Push and Pull Factors for Japanese Manufacturing Companies Moving Production Overseas February 20, 2013 Tsunehiko Yanagihara Mitsubishi International Corporation/Washington Office
OUTLINE 1. Hollowing-Out Trend in Japan s Manufacturing Industry 2. Important Push Factors - Overview - Yen Appreciation - Labor Rigidity and High Wages - Energy Uncertainty - High Corporate Taxes - Shrinking Domestic Market - Logistics Costs 3. Pull Factors - Growing Markets are All Overseas - Differences between Large Companies and Small and Medium-sized Enterprises (SMEs) Proprietary & confidential Proprietary & confidential 2
1. Hollowing-Out Trend in Japan s Manufacturing Industry (1/2) Overseas production ratio of Japanese manufacturing companies is rising. Overseas investment is growing due to emerging countries high GDP growth and Japan s low GDP growth. (%) 30 20 Manufacturing Industry Overseas Production Ratio (by type) 10 5.7 3.8 2.8 0 2.2 1989 1990 Processing-type* 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Manufacturing Total Others 25.4 18.4 15.5 Material-type** Source: Economic and Social Research Institute, Japan Cabinet Office : *Processing-type manufacturing industry: Machinery, Electric Appliances, Transportation Equipment, Precision Instruments **Material-type manufacturing industry: Textiles and Apparels, Pulp and Paper, Chemicals, Iron and Steel, Nonferrous Metals 9.8 2005 2006 2007 2008 2009 2010 2011 Trend of Manufacturing Investment and Nominal GDP Overseas investment Domestic investment GDP (Emerging countries) GDP (Developed countries) GDP (Japan) Source: Ministry of Economy, Trade and Industry Proprietary & confidential Proprietary & confidential 3
1. Hollowing-Out Trend in Japan s Manufacturing Industry (2/2) (%) 15 10 Despite relatively steady unemployment rate, manufacturing employment is down. Technical skills among new graduates are declining, while employee age is rising. Unemployment Rate 7.7 15-24 years old 9.1 9.1 9.6 9.9 10.1 9.5 8.7 8.0 7.7 7.2 9.1 9.4 8.2 8.1 (10,000 students) Fewer High School Students in Specialized Courses General course Specialized course (Technical, commercial, etc) 5 0 4.1 4.7 4.7 5.0 5.4 5.3 4.7 4.4 4.1 3.9 4.0 5.1 5.1 4.6 4.3 1998 1999 Total 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Ministry of Internal Affairs and Communication, Statistics Bureau Labor Force Employed by Sectors 2012 Source: Ministry of Health, Labor and Welfare Tertiary sector (Service) 70.2 (%) 30 Aging of Employees in the Manufacturing Industry Above 55 years 25.2 39.8 35.8 24.3 Secondary sector (Manufacturing) Primary sector (Agriculture) 24.8 4.0 20 10 22.1 Source: Ministry of Internal Affairs and Communication, Statistics Bureau Source: Ministry of Economy, Trade and Industry Proprietary & confidential Proprietary & confidential 4 15.1 Below 29 years old 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 15.7
2. Important Push Factors: Overview (1/7) Results of recent survey of Japanese companies show the main factors pushing production overseas include yen appreciation, high labor costs, energy uncertainty, and corporate taxes. Appreciation of YEN High labor cost Energy supply issue Corporate tax Overseas transfer of counterparties Population decline Overseas market growth Economic globalization Cheaper material cost Currency risk hedge Factors Accelerating Overseas Transfer (%) 0 10 20 30 40 50 Source: Ministry of Economy, Trade and Industry Proprietary & confidential Proprietary & confidential 5
2. Important Push Factors: Yen Appreciation (2/7) Steadily increasing yen value negatively impacts price competitiveness of Japanese exports in foreign markets. A rise in the exchange rate from 100/USD to 80/USD (20% change) raises the price of a car manufactured in Japan and exported to the US from $20K to $24K. Yen/US Dollar Exchange Rate Trend YEN/USD 249.3 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 1980 1982 1984 1986 1988 1990 1992 1994 1997- Asian Financial Crisis 1996 1998 2000 2002 2004 2006 2008 Source:Cabinet Office, Japan Sep,08 Lehman Crisis Proprietary & confidential Proprietary & confidential 6 2010 79.8 2011 As of Feb20th, 2013 93.5YEN/USD
2. Important Push Factors: Labor Rigidity and High Wages (3/7) Average wages in Japan are higher than those in other Asian countries and developing economies around the world. Labor mobility is also low. Hourly Compensation Costs in Manufacturing Sector, 2011 US$ Low Mobility of Labor Market in Japan Labor mobility rate* in Japan U.S.A 126.2 Canada 92.6 Germany 62.0 France 58.0 Denmark 57.9 Japan 31.9 Source: National Policy Unit, Cabinet Secretariat *Labor mobility rate=hiring rate + Turnover rate Source: U.S. Bureau of Labor Statistics Proprietary & confidential Proprietary & confidential 7
2. Important Push Factors: Energy Uncertainty (4/7) While Japan has long been highly-dependent on energy imports, energy supplies have been further constrained by the shutdown of nuclear power plants. Increased energy import dependency makes Japan s energy supply more vulnerable to external shocks (economic & geopolitical) and price increases. Japan s Energy Import Dependency (2009) (%) Yen/kWh Japan s High Energy Prices Currency Rate: 87.78Yen/US$ Nuclear Energy not included in domestic energy Nuclear Energy included in domestic energy Japan France U.K China Italy Germany U.S.A India Russia Canada USA UK France Germany Italy Spain Denmark Canada Korea Japan Source: International Energy Agency Source: International Energy Agency Proprietary & confidential Proprietary & confidential 8
2. Important Push Factors: High Corporate Taxes (5/7) High corporate taxes increase domestic production costs, especially compared to developing countries. (%) 60 50 40 30 20 10 Corporate income tax rate 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Australia Canada Chile Germany Japan Korea Mexico United Kingdom* United States Source: Organization for Economic Co-operation and Development 2008 2009 2010 2011 2012 2012 Japan 39.5 U.S.A 39.1 Germany 30.2 Australia 30.0 Mexico 30.0 Canada 26.1 Korea 24.2 U.K 24.0 Chile 20.0 Proprietary & confidential Proprietary & confidential 9
2. Important Push Factors: Shrinking Domestic Market (6/7) Domestic markets are shrinking as demographic trends progress. For example, there are signs of a downward trend in Japan s auto market. Population Decline in Japan Auto Sales Trend in Japan (Cars) 6,000,000 65+ 5,000,000-14 15-64 years old 4,000,000 3,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source:Mizuho Research Institute Source: Japan Automobile Manufacturing Association Proprietary & confidential Proprietary & confidential 10
2. Important Push Factors: Logistics Costs (7/7) Logistics and container shipping costs are high in Japan compared to other countries. Export Overseas subsidiary Factory/ Distribution Center Land freight Port Sea freight Port Land freight Overseas distributor/ Local factory Comparison of toll fee (regular fee for a car) Comparison of container fee (in 2008) No fee Japan U.S.A China Korea Japan Gaoxiong Busan (Taiwan) (Korea) Source: Presentation material from TOYOTA at council of advisers to Ministry of land, infrastructure, Transport and Tourism on Jan, 2013 Proprietary & confidential Proprietary & confidential 11
3. Pull Factors: Growing Markets are All Overseas (1/2) (Trillion yen) 100 50 0 74 The value of sales in overseas markets is growing, while profits are rising. This trend is encouraging Japanese companies to move closer to their markets. Sales Trends for Overseas Affiliates of Japanese Companies (by region) 76 46 79 86 51 North America Asia Europe 62 06 07 08 09 10 (FY) Profit Trends for Overseas Affiliates of Japanese Companies (10 billion yen) 800 600 400 200 0-200 84 43 41 78 42 52 67 31 162 164 188 131-2 319 53 423 80 33 515 248 273 242 174 (in Asia) (Trillion yen) Proprietary & confidential Proprietary & confidential 12 40 30 20 10 0 Manufacturing industries Non-manufacturing industries All industries 01 02 03 04 05 06 07 08 09 10 (FY) 357 689 331 419 33 33 27 24 25 24 21 3 China ASEAN4 NIEs3 Other Asian countries 773 354 166 445 280 23 20 Source: METI Survey on Overseas Business Activities 4 240 3 468 229 31 19 14 06 07 08 09 10 (FY) *ASEAN(Association of South East Asian Nations) 4:Indonesia, Thailand, Malaysia, Philippines NIEs (Newly Industrializing Economies)3: Korea, Taiwan, Singapore 411 769 359 4 35 24 17 4
3. Pull Factors: Differences between Large Companies and SMEs (2/2) The overseas production ratio is higher for large companies compared to small and mediumsized enterprises (SMEs). The most important reasons for moving production overseas also differ. Overseas market development is the most important factor for larger firms, while low labor costs are most important for SMEs. Overseas Production Ratio Reasons for Overseas Production by Company Size Overseas production Less than half More than half Source: METI Survey (Jan, 2012) No overseas production Large Companies 66% 53% 13% 34% SMEs 21% 18% 3% 80% Large Company SMEs Source: White paper on small and medium enterprises in Japan 2009, Small and Medium enterprises agency Note: The definition of medium/small company is from the medium/small company basic law. Proprietary & confidential Proprietary & confidential 13