Policy Update 085

Digital transformation of the small and medium-sized manufacturing enterprises after the novel coronavirus COVID-19

Research Associate, RIETI

1. The negative shock from COVID-19 on the small and medium-sized manufacturing enterprises

Japan's small and medium-sized manufacturing enterprises took no measures against the unexpected novel coronavirus, due to its sudden spread. At the moment, there's nothing we can do but learn to coexist with it until a vaccine or better therapeutic drugs are developed in the future. Having in mind the fact that influenza virus can also mutate very quickly, small and medium sized manufacturing enterprises must take measures, because a stronger virus has the potential to appear in the future.

The most serious problem facing Japanese small and medium-sized manufacturing enterprises is the fact that there are few tasks compatible with telework systems and many workers have no choice but to ride crowded trains and risk infection in commuting to their places of work. Although it is thought that various other issues will come to prominence, I will focus on this issue.

2. Telework in the small and medium-sized manufacturing enterprises

Digitization is progressing at a more advanced pace in larger companies, but small and medium-sized businesses are lagging behind in the fourth industrial revolution that is now underway. The reasons for the lack of progress vary with different companies. For example, even if one company is very advanced in terms of mechanical or metalworking skills , there is often little expertise in information and communications technology and motivation to develop that expertise is often lacking in small and medium-sized manufacturing enterprises who are already busy performing their main work and lack additional resources to allocate to make the important changes, unless it is directed by business partners.

With these excuses and resource problems, the small and medium-sized manufacturing enterprises postponed digitization, but, as has become evident through the experience of this novel coronavirus, the process cannot be put off any longer.

At the risk of being misunderstood, we can say that "Except for those tasks that absolutely need the physical presence of workers, all manufacturing tasks can be done remotely. All routine work can be automated by replacing [human] with AI." No matter how advanced the skill is, as long as it is repetitive, it can be programmed.

Even a small and medium-sized enterprise has various types of work. Back-office departments, which mostly involve office work, can certainly apply telework or AI. Production departments, except for tasks that must have workers' physical presence, also involve office work and can apply telework or AI. For example, the Planning & Development Department of new products and the Design Department can apply telework and AI. Telework and AI can also be applied to various services that use data collected from products that have been sold and are being used by customers. In fact, these services have the potential to become main sources of income for the manufacturing industry in the future. Telework can become possible through remote controls even for production lines by introducing robots or AI. Remote control has been introduced for a long time at ironworks and power stations.

Please do not misunderstand that every task needs to be converted to telework. The strange thing is, manufacturing companies, in seeking "optimization" (which may differ for different companies), try to optimally locate their plants in Japan or foreign countries. But human, for whatever reasons, do not optimize working locations and continue a "mass group" method where everyone gets together in one place to work form 9 to 5. Is this way of working, which resembles the work style of the old army in the Showa era, optimal for these companies or improving their performances to their best? The answer is probably no.

Because the education system in the Showa era and earlier was designed to foster nearly identical, dependable workers, team systems modeled on military education was sufficient. The expression, "harmony is the most highly valued aspect of work ability" rose to prominence in those days. It was because interpersonal relationships were valued more highly than working performances. But young Japanese people today have a variety of talents and skills. Some people have to commute two hours to work and may be exhausted. Other people may have to take care of small children or aging parents. For some people, efficiency may increase by working on their PC in a cafe. It is a personal opinion, but I think that the opinion that commuting time on the train is a waste of time seems to be increasing considerably among young people.

Under the influence of novel coronavirus, people might start to notice that efficiency of the work increases as people become more accustomed to doing telework like this and that everything can actually proceed adequately even when some people do not go to the office. The people who experience this way of working may not wish to return to the original work style after the pandemic subsides.

Companies that just focused on optimizing plants' locations but neglected to optimize workers' allocations can certainly improve their productivity and sales by also trying to optimize workers' allocations. An important factor is to determine which tasks can be converted to telework, but as mentioned above, telework is possible for most of the tasks. With current and future information and communications technology, there will be no domain where telework is absent within manufacturing industries in the future.

3. Trends of digitalization in the fourth industrial revolution

There are two main trends for digitalization within the fourth industrial revolution. First, blue-collar workers have been replaced by robots for routine manual tasks up until now, but from now on, white-collar workers will be replaced by AI for routine cognitive tasks. Second, sensors, semiconductors, computer storage devices and communication capacity are becoming faster, smaller and produced in larger amount, thanks to which it is possible to grasp the need of each customer and to "customize" products and services to meet each customer's need. The novel coronavirus will only accelerate the advance of these flows as companies struggle to restore corporate earnings. If the small and medium-sized manufacturing enterprises do catch up with these trends, they will lag far behind.

July 6, 2020

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