that through industrial policies such as “Made in China 2025,” though it is far from certain that such state-led initiatives can produce the real innovation China requires.

Of course, Japan’s success can’t be separated from the revived global economy overall. Exports are revving up Japan’s factories, just as they always have. In October, exports, by value, jumped 14% from the year before.

At the same time, Japan has wisely moved away from its usual semi-protectionist tactics to embrace more open trade. On Dec. 8, Japanese negotiators finalized the terms of a sweeping free-trade agreement with the European Union, while Tokyo has also led efforts to complete the Trans-Pacific Partnership after the U.S. withdrew. A U.S. administration that’s been quick to deride free-trade agreements should take note.

A potential threat to Japan’s rebound is instructive as well. With unemployment now down to a miraculously low 2.8%, and companies screaming for staff, it’s very likely that the aging Japanese population simply can’t offer the resources needed to keep factories expanding. Here’s where Tokyo’s persistent resistance to wider immigration really costs the country. That’s another lesson policymakers in the U.S. and Europe should take to heart.