TEPCO hydro transformer
Manufacturing accounts for a fifth of Japan’s GDP.Important industries: motor vehicles, electronic equipment, machine tools, steel, ships, chemicals, textiles, processed foods. Many industrial towns are quiet. Shipbuilding, steel, chemicals, and automobiles have all been affected by a changing economy, modernization and recession. Some basic industries like coal mining and aluminum smelting have disappeared.

Japanese firms hold more than a 70 percent market share in 30 industries worth more than $1 billion in annual sales, including digital cameras and car navigation devices. In addition to the products themselves Japanese manufacturers are key producers of the components that go into them and the machines used to manufacture them.

Many Chinese and Taiwan companies that make personal computers rely on parts and intermediate goods imported from Japan. Exports of intermediate goods accounted for 9.1 percent of the nation's GDP in 2008 on value basis, which was about double the figure from 1990. After the March 2011 earthquake and tsunami in 2011 companies in other countries began seeing dependence on the supply of goods from Japanese firms as a liability, and this view has contributed to Japanese firms receiving invitations to move their production bases overseas.

According to a Yomiuri Shimbun editorial “industrial sectors in Japan are characterized by tough competition among several major companies. Japanese companies are engaged in a domestic war of attrition, and it is often noted they have become too exhausted to do battle against business giants in other countries.” In recent years there has been a trend for large Japanese corporation to realign, merge and form tie ups to increase efficiency and productivity and strengthen the competitive edge of Japanese companies.

Japanese industries are facing increased competition from abroad, particularly from China and South Korea. Many big automobile and electronics companies farm out much of their work to other Asian countries, particularly China. But at the same time Japanese companies are becoming more integrated with companies form these countries. These days Japan exports advanced materials and machinery tools to Taiwan and South Korea, which makes microchips and other intermediate products to export to China, which puts together products like laptops and iPhones that are sold in the United States and Europe.

During the economic crisis in 2008 and 2009 companies were hurt by the yen appreciation and a fall in demand for their products. Toyota is aiming to be profitable at an exchange rate of 80 yen to the dollar and prefers the 85 yen level as a manageable break-even point. When yen climbed to the upper 70s yen per dollar, Toyota President Akio Toyoda said, “The manufacturing situation is difficult in Japan. “We are clenching our teeth in trying to protect manufacturing in Japan.”

Websites and Resources


Good Websites and Sources: Good Photos at Japan-Photo Archive ; Companies Listed by Industry ; Ministry of Economy, Trade and Industry ; Statistical Handbook of Japan Manufacturing Chapter ; 2010 Edition ; News ; Iron and Steel Institute of Japan ; Japan Industrial Archeology Society ; Nippon Steel ; Shipbuilding Association of Japan ;Aerospace Industry in Japan 2009 ; Wikipedia article on the Construction Industry of Japan Wikipedia ; Good Construction Photos at Japan-Photo Archive ; Keihin Industrial Area (Tokyo and Kanagawa Prefecture) is one of the largest industrial areas in Japan. Websites: Wikipedia Wikipedia ; Kawasaki City site

Small Companies and Craftsmenship

Japan’s talent for “monozukuri” (“thing making” or "obsession with craftsmanship") has been a key to its success. Many Japanese workers can produce goods with higher precision with conventional tools and their hands than a computers and sophisticated machines. Scattered around Japan are many small workshops, some of them in houses, that produce pieces of equipment that are the best of their kind in the world.

Damian Thong, a Tokyo-based analyst at Macquarie Securities, told the New York Times, “The small- and medium-sized enterprise sector is an immense resource. It’s Japan’s beating industrial heart.” Companies with less than 300 employees account for 99 percent of the manufacturing in Japan. Small and mid-size companies employ 65 percent of the workforce in Japan. Many small and mid-size companies act as suppliers or subcontractors to large companies. Many of these have been hurt as the large companies have shifted their work to China to take advantage of cheap labor costs.

Many successful niche companies in Japan say they owe their success to following suggestions by their customers rather than creating new products and marketing them. The president of Otsu-based material maker IST, which makes high-tech tubes for laser printers, jet engines and medical equipment, told the Daily Yomiuri, “Instead of marketing developed products we tell customers what we can do with our technology. Then the clients would ask us if it’s possible to make something they want but can’t find anywhere. And we say yes “except cases where another company could easily make that product.”

Masanori Kikuchim the owner of Porite, a company that makes parts for small, complex motors used in electronics and cars, told the New York Times. “Every time we get an order for smaller more complex specifications, I thinks it’s impossible at first. Now we’re talking two-thousandths of millimeter. And we’re going to go even smaller.”

Industrial Giants in Japan

Toyota assembly line
The largest companies in Japan are Toyota, Mitsubishi and Mitsui Trading.

Only three Japanese companies — NTT Corp. (41st), Mitsubishi Corp (78th) and Honda Motor Co. (86th)—were on the Forbes list of the world’s leading companies in 2010, compared to 11 the previous year. By contrast China had seven companies in the Forbes top ten. Toyota dropped from 3rd in 2009 to 360th in 2010 on the list.

Large industrial giants are increasingly joining together to try to win overseas contracts. Hitachi Mitsubishi Heavy Industries have joined forced to win overseas urban railways and hydro generation contracts while Toshiba, Hitachi Mitsubishi Heavy Industries and TokyoElectric,Kansai Electric, and Chubu Electric ave formed an alliance to build nuclear power plants.

Mitsubishi Heavy Industries

Mitsubishi Heavy Industries is Japan's leading aircraft builder, defence contractor, a major shipbuilder and the lead systems integrator for Japan's space programme. A major partner of Boeing Co it has annual sales of about ¥ 3 trillion yen with 69,000 workers worldwide. Mitsubishi Heavy, the nation's leading heavy machinery maker, remains saddled by losses in its jet and shipbuilding units.

Mitsubishi Heavy Industries is the largest heavy machinery manufacturer in Japan with total sales reaching ¥1 trillion. It is Asia’s largest aerospace company and the world’s second largest ship builder. It has an alliance with France’s Areva to build nuclear plants and supplies a number of parts to Boeing aircraft along with Fuji Heavy Industries and Kawasaki Heavy Industries have

The Mitsubishi plant in Nagasaki at one time assembled the biggest movable objects ever built by man. These objects including massive drilling platforms used to harvest oil from the North Sea and super tankers four football fields long and able to fill the tanks of three million cars.

Mitsubishi Chemical (Mitsubishi Tanabe Phram Corp) is Japan’s largest chemical company with $29 billion in sales. It was formed by a merger of of Mitsubishi Chemical and Mitsubishi Pharma Corp in October 2005. It is a global leader in the DVD-R market, with about a 24 percent share.

Mitsubishi made a group net profit of ¥ 463.19 billion (about $5.3 billion) in fiscal 2010-2011, a 69 percent increase from the previous year, on sales of ¥20.5 trillion (about $250 billion). The increase was largely due to the sale of trucks, especially in emerging markets such as China.

Mitsubishi Heavy Industries returned to the black in the April-September half of 2010 on strong sales of machinery and special vehicles.

Hollowing Out of Japanese Industries

Economists fear a hollowing-out of domestic industries as Japanese firms consider relocating more business and production bases to other countries. Disruptions to domestic supply chains caused by the Great East Japan Earthquake have forced many companies to consider exiting the nation. Also weighing is the shortage of electricity, which may persist for a long time, as it remains unclear when nuclear reactors suspended for regular inspections will be able to resume operations. [Source: Etsuo Kono and Takashi Asako, Yomiuri Shimbun, July 12, 2011]

Then on top of this is the rising value of the yen. Yoichiro Kagawa and Etsuo Kono wrote in the Yomiuri Shimbun, “Companies struggling to recover from the impact of the Great East Japan Earthquake also have been rocked by the strengthening yen, which has risen to the 77 yen level against the U.S. dollar in Tokyo. Many exporters had predicted the exchange rate in fiscal 2011 would be between 80 yen and 83 yen per dollar, so the rise of the yen beyond this level has put them on the ropes.” [Source: Yoichiro Kagawa and Etsuo Kono, Yomiuri Shimbun, August 1 2011]

Takashi Shiraishi, president of both the National Graduate Institute for Policy Studies and the Institute of Developing Economies, Japan External Trade Organization, wrote in the Yomiuri Shimbun,”Many Japanese businesses have persistently relocated production facilities abroad. As a result, about 220,000 manufacturing sites vanished between 1996 and 2006, causing a loss of about 3 million jobs in Japan. The aftermath of the March 11 catastrophe will likely augment this trend. While the yen remains strong, a situation that dates back to the so-called Lehman shock, the disaster has disrupted Japan's supply chains and electricity shortages are now a real threat. Against this backdrop, businesses are being forced to choose to build production and related facilities at home or abroad. According to a recent survey, nearly 70 percent of businesses are expected to opt to relocate overseas.

Furthermore, central and regional governments in other countries have been making strenuous efforts to attract investment by Japanese companies. For instance, a local government in South Korea has promised to study the possibility of offering three-year and seven-year holidays for corporate and income taxes, respectively. In Vietnam, the owner of an industrial park is reportedly trying to lure small and medium-sized enterprises affected by the disaster to open facilities there as part of its strategy of ensuring a higher concentration of high-tech small and midsized companies

Yoichiro Kagawa and Shoichi Shirahaze wrote in the Yomiuri Shimbun, “The rapid growth of parts manufacturers in other parts of Asia and parts standardization through globalized production also are accelerating Japanese manufacturers' moves to increase procurement from abroad. Currently, major manufacturers are intensifying efforts to cope with the strong yen by buying more parts overseas, while maintaining domestic development and production as much as possible to keep technology levels high. However, this will result in fewer contracts for small and midsize parts makers, and could force them to relocate their operations overseas. With domestic production and exports facing tough times in recent months, Nissan;s Carlos Ghosn said Japanese manufacturers are having to make a tough choice--either increase parts procurement from other nations or become unable to continue production in Japan.” [Source: Yomiuri Shimbun, September 23, 2011]

“Many major manufacturers are procuring fewer parts domestically and buying more components overseas to lessen the impact of the super-strong yen, a trend that is hurting small and midsize firms and could weaken the nation's industrial base. Mitsubishi Motors Corp. President Osamu Masuko said a yen-dollar exchange rate in the 76 yen range against the dollar is “a tough level for companies that are highly dependent on exports. MCC plans to raise the percentage of parts it buys overseas from the current 18 percent to 25 percent in 2013 to cut costs. Nissan Motor Co. President Carlos Ghosn also said his company plans to raise the percentage of parts bought from South Korea and China, as well as Kyushu--from where parts can be shipped relatively cheaply--from about 70 percent now to between 80 percent and 90 percent.

Panasonic said it will reduce the number of companies from which it procures parts to about 10,000, down 40 percent from the current level of about 18,000, in fiscal 2012. Sony Corp. halved its number of parts suppliers by spring 2011.

A July 2011 white paper of the Economy, Trade and Industry Ministry emphasizes the sense of urgency over the situation. The nation needs to take urgent measures to avoid an expanding exodus by securing jobs at home and increasing the potential for economic growth. In a survey of 163 major domestic companies, 69 percent said that accelerating the transfer of supply chain operations, in part or in full, overseas was a possibility. Eighteen percent said there was a "low possibility" of relocating such operations overseas.

William Pesek of Bloomberg wrote: “In reality, hollowing out in one form or another has been Japan’s lot since the mid-1990s, after the economic bubble imploded. High wages, overcapacity and bloated corporate structures led to painful downsizing. Factories closed, jobs went overseas, the lifetime employment that formed the core of Japan’s postwar boom went away, deflation deepened, rust-belt cities such as Osaka and Shizuoka lost their buzz, homeless shelters swelled and the interest rates were cut to zero.” [Source: William Pesek, Bloomberg, July 30, 2012]

Japanese Firms Move to South Korea

Daisuke Segawa and Michihiro Kawashima wrote in the Yomiuri Shimbun, An increasing number of Japanese companies have been speeding up activities to shift production to South Korea. This is against a backdrop of markedly more favorable investment conditions in South Korea than in Japan. Among them are lower electricity charges and free trade agreements South Korea has made with countries that have strong market potential. [Source: Daisuke Segawa and Michihiro Kawashima, Yomiuri Shimbun, September 10, 2011]

Japanese companies have been increasingly exposed to intensifying concerns over power supply stability and the yen's sharp appreciation. Given the progress on trade liberalization overseas, concerns over the hollowing out of the country's industries are likely to deepen without effective government steps to support companies' domestic production bases.

Among those making the move to South Korea are Mitsubishi, Softbank and carbon fiber maker Toray. Direct capital investment in South Korea from abroad, which stood at 1.42 billion dollars in 2008, rose sharply to nearly 2.08 billion dollars in 2010, according to the Japan External Trade Organization.

Ambitious to be a trading powerhouse, the South Korean government has been aggressively engaging in free trade negotiations with the United States, the European Union and others, while extending a great deal of financial assistance to promising industries.South Korea's geographical proximity to China, whose economy has been rapidly expanding, is another appealing feature in the eyes of Japanese companies.

Japan, by contrast, has become less attractive due to concerns over power shortages in the wake of the Great East Japan Earthquake and the rising value of the yen. In addition, the chances of Japan's participation in the Trans-Pacific Partnership trade negotiations, which would pave the way for expanding the nation's trade volume, have been mired in uncertainty.

Toray Industries, Inc. has started construction on a new plant in South Korea for the production of carbon fiber composite materials, a key element of the firm's business expansion plans. Scheduled to begin operation in 2013, the plant will produce about 2,200 tons of carbon fiber material annually for civil engineering use and industrial robot production.

Mitsubishi Chemical Corp. announced Tuesday it will establish a joint venture with Mitsubishi Corp. and POSCO, South Korea's top steelmaker, for manufacturing and marketing electrode materials for electric furnaces. In exchange for providing POSCO with relevant technologies, Mitsubishi Chemical and Mitsubishi Corp. will receive tar, a by-product of steel production from POSCO.

SoftBank Telecom Corp. started a company in July in South Korea to manage Japanese companies' computer servers. The firm plans to build new data centers in Busan, Seoul and elsewhere over the next year. As SoftBank President Masayoshi Son noted, "Electricity charges for industrial use in South Korea are substantially lower than in Japan."

Foreign Competitors Entering Japanese Markets

The appliance industry in Japan is dominated by Japanese companies but that may not be the case for long as Chinese manufacturers such as Haier and South Korean companies such as Samsung and LG that offer cheaper but still good quality products step up their efforts in the Japanese market.

In 2010, Haier launched a major marketing offensive in Japan. It hired Japanese technical experts for advise, designed products specifically for the Japanese market and sold its products for 20 percent less than other manufacturers. The same year LG announced plans to re-enter the Japanese television market, rolling out a whole line of models, including 3-D ones, and mounted an aggressive driver to grab a major market share. LG sold small LCD TVs in Japan from 2005 to 2008 but quit after failing to establish a brand image.

Japan Dispensable as a Supplier?

Steve Lohr wrote in the New York Times, “Maybe Japan is not as crucial to the global supply chain as those first weeks after the earthquake made it seem. Consider the case of STMicroelectronics, Europe’s giant in the semiconductor business, which buys silicon wafers, chemicals and chip-packaging components from Japan.STMicroelectronics has more than $10 billion a year in sales. Its major customers span a variety of industries — consumer electronics, autos, mobile phones and computers — and include Apple, Bosch, Hewlett-Packard, Nokia and Sony Ericsson. [Source: Steve Lohr, New York Times, May 29, 2011]

After the earthquake and tsunami struck Japan in March, STMicroelectronics, like many global companies that buy parts and materials from Japan, quickly set up a crisis task force to assess the health of its supply network there. But the sense of crisis gradually passed. When necessary, suppliers outside Japan have been lined up, and the company’s production has not been disrupted. And even though STMicroelectronics’ sales to Japan — about 4 percent of total revenue — will decline this year because of lower demand, “it is going smoother on the supply-chain side than we had thought,” said Carlo Bozotti, chief executive of STMicroelectronics.

The big European company’s experience is widely shared. More than two months after the disaster, any lingering impact on industries outside Japan from shortages of crucial supplies is limited. Beyond their concerns about a very short list of components, like certain automotive microcontrollers, companies around the world are cautiously breathing easier. “The global supply chain has been able to weather the storm,” said Hau Lee, a professor at Stanford University’s graduate school of business. Barring further unexpected shocks, Mr. Lee said, “This has not been as bad as most people initially worried it might be.”

Japan and the Global Supply Chain

Steve Lohr wrote in the New York Times, “The resiliency of global supply networks and quick action by companies are part of the reason. But another explanation was provided by a study published last week, led by Mr. Lee and Kevin O’Marah, a supply chain specialist at Gartner, an information technology research and advisory company. Their report used data from a survey of 750 supply chain managers across a spectrum of industries worldwide, sponsored by SCM World, a professional organization and Web site. As it happens, the survey was done in February, shortly before the quake and tsunami. It found that Japan, despite being the world’s third-largest economy (behind the United States and China), plays a relatively small role in the global supply chain.” [Source: Steve Lohr, New York Times, May 29, 2011]

“The supply managers gave a telltale sign when asked to name the most important source of supply of manufactured parts and materials outside of the corporation’s home country. They were then asked to name their second and third most important nonhome source. China was the leader, with 37 percent of the managers saying it was their leading source beyond the home nation. Next came the United States with 20 percent, followed by Germany with 7 percent. The same order was evident in the combined totals. Japan fell well down the list, tied for eighth with Canada.” “What’s remarkable is how relatively isolated Japan is,” said Mr. O’Marah, an author of the report. “It’s far less integrated into the world’s manufacturing supply chains than you would expect, given the size of Japan’s economy.”

“Another supply-chain specialist cautioned that the country survey data may understate Japan’s role. China’s rise as a manufacturer has tilted toward low-cost assembly operations, which often rely on Japan for important components, said Hal Sirkin, a senior partner at the Boston Consulting Group.” “There is a Japan-inside-China element that might be missed here,” Mr. Sirkin said.

Relationship Between Japanese Companies and Their Suppliers

Steve Lohr wrote in the New York Times, “Japan specialists are likely to find the survey data — and Japan’s modest place in the global supply network — more revealing than surprising. Japan’s manufacturing prowess and global competitiveness are focused in a few industries, like automobiles and consumer electronics, they note. In those industries, the traditional Japanese model has been that a supplier would sell almost exclusively to one large manufacturer, like Toyota or Nissan.” [Source: Steve Lohr, New York Times, May 29, 2011]

The big, household names of corporate Japan preferred to have essentially captive suppliers as well. “They value the trust and flexibility that those close bonds with suppliers give them,” said Edward J. Lincoln, professor of economics at the Stern School of Business at New York University. The shared experience and constant communication have contributed to the development of manufacturing innovations and efficiency techniques for which Japan’s leading companies are renowned, Professor Lincoln said. Those tight, cooperative bonds may also help Japanese industry recover more quickly from the earthquake than it would have otherwise.

“But he said the close arrangements among domestic companies have also meant that Japanese manufacturing suppliers have been less likely to sell to foreign corporations,” Lohr wrote. “As disruptive as the Japan disaster was to the auto industry’s Japanese transplants in North America, for example, non-Japanese carmakers were relatively unaffected. The deep and lasting supplier relations among Japanese manufacturers, Professor Lincoln added, are also a byproduct of a business culture that often places social stability above profits — despite changes in recent years meant to make companies more focused on profits and pleasing shareholders.”

“Things have changed some,” said Professor Lincoln, director of the Center for Japan-U.S. Business and Economic Studies at New York University. “But business in Japan is still tempered by a desire for social cohesion, far more so than in the United States and even Europe.” Analysts say that in the aftermath of the earthquake, Japanese industry may loosen the domestic corporate networks somewhat. Big manufacturers will increasingly look to buy supplies and even set up production in countries less prone to tsunamis and earthquakes than Japan, they say. And Japanese suppliers, in turn, might have to seek buyers abroad more than in the past.


Japanese companies have traditionally been joined together in “keiretsu” (webs of suppliers and interrelated companies) that share long-term business goals and hold shares in each other's companies. Keiretsu are basically cartels. They dominate everything from auto parts to agriculture to cosmetics. It is estimated that roughly half of the Japanese manufacturing companies belong to them. Some keiretsu are huge. Nissan's, for example included 1,000 companies and employs 10 workers for every one of Nissan's.

Nippon Steel is a good example of how Japanese enterprises are incestuously intertwined. In the 1970s, when it was the largest steel company in the world, with nearly 100,000 employees, its largest stockholder and lender was the Industrial Bank of Japan, In turn Nippon Steel was the second largest stockholder in the Industrial Bank. The Fuyo group was Nippon Steel's second largest lender and 3rd largest stockholder, while Nippon Steel was the Fuyo groups third largest stockholder. The Chairman of Nippon Steel was on the advisory board of at least a dozen of the country's banks, corporations and government ministries.

Letting a supplier or partner go bankrupt was as unthinkable as a parent abandoning a child. Banks were known for rescuing troubled companies On the relationship with suppliers one Nissan executive told writer Steven Vogel, “If you just procure what is cheapest then what do you do about the cost of developing the next technology?”

The keiretsu system allows companies to think in the long term, take bigger risks, invest more and compete more aggressively without worrying quarterly profits. It also gives them the power to fix prices, impede imports and shut competitors out of markets by cutting off shipments from suppliers and convincing distributors not to accept their products. As cartels keiretsu were very effective over the years in keeping foreign imports out of Japan and were often the target of trade battles between Japan and the United States. Exchanging shares makes large companies immune to hostile takeovers and prevents large dividend payments.

Foreign companies have claimed that huge domestic profits made by companies like Fuji film using cartels to jack up prices allowed them to undersell the competition abroad. They also claimed that cartels, in copper for example, became so large that could control prices and bidding.

The powers of the keiretsu and Japan Inc are not what they once were. Keiretsu loyalties are breaking down as companies have become more concerned about the bottom line. During hard times, keirestu obligations can be a burden as large companies give loans and subsidize to help prop up their ailing subsidiaries.

Impact of the 2011 Earthquake and Tsunami on Japanese Industry

20110413-US Navy Sendai 2.jpg
fire in Sendai's industrial area
A total of27,149 businesses in three prefectures were damaged by the March 2011 earth. Among commercial and industrial businesses affected by the disaster in Iwate, Miyagi and Fukushima prefectures, 22 percent were closed temporarily or permanently. Progress has been slow in rebuilding main industries in coastal areas, such as seafood processing, and about 65,000 people were still looking for work at the end of 2011.

In March 2012, the Yomiuri Shimbun reported: Among listed companies, 1,356, or about 40 percent, have declared special losses due to the Great East Japan Earthquake in their full- or half-year earning results, according to Tokyo Shoko Research Ltd. The credit research firm said total losses had reached 4.07 trillion yen.The largest loss--2.1 trillion yen--was recorded by Tokyo Electric Power Co. because of compensation to victims of the nuclear disaster at the Fukushima No. 1 nuclear power plant. The company's figure alone accounted for about half of the total losses. [Source: Yomiuri Shimbun, March 12, 2012]

Tohoku Electric Power Co. suffered 173.1 billion yen in losses because of severe damage to its electric power facilities, while JX Holdings Inc. incurred a 137.4 billion yen loss as its refinery was damaged by the disaster. Sumitomo Metal Industries Ltd. incurred a 74.3 billion yen loss, and Nippon Paper Group Inc., 71.1 billion yen.

Initial Impact of the Earthquake and Tsunami on Factories

A total of 1,135 of Japan’s 1,597 listed firms — including some of Japan’s best known companies’suffered earthquake and tsunami damage. Of these 529 companies said they suffered building damage. In the tsunami-devastated areas even factories two kilometers inland were wiped out. These included a Sony factory that made Blu-ray discs, a Hitachi factory that makes parts for nuclear reactors and Renesas Electronic factory that makes LSI chips. Inland a Shiseido shampoo was decimated by the earthquake. There many companies had to start from scratch in their rebuilding efforts.

The disaster also immediately affected the supply of all sorts of components used in myriad consumer electronics and other products. Toyota, for one, closed all its factories for at least a few days and it stock value tumble by as much as 6 percent. Globally there were shortages of everything from video tape to I-phones because key components were manufactured in northen Japan.

Steve Lohr wrote in the New York Times: Japan is a major exporter of cars, consumer electronics goods, and parts and sophisticated industrial machinery... A high-tech factory does not have to topple to halt production. A strong shaking, like that generated by the magnitude-8.9 earthquake can upset the delicate machinery used in production. Recalibrating the machines, analyst say, can take a week or two, crimping supplies.” “We do expect some upward price pressure because of this,” said Dale Ford, an analyst at IHS iSuppli, a technology market research firm. But it is too soon, Mr. Ford noted, to predict how much prices might rise, though it should not have a long-term impact.[Source: Steve Lohr, New York Times, March 11, 2011]

In the electronics industry some producers were unable to resume production because their factories were located within the 20-kilometer evacuation zone around the Fukushima nuclear power plant. In many cases companies that usually competed against one another to provide assistance to their common parts suppliers and helped each other secure needed parts.

Things could have been worse. Japan, for example, produces 40 percent of lightweight memory chips most commonly used for storage in digital music players, smart phones and tablet computers, estimated Jim Handy, an analyst at Objective Analysis, a research firm. But most of the plants that make such chips, and other electronics components, are south and west of Tokyo.

Impact of the Earthquake and Tsunami on the Automobile Industry

20110413-Kelly Kaneshiro Japan_earthquake_store_shelves.jpg
Short term shortages in Sendai
The car industry was hard hit because about 30,000 parts are needed to make a car and many precision parts are so specialized they have no substitutes. This means that if production of these parts is disrupted then production of the cars made them also have to be halted.

Among the auto parts factories shut down by the disaster were: 1) Kanto Auto Works in Kanegasakicho, Iwate Prefecture which makes body parts assembly for Toyota; 2) Central Motors’s Miyagi in Ohiramura which makes body parts assembly for Toyota; ; 3) Keihin Corp’s Kakuda plants in Kakuda, Miyagi Prefecture which make vehicle parts for Honda; 4) Iwaki Diecast Co. in Yamamotocho, Miyagi Prefecture which makes auto parts; 5) Naime Japan Brake Co. in Namiemachi, Fukushima Prefecture which makes brake parts; and 6) Nissan’s plant in Iwaki, Fukushima which makes engines.

Toyota, Honda, Nissan, Mazda and other Japanese automakers shut down production for several weeks at their plants in Japan. But Toyota resumed production at all of its Japanese plants within six weeks after the quake. “Japan’s major automakers have long had contingency plans in place to keep supplies moving,” Lohr wrote. “Car companies did report damage to some factories and offices, and Honda said one employee was killed at a research center in Tochigi, north of Tokyo, when a cafeteria wall collapsed, Toyota, Japan’s largest automaker, reported that its car assembly plants had resumed production after a brief stoppage — though four factories operated by Toyota subsidiaries remained closed while workers were evacuated to safer areas. But most of Toyota’s Japanese production is done south of Tokyo, especially around Nagoya, including the Prius hybrid, which is built only in Japan.” [Source: Steve Lohr, New York Times, March 11, 2011]

The effects of the earthquake were felt not only in Japan by the Japanese car industry. Honda cut production by half at its plant in Swindon, England. Citreon temporarily laid off workers in its French plants to conserve parts from Japan. Ford closed a plant in Belgium for the same reason. General Motors had to temporarily shut down production and lay off workers because of a lack of parts from Japan. As a result of this many automakers took another look at the global supply chain strategy

Auto factories that stopped production were able to restart production within a few weeks the plants were unable to operate at full capacity because of parts shortages, In the early going about 500 parts were hard to get. By late April 150 parts were hard to get. These included microcontrollers that regulate the engine and other systems. Brake parts and chemical products such as coating materials and paint — most of which modern 30,000-part cars can not be produced without. By May the number of kinds of parts needed by Toyota had fallen to 30. Supply chain disruptions caused by a dearth of parts continued until the end of 2011.

Japanese Factories Recover After Quake

Reporting from Shibata-machi seven weeks after the disaster , Andrew Pollack wrote in the New York Times, “When the ground shook violently on the afternoon of March 11, the ceiling collapsed in part of the huge Ricoh copier factory here, exposing the vents and wires above. The offices at the Ricoh plant near Sendai are still in disrepair; workers have focused on restoring the factory and production. The ceiling is still not fixed. But employees are back at their posts, working under temporary lighting and wearing hard hats to protect themselves in case debris falls.” [Source: Andrew Pollack, New York Times, May 1, 2011]

“The factory may be a case study for the can-do recovery of Japan’s manufacturing industry. Only seven weeks after the huge earthquake in northeastern Japan collapsed the ceiling, toppled a huge water tank and upended assembly line equipment, the Ricoh factory here is nearly back to full production. And so, for the most part, is all of Ricoh, a nearly $25 billion company that makes copiers and other office equipment.” “The influence of this disaster is not as large as the world thinks,” Shiro Kondo, Ricoh’s president, said in an interview at the company headquarters in Tokyo.

“At varying speeds, Ricoh’s story is being played out all over the quake-affected parts of Japan. The pattern suggests that whatever the long-term effect of the natural and nuclear disasters on this country, manufacturing — the most important cog in Japan’s export-oriented economy — might largely rebound within a few months.”

“Without doubt, things are not back to normal yet. And some sectors, particularly automobile manufacturing, are suffering more than others. Still, almost every day companies are reporting progress on some of the hundreds of factories knocked out of commission by the quake or ensuing tsunami. The government estimates that 7 percent of Japanese factories were in the region heavily affected by the earthquake. A survey of 70 damaged factories released in late April by Japan’s Ministry of Economy, Trade and Industry found that nearly two-thirds of them had recovered while most of the rest in the survey group expected to do so by summer.”

“Shin-Etsu Chemical, a leading producer of silicon wafers used to make computer chips, said last week that it expected to return to pre-earthquake production levels by July. Sony has resumed operations at nine of its 10 halted factories, with the 10th expected to come online in phases from May to July.”

“Mr. Kondo, Ricoh’s president, said it would probably take half a year for the company to be fully back to normal. He declined to say how much the lost production and the lower economic activity expected in Japan this year would hurt the company’s sales and profits.”We have many problems, so it’s very difficult to think about the results of this year,” he said. His main concern was that a drop in industrial and consumer spending would mean less photocopying. Japan accounts for about 45 percent of Ricoh’s sales.”

Parts Shortages and Weak Emergency Planning

Andrew Pollack wrote in the New York Times, “The biggest susceptibility for Ricoh and many other companies has proven to be parts shortages. Although Japanese manufacturers have spread their factories around the world — Ricoh makes 70 percent of its products outside of Japan — many of those overseas plants often still depend on parts made in Japan.” [Source: Andrew Pollack, New York Times, May 1, 2011]

“For example, Tohoku Ricoh, as this plant is known, is the company’s only factory making a particular motor used in copiers. When the factory here went down, a giant Ricoh plant in Shenzhen, China — which supplies most of the Ricoh copiers sold in the United States — had to stop production for a full week. Ricoh is also dependent on parts from various suppliers in Japan, some of which suffered their own damage from the earthquake. That is forcing Ricoh to live off its inventory of certain computer chips and connectors. If production of those parts does not resume in the next couple of months, Ricoh might have to slow or halt production.”

“Another weakness was in emergency planning. Tohoku Ricoh, for instance, had 200 metric tons of backup water for cooling and ink production, in case water service was disrupted. But when the power also went out, it could not pump the water to where it was needed. Workers had to deliver the water, one ton at a time, by truck. The emergency plan at Ricoh’s headquarters was designed to cope with a big earthquake in Tokyo, not one in northeastern Japan. “We had a manual of what to do in such cases, but things did not go as written,” said Toshihiro Kenmoku, a leader of the recovery task force at headquarters.

Companies Cooperate and Workers Rally to Get Factories Open After Quake

Masatomo Onishi of Kansai University, who studied the recovery after the 1995 Kobe earthquake, told the New York Times that when a disaster strikes, Japanese companies tend to cooperate with one another and workers rally to the cause. [Source: Andrew Pollack, New York Times, May 1, 2011]

Andrew Pollack wrote in the New York Times, “That seems to be the case at the Ricoh factory here. Even many of the Ricoh workers who lost family members to the tsunami came to work. Some whose homes were destroyed or flooded slept on blankets on the floor of a factory conference room. With gasoline scarce, many rode bicycles. And with bathrooms not working because of blocked sewer lines, employees improvised with plastic bags.”

“When the earthquake occurred, powder started coming out of the walls and ceilings of the office of Hiroshi Tsuruga, the president of Tohoku Ricoh. “I felt like I would be crushed with the building and die,” Mr. Tsuruga recalled. The day after the quake, 70 factory employees gathered in the gym to plan the recovery, posting the plans on the walls. A similar scene was taking place at headquarters in Tokyo, where a conference room was converted into a war room for a recovery task force. The table soon became covered by phones, documents and packages of instant noodles.

One of the first tasks was to send 10,000 bottles of water, as well as food, blankets and other supplies, to Ricoh’s stricken factories using the company’s own trucks. Besides Tohoku Ricoh, three other Ricoh factories making a variety of products and one research center were damaged. But Tohoku Ricoh — which accounts for about $60 million in annual revenue, or one-fortieth of Ricoh’s total — posed the biggest challenge.”

“The priority was to restore production of ink and the motors made only at the Tohoku plant. Finally, by April 6, all the production lines were back in operation, with the exception of toner manufacturing. (Toner is used for machines that can print, copy and scan, while ink is used for some copiers.) Then, On April 7, an aftershock of magnitude 7.1 jolted the region. Electricity and water were knocked out again and many repairs undone. “Production went back to zero again,” said Hiroyuki Murakami, a general manager. It took until April 15 to restore motor production.

“At Ricoh headquarters, the war room has reverted to a conference room. But a new challenge looms. Because of the power plants disabled by the earthquake and tsunami, big companies like Ricoh will have to cut their use of electricity by up to 25 percent in the summer, which could also disrupt production.”

Economic and Infrastructure Damage from the 2004 Niigata Earthquake

At 5:56pm on October 23, 2004, an earthquake measuring 6.8 on the Richter scale hit the Chuetsu region of Niigata prefecture. A total of 67 people died and 4,805 were injured. About 13,000 buildings were destroyed or severely damaged and more that 100,000 people were evacuated. The 6.8 earthquake was one jolt in series of seven earthquakes that occurred over a two hour period that were followed by a series of aftershocks, some of them quite strong, that continued into December.

By some estimates the earthquake caused $13 billion in economic damage because of delays and lower production. Factories in Niigata that produce fine fabrics and precision equipment were forced to shut down. A large Sanyo chip-making plant was shut down. Sanyo had originally planned to post record profits but the earthquake caused it to post loses for the year. Matsushita and Sharp factories in the area were also affected.

Niigata Earthquake in 2007 and the Automobile Industry

On July 16, 2007, an earthquake measuring 6.8 on the Richter scale struck Kashiwazaki in Niigata Prefecture, killing 15 people, injuring 2,300 and damaging 14,000 homes. Cracks opened up on roads and major expressways. A fire broke out at a nuclear power plant. Tremors were felt as far away as Tokyo. Damages from the quake were estimated do be around ¥1.5 trillion.

The earthquake affected he automobile industry by closing or slowing suppliers whose factories were damaged by the quake which in turn forced the temporary closure of some assembly plants that relied on parts from these suppliers. Toyota was forced to halt production at all of its plants for two days ands saw production drop 9.5 percent for the month, showing vulnerabilities of the “Just in time” production strategy.

The closure of an auto parts plant that made piston rings in Kashiwazaaki affected the production of engines outside the region and that in turn affected the making of cars, and caused all 12 Japanese car makers to shut their production lines. The plant, owned by the Riken Corp., makes 50 percent of the piston rings for the Japanese market The rings are made to very precise specifications. Bringing in other manufacturers would require Riken to reveal production secrets.

Automakers production fell by 120,000 units. Toyota alone had to suspend operations at 30 plants because of the piston ring shortage. The automakers dispatched a huge number of employees to the Riken plant to get the plant back in operation, a goal that was achieved in less than a week after the earthquake. A number of other factories and businesses were also affected.

Thai Floods Impact Japanese Industries and Consumers

In the autumn of 2011 stocks of printers, glasses, hard disk drives ran low in Japan as plants affected by flooding in Thailand suspended production. The Yomiuri Shimbun reported, “The severe flooding in Thailand is making itself felt in the Japanese consumer market, as some electronic goods have become scarce and prices are surging. Stocks of such products as hard disk drives used in personal computers, printers, cameras, refrigerators and eyeglass lenses have dwindled, and suppliers have failed to deliver products on schedule due to the flood. [Source: Yomiuri Shimbun, November 5, 2011]

“A PC parts shop in Tokyo's Akihabara district increased all its HDD prices. The price of a 500 gigabyte HDD was raised by about 1.8 times the original price of 7,980 yen. Prices of other products were also increased by about 1.5 times. "This is the third time for us to raise prices since the flooding started. I think they'll go up further," the shop's owner said.

“Manufacturers of electronic goods are also being hurt by the flood. Toshiba Corp. decided to postpone the launch of new products, including refrigerators and microwave ovens, which it had planned to begin selling in November. Sony Corp. also postponed the launch of a new digital single-lens reflex camera. Nikon Corp., which makes 90 percent of its products in Thailand, has been forced to halt production as its plant was inundated by two-meter-high floodwaters.

“Canon Inc. said its production of printers, used by many people to make New Year's cards, will likely be affected. The company has suspended production since Oct. 6 at the thai plant that made its ink jet printers and related items. "[Printers] will be in short supply until the end of this year. We don't know how many popular products we can put in the shop," an employee at an electronics store in Akihabara said.

“Major optical glassmaker Hoya Corp. has shut down its plant for eyeglass lenses in Ayutthaya since Oct. 12 due to flooding. The company has no idea when it will be able to resume operations as floodwaters have yet to recede, it said. Under these circumstances, Hoya stopped accepting orders of custom-made colored prescription lenses. It also was late delivering bifocal lenses, according to the company.

“Automakers have been particularly hard-hit by the flooding in major industrial parks in the country. Honda Motor Co.'s plant in Ayutthaya has been inundated by floodwater, making it likely the factory's operations will be suspended for about six months. Because the floods also prevented the automaker from producing parts in Thailand, Honda has been forced to cut production at its Japanese and North American plants as well. Toyota Motor Corp. also suspended operations at its Thai plants because of the difficulty of procuring parts from its suppliers. Just like Honda, Toyota was forced to reduce production at its plants in North America and other parts in the world.

Flooding at a Thai Industrial Park used by Japanese High-Tech Firms

Junichi Fukasawa wrote in the Yomiuri Shimbun: “It has one month since the flooding began “at the Saha Rattana Nakorn Industrial Estate, one of seven inundated industrial parks in Ayutthaya and Pathum Thani provinces north of Bangkok and the first affected by flooding. All the industrial parks have been transformed into huge muddy ponds, and no one can reach factory buildings there without a boat. There was no indication when work to drain the parks would start. Several people were moving parts and other items from a plant by boat at the Hi-Tech Industrial Estate in Ayutthaya, but the area was mostly blanketed in silence. [Source: Junichi Fukasawa, Yomiuri Shimbun, November 5, 2011]

“About 100 of the 143 firms hit by flooding at the Hi-Tech Industrial Estate are Japanese. All their plants, including those for Sony Corp. digital cameras and Canon Inc. printers, were flooded nearly up to the first-floor ceilings. Although the water level has begun dropping, it was still 2.2 meters high. The tops of street lamps could just be seen above the water. The situation was essentially the same at the Nava Nakorn Industrial Promotion Zone in Pathum Thani Province. Oil was floating on the water, and there was a foul odor. A large truck and a drainage pump had been abandoned in the water.

“More than 400 Japanese companies have been flooded at the seven industrial parks. One company hired a diver to retrieve an essential mold from the water. The president of another Japanese firm said he felt like he had been hit by a tsunami of muddy water. thai Justice Minister Pracha Promnok, head of the nation's flood task force, said nowhere in Bangkok is safe from the advancing waters, indicating his concern about flooding of the central area of the capital.

Thai Floods Impact Japanese Industries and Consumers

The flooding in Thailand forced Japanese manufacturers to drastically reduce their production. Coupled with the soaring yen, there are now concerns that the floods will deal a serious blow to their year-end sales and business performance. Many major Japanese manufacturers have concentrated their manufacturing plants and parts supply chains in Thailand. But this time, such steps have completely worked against the companies. [Source: Yomiuri Shimbun, November 4, 2011]

“As part of their cost-cutting efforts, Japanese car manufacturers have embraced the so-called just-in-time production system, which is designed to avoid excess parts inventory, and consolidated their parts supply networks in Thailand. This efficient management style has helped make them competitive. However, the current situation has revealed once again that it can also be a weakness when it comes to crisis management, as shown by the Great East Japan Earthquake, which disrupted supplies.

“Other industries are facing similar problems. Disruptions in parts supply chains are delaying productions of various items, forcing Toshiba Corp. and Sony Corp. to put off product launches of refrigerators and digital cameras, respectively. There will likely be a shortage of hard disk drives (HDDs), a key component for personal computers, which will certainly influence PC manufacturers' year-end sales.

“The government's white paper on manufacturing industries this year showed Japanese companies' unpreparedness for such a situation. Asked in a survey in February what countermeasures would be implemented if parts procurement was cut off, more than 90 percent of the companies said their measures were insufficient or they had not established any.

“Companies affected by the floods in Thailand tried to resume operations at their plants as quickly as possible by procuring alternative parts from Japan, China and elsewhere, and supporting restoration of their suppliers' factories. In the future they will need to develop parts that can be easily replaced with substitutes and manage their inventory more appropriately.

Image Sources: 1) TEPCO 2) Toyota 3) 4) 5) Nippon Steel, 6) Osaka Gas 7) Wikipedia

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated October 2012

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