Future Prospects for Auto-related Industries in the Tohoku Region
Faculty of Business Administration
Tohoku Gakuin University
Expectations have grown still higher since the Great East Japan Earthquake that Tohoku’s auto-related industries will serve as a catalyst for the region’s recovery, but the road will be far from smooth. Here we overview the current status of auto-related industry clusters in Tohoku and examine the region’s potential as well as obstacles to reaching this. Based on this analysis, we turn to ways of developing the industry and the challenges presented.
Whether Tohoku region can successfully link the golden opportunity to become Toyota's third domestic hub with the restoration of the local economy hinges on the extent to which production facilities within the region can produce automobile components and the production facilities using these. This is because while the final assembly of finished vehicles might create a certain amount of employment, it offers only a limited economic effect in terms of generating more added value in the Tohoku region.
Current status of industry clusters
The Tohoku region is currently extremely short on auto parts industry clusters. There were originally no auto assembly plants, but since the 1960s, a few primary subcontractors have set up local operations. All of these are either affiliates of Nissan and Honda, which are based in the Kanto region, or else independent; none of them are Toyota affiliates. Subsequently, Kanto Auto Works' Iwate Manufacturing Plant started operations in 1993, but because in most cases there would be no profit in producing for that plant alone, only a few other Toyota affiliates originally followed in its wake. After the Iwate Plant added an extra production line and Central Motors shifted into the region, Tohoku's auto production capacity expanded to around 500,000 vehicles per annum. However, unlike the situation when auto companies gravitated toward Kyushu, the trend toward "local production for local consumption" in the auto industry is now picking up pace worldwide even as the Japanese market continues to shrink, dimming the prospects of auto production in Japan growing significantly in the coming years. This has left primary subcontractors' existing plants in the Chubu region and elsewhere with a substantial excess supply capacity, slowing the influx of auto affiliates into the Tohoku region greatly compared to the Kyushu region's experience. This is because while manufacturers might have to shoulder freight and warehouse costs, because they're producing in Japan for a Japanese market, they don't have to deal with tariffs and non-tariff barriers, so it's easier to produce parts in existing factories and simply transport them to where they are needed.
In addition, secondary and tertiary subcontractors are also in short supply. Not only did few of these move up to Tohoku, but there are few local plants with the capacity to be able to deliver a stable supply of components that meet the requirements of the auto industry in terms of quality, cost or delivery. There are a few local clusters fostered by those initial primary subcontractors noted above, but most still deal only with other companies in and beyond Japan, and have consequently failed to evolve into the hoped-for "third hub".
An overall increase in buffer stock is essential, which is one of the reasons for the comparative inferiority of Tohoku's production bases. However, as noted by Takeshita and Kawabata (2013), after parts have been freighted out of the region, at least in some cases they come back to Toyota's various Tohoku plants as part of integrated components. Murayama (2013) further observes that there are some small-scale local plants with outstanding processing technologies, and these have managed to enter the auto industry as secondary and tertiary subcontractors. In addition, while it is an exceptional case, Iwaki Diecast (Yamamoto-cho, Miyagi Prefecture) , which built itself up as part of the Keihin keiretsu which serves as a primary contractor for Honda, used its experience in the auto industry to secure business from Toyota Tohoku (now Toyota East Japan) for three years. Applying die cast technologies, Iwaki Diecast succeeded in cutting out machine processing, realizing a major cost reduction for existing parts, which led in turn to orders from Toyota itself. Orders have also come in from the medical care and electrical and electronic machinery fields, with the scope of the company's business continuing to expand.
Possibilities and obstacles
It is certainly not the case that Tohoku has no foundation from which to foster new suppliers. Tohoku has a traditional foundry industry—Iwate's Nanbu ironware, for example-and there are also local companies with top-flight production technologies. In the field of electronic and other engineering too, Tohoku University is a world leader, while Iwate University and Yamagata University too have areas of particular strength. There are also local electronic component manufacturers who have gradually developed along with the movement into the Tohoku region of the semiconductor and electrical machinery industries since the 1960s. At the same time, many of the major corporations that have set up operations in the Tohoku region have left their R&D and other key functions back in the Kanto and Kinki regions, taking only their mass production north—a "headless" foray, as it were. The result, unfortunately, has been that local subsidiaries have failed to develop key development and engineering capacity.
The auto industry, however, has still to really arrive in the Tohoku region, despite gradual hollowing-out and the difficulties faced by many electronic parts manufacturers. Auto manufacturers aren't taking advantage of these firms because the requirements of the industries for which they have traditionally worked are entirely different from those of the auto industry. Firstly, the auto industry generally aims to recoup its investment over the several years of the model change cycle, but local parts manufacturers which have worked in the semiconductor and electrical machinery industries where cycles are shorter still have a strong preference for investment recovery over the short term. Secondly, where a certain percentage of defective parts is a given in the chip and electrical machinery industries, in the auto industry defective parts can kill people, so perfect quality is essential. Thirdly, auto parts production often requires large-scale production facilities and buildings, so manufacturers are frequently unable to use their existing facilities. These differences in industrial characteristics have made manufacturers reluctant to take on the challenge of the auto industry.
Auto manufacturers have also been pursuing "mega-platform" strategies in recent years, fueling an increasing drive to standardize parts (Mokudai and Iwaki, 2013). The simultaneous rise in the use of electronics in automobiles offers a great chance for electronic parts manufacturers, but conversely, parts standardization means more mass order lots and consequently fewer chances to get orders, while with procurement shifting on to a global basis, the competition environment is becoming even more intense, presenting another major hurdle for Tohoku's parts manufacturers.
Development measures and challenges
This section will deal with efforts to increase auto production-related added value generated in the Tohoku region, as well as the development of the human resources to handle this.
Beginning with increasing added value, firstly, the Tohoku region needs to actively attract primary subcontractors. For parts manufacturers to be able to deal directly with auto manufacturers, they need advanced auto integrated component development and design capacities not only in relation to production technology but also product technology. Consequently, it will be a while before local manufacturers are able to take on the role of primary subcontractors.
Secondly, Tohoku needs to build supporting industries at the secondary and tertiary levels and beyond. This will also be vital in encouraging primary subcontractors to move north. The first step will be to manufacture products with stable quality, cost and delivery per the customer's design in order to build capacity and also trust. Parts manufacturers can then start to aim higher, gradually developing their product technology development capacity. However, that is likely to be a long and hazardous path. There is considerable doubt as to whether local firms will have either the time or the management capacity to take on this challenge. Accordingly, having some form of business that makes a stable profit and the capacity to continue engaging in upfront investment in auto parts production are probably essential conditions for entry into the industry.
Further, while the above is directed at local companies without experience in the auto industry who are looking to break in, in terms of realistic short- and medium-term steps, the best thing to do is probably to be pushed by the above-noted non-Toyota primary subcontractors that have already moved into the Tohoku region or cooperating local firms, or by local firms that are already producing small auto parts, and go on from there to establish business with plants set up locally by Toyota East Japan and Toyota primary subcontractors. Additionally, while it will depend on the strategic decisions of Toyota East Japan, a higher in-house production ratio would work in Tohoku's favor through an economic ripple effect.
Many challenges also present in relation to human resources development. Below I have summarized these into four issues according to workplace hierarchy, providing a brief introduction.
The first issue is how to secure enough factory workers of sufficient quality. With society aging and the birth rate falling, accompanied by population drift into Tokyo and other major cities, there is not a lot of spare labor at hand. Another problem is work motivation, with young people less interested these days in factory work. Given these conditions, relatively-unknown secondary subcontractors and below are unlikely to be able to secure good human resources, and this could hamper their growth.
The second is the shortage of factory floor managers. A lot of plants have only been in operation for a few years, but top-flight foremen are essential to smooth factory management, making this a priority human resource development task.
Third, Tohoku doesn't have the necessary structures in place to train the engineers needed to cope with the succession of factories being established in the region.
Fourth, the need for a change in mindset among local factory management cannot be overlooked. Developing managers with a thorough understanding of the particular characteristics of the auto industry and a strong attraction to the merits of entering the industry will be essential in the broadening the range of companies operating there.
Bibliography (All articles and book in Japanese)
Orihashi, Shinya, Takeshi Mokudai and Takatoshi Murayama (2013), The Tohoku Region and the Automobile Industry: Toyota's Third Hub, Soseisha Co., Ltd. (various chapters)
Takeshita, Hiromi and Nozumu Kawabata (2013), "Structure of auto parts procurement in the Tohoku region: Development of local procurement, constraints and prospects" in Akamon Management Review 12:10, pp 669-697
Mokudai, Takeshi and Fujio Iwaki (2013), "Exploring a new car development approach: VW's MQB, Nissan's CMF, Mazda's CA and Toyota's TNGA" in Akamon Management Review 12:9 pp 613-653
(original article : Japanese)