RIETI Report February 2014

Challenges on the Road toward Reviving Manufacturing: Japanese companies lagging in localization

Japan is facing challenges in reviving its manufacturing industries, with the lagging localization in their overseas operations as the primary issue. What can be done to address this? Looking at the examples of other countries, we look to find suggestions for Japan's manufacturing industries to implement. In the February issue of the RIETI Report, we present the column "Challenges on the Road toward Reviving Manufacturing: Japanese companies lagging in localization" written by Faculty Fellow Kazuyuki Motohashi.

Motohashi first looks at the situation of reshoring in the United States, where a growing number of American manufacturers are bringing production back to the country. This case shows that the localization of production operations to match the market needs is the key to the revival of manufacturing in the global economy. Considering its decreasing population, Japan faces a more difficult situation, and expanding into the global market including emerging economies is the key to its manufacturing revival. However, Japanese manufacturers lag behind their U.S. and European counterparts in localizing overseas operations due to their tendency to pursue product development under the leadership of the headquarters in Japan. Motohashi states that this must change and that creative ideas with unique local tastes are indispensable, and he further asserts that accelerating the localization of manufacturing can be achieved by giving more authority to local subsidiaries and promoting local personnel to positions of authority. Finally, Motohashi looks at this from the perspective of the science-based economy and gives some business and policy suggestions.

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Challenges on the Road toward Reviving Manufacturing: Japanese companies lagging in localization

MOTOHASHI KazuyukiFaculty Fellow, RIETI

A growing number of American manufacturers are reshoring production to the United States from China and other overseas locations. General Electric Company (GE) began producing new appliances for American consumers on its factory floors in the state of Kentucky. Likewise, Ford Motor Company is planning to curtail overseas production and expand its manufacturing base in the state of Texas. Reduced production costs resulting from cheaper U.S. dollars are a big reason behind the booming production in the United States. Combined with soaring labor costs in China, the relative wage gaps between the two countries are shrinking.

Non-labor costs associated with overseas production are also on the rise. An analysis by Harvard University Professor Michael Porter et al. found that advancement in production processes have led to a decrease in the proportion of labor costs relative to total costs, highlighting the impact of the hidden costs of overseas production such as difficulties in quality management, high attrition rates, and concern over intellectual property protection. The shale gas revolution has had a significant impact as well. Following a significant decline in natural gas prices, Dow Chemical Company announced its plan to construct the world's largest ethylene plant in Texas.

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