Challenges and Direction of the Industrial Policy December , 2012 Tadao Yanase Ministry of Economy, Trade and Industry
Before the Great East Japan Earthquake The Industrial Structure Vision 2010 June 3 ,2010: released by METI Minister’s Task Force
Industrial Structure Vision 2010 For the reform, the first step must be to objectively observe and recognize severe current situation and challenges of Japanese industries. We analyze the background of the current stalemate into three factors.
［1st factor］: Problem of the overall industrial structure ( i.e. “too dependent on automobile” and “too many companies in one sector”) ［2nd factor］: Obsolete business model (Why Japanese industries “win in technology but lose in business”) ［3rd factor］: Incompetitive business infrastructure (tax system, human resources, etc.) 2
Current Situation and challenges of Japanese Industry ２．Background to the Stalemate ① Problems in the Overall Industrial Structure ●
Extreme dependent on automotive industry
Not sustainable
Contribution of auto industry to GDP growth (2000 – 2007 )
¥ 13
trillion
Automotive contribution is about 50 % ¥6
Overall (GDP growth rate)
trillion
Auto industry share
3
Current Situation and challenges of Japanese Industry ２．Background to the Stalemate ① Problems in the Overall Industrial Structure ● Too many companies in one industry → low profitability.
Japan
North America
Europe
Asia & others Samsung (ROK), LGE (ROK), TCL (China)
LCD TVs
Sony; Sharp; Toshiba; Panasonic; Funai Electric
Vizio (U.S.)
Railways
Nippon Sharyo; Hitachi, Kawasaki Heavy Industries; Tokyu car corp.; Kinki Sharyo
Bombardier (Canada)
Toshiba (WH), Hitachi, Mitsubishi Heavy Industries
GE (U.S.)
AREVA (France)
Doosan Heavy Industries & Construction (ROK)
oray; Metawater; Ebara; Kubota, others *The number of leading companies is 16 in equipment, 9 in plant construction, and 3 in operation and maintenance management.
GE (U.S.), Nalco (U.S.)
Veolia (Europe); Siemens (Germany), Suez (France)
Thames Water (Australia)
Toshiba Medical systems, Hitachi Medical, Shimadzu; ALOKA
GE (U.S.)
Philips (France)
Nuclear
Power
Water business (Drinking water & sewerage)
Diagnostic imaging
equipment
Philips (Netherlands)
ALSTOM (France), Siemens (Germany)
Hyundai Rotem (ROK)
?
4
Current Situation and challenges of Japanese Industry
Japanese companies profitability is less than half that of overseas companies
Comparison of profitability (5 industries) (Profitability)
18% 16%
14% 12% 10%
Japanese
8% Foreign
6% 4% 2%
0%
Telecommunications equipment (2007)
Heavy electric Semiconductors Chemicals machinery (2007) (2006) (2007)
Cement (2007)
(source) Made by METI based on 2009 White Paper on Manufacturing.
5
Current Situation and challenges of Japanese Industry ●
The “key” to capture the global market has shifted to the “scale and speed of investment.”
Domestic market size per company in South Korea(Market size in Japan=1)
Investment in Semiconductor After the major reorganization After the major reorganization ofindustries industries inin South Korea of South Korea
(trillion yen) 8,000
Samsung
Passenger cars
Iron and steel
Cellular phones
Electricity
Oil distributor
1.5
1.5
2.2
3.9
1.1
7,000 6,000 5,000 4,000
Average of Average of 5 5Japanese Japanesecompanies companies
3,000 2,000
South Korea’s domestic market is smaller than Japan’s, but market size per company is bigger in South Korea.
1,000 0 199119921993199419951996199719981999200020012002200320042005200620072008
6
Sharp decrease of private sector’s investment Basic trend: Among Japanese manufacturers, capital investment scale is limited to their depreciation value after 90’s. Vintage of plant and equipment results in drop of their competitive position. （trillion yen）
70
＜capital investment＞
60
50
Capital investment
Negative trend after 90’s
（year）
＜vintages of fixed capital＞
14.0 13.4 13.0 manufacturer 12.0
40 11.0 30
Getting older after 90’s
10.0 20
depreciation value
9.0
10 8.0 0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
1961年度 1966年度 1971年度 1976年度 1981年度 1986年度 1991年度 1996年度 2001年度 2006年度
left：Financial Statements Statistics of Corporations by Industry(MOF) right：Business and Investment Survey of Incorporated Enterprises:, National Wealth Survey(Cabinet)
7
Current Situation and Issues of Japanese Industry ２．Background to the Stalemate ② Problems Involved in Corporate Business Model
●Win by technology, but Lose in business
Shareshare in theinworld market (%)(%) Japan’s the world market
DVD player
Car navigation system
Liquid crystal panel
DRAM memory
Solar power generation panel
8
Closed / Open success strategy (Digital camera) Successful business model: Closed / Open strategy (Digital camera)
MCU
Fourier Transformation
A/D
CDS
CCD
Shutter Apertures
AF+ Lenses
DSP image processing
Applications M/W OS Drivers Image compression and expansion
LCD
Concentration and encapsulation of integration know-how
Video
Controllers AF and other lenses, shutters, sensors
Memory cards USB
Internal structure is a complete “black box� Source: Materials from Univ. of Tokyo Professor Koichi Ogawa
Only external interface of digital camera adheres to global standard
Increase in mass production by other companies 9
Changes in Added-Value Strategy in the World 1970s
Late 1980s
Japan
Dominated the world through vertical Integral model and in-house development policy
1990s
Measures to boost domestic economy
Collapse of bubble economy (1991)
Digital technology
・Pro-patent ・Joint research
Loss of world share
Modularization, Move to open technology
・Drawing intellectual human resources ・International standardization
Europe
・Strengthening of location competitiveness (corporate tax reductions, etc.) ・Integration of intra-regional markets ・Government-led joint research
Asia
Asian currency crisis ⇒Large industrial reorganization (South Korea)
Restrictions on foreign investment
Delay of change
Reform of state-run enterprises, foreign capital inflow policy (China)
Bold tax reductions Concentrated investment in for investment
specific products
U.S. and European cooperation with labor production in Asia
U.S. Loss of world share due to vertical integration
Shift in strategy to open inovation
Present
Three excesses (debts, capacities, employment)
Yen’s appreciation Bubble
Competition
Around 2000s
Winning back world market share by promoting modularization models
Concentrated support for strategic fields (clean energy, next-generation automobiles)
10
Current Situation and Issues of Japanese Industry ２．Background to the Stalemate ③ Problems in Corporate Business Infrastructure
(1) Corporate tax rate 45
40
35
30
42%
Japan
41%
○Actual tax burden ratios of major corporations in Japan and South Korea (Average for fiscal 2006 through 2008, on a consolidated basis)
Japan
40%
40%
Advanced country average
34%
U.S. (New York State)
Sharp
Canon
Nominal tax rate
35.8%
38.0%
40.7%
28%
26% 25
25%
Asia (NIEs + ASEAN4 + China)
20 2000
2001
2002
2003
2004
2005
2006
2007
2008
South Korea
Samsung Electronics
LG Electronics
Nominal tax rate
15.7%
19.2%
27.5%
2009
(Source) KPMG Japan (Note) Figures for EU (15 countries as of 1998), OECD, and Asia are simple averages (but for Switzerland, the tax rate as of January 2008 was used).
11
(2) Competitiveness of Distribution Infrastructure ・ Japanese port and harbor infrastructure has become less competitive. ・ Narita losing ground in terms of air cargo handled.
Port
Airport
(Ranking of major ports in terms of containers handled)
(Ranking of major airports in terms of air cargo handled)
1994
2000
2008
Port name
Port name
2008
Airport name
Airport name
1
Hong Kong
1
Singapore
1
Memphis (U.S.)
1
Memphis (U.S.)
2
Singapore
2
Shanghai
2
2
3
Kaohsiung
3
Hong Kong
Hong Kong (China)
Hong Kong (China)
4
Rotterdam
4
Shenzhen
3
3
Shanghai (China)
5
Pusan
5
Pusan
Los Angeles (U.S.)
4
Incheon (ROK)
6
Kobe
6
Dubai
5
Anchorage (U.S.)
6
Paris (France)
7
Frankfurt (Germany)
8
Narita (Japan)
・・・
10
Yokohama
・・・
4
Narita (Japan)
5
Seoul (ROK)
6 New York (U.S.)
・・・
15
・・・
24
7
Tokyo 24
Tokyo ・・・
Nagoya
29
Yokohama
8
Anchorage (U.S.) Frankfurt (Germany)
12
(3) Competitiveness of Japanese Human Resources ăƒťThe inflow of highly intellectual foreign human resources into the Japanese labor market is very small compared with other advanced countries.
Ratio of foreigners who have finished higher education in the country (By far smaller compared with other advanced countries)
(2008)
Australia
Canada
U.K.
U.S.
France
Japan
29%
26%
16%
13%
12%
0.7%
Ratio of foreign students (Japan is lowest among major countries)
U.S. 5.8%
U.K. 25.7%
Germany 12.4%
France 11.7%
(2009)
Australia 28.6%
Japan 3.5%
ďźˆNumber of foreign students accepted á Number of students attending higher education institutions)
13
How to tackle the challenges
I
Shift in industrial structure - Building a new industrial structure that connects potential strengths to business Strengthen 5 strategic areas
Industrial structure
From a “Mono-pole structure” based on automobiles and electronics
To a “Stable multi-pole structure” based on the 5 strategic industrial fields
- Infrastructure related / system sales globally(nuclear, water, railroad, etc)
Sources of added value
To industries focused on system sales, business solutions and cultural value-added products
- Environment and energy problem solving industry(smart community, next generation automobiles)
From a efficient, oneitem selling industry
- Creative industries (fashion, content, etc.)
Impediments to growth Environment & energy, falling birthrate, aging population
Converting inhibitors into “Problem solving industry”
- Medical, nursing, health, and child care services - Frontier fields (robots, space, etc.) 14
How to tackle the challenges
II
Shift in business model - Win by technology and win in business -
Many firms in a war of attrition in Japan
Keys to global competition
High-level vertical integral model and in-house development policy
Modularization model (strategic combination of black box policy with open policy and international standards) in the private sector
International standardization in coordination with business strategy
Investment scale and speed
Industry reorganization and realignment to meet global markets
15
Aims of the Industrial Structure Vision Embarking on a nationwide effort to strengthen industrial competitiveness
III
Shift from the dichotomy between globalization and domestic employment - Job creation by aggressive globalization “and” building world-class business infrastructure - Make domestic operations more internationally competitive (corporate tax reform aiming at international standards, enhanced logistics infrastructure)
“Globalization = hollowing out” theory
Shift in growing markets from Japan and developed countries to emerging countries
- Attract High Added-value function of foreign enterprises abroad(Asia headquarter, R&D)
- Develop and invite high-level global human resources - Maintain key industrial capabilities within Japan (support investments in strategic areas, develop shop floor professionals) - Support SMEs’ entry into overseas markets 16
Development after Industrial Structure Vision
Major progress after the Industrial Structure Vision 2010 Cross-cutting policies
Corporate tax reform aiming at international standards ・FY2011 tax reform (reducing the effective corporate tax rate by five percentage points)
Reorganization of industries to enhance their competitiveness in the global market ・Amendments to the Law on Special Measures for Industrial Revitalization ・Establish the big fund for the open innovation (the Innovation Network Corporation of Japan (INCJ))
Attract and educate for higher-level global human resources ・Providing preferential treatment in terms of immigration control for foreign people by “point system.” ・Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Enterprises (aimed at making Japan an Asian business center)
Promoting economic partnership for high-level liberalization ・Progress negotiations of Japan-EU, Japan-China-Korea FTA ,TPP, Japan-Canada EPA ・Support to industrialization of Agriculture
Enhancement and retention of key industrial capabilities ・Introduce a subsidy program for domestic site location ・An Act of Support for Strengthening the Management of Small and Medium Enterprises
18
Major progress after the Industrial Structure Vision 2010 Strategic areas
Overseas sales of all-inclusive infrastructure packages ・Support for the export of infrastructure and related operational management services ・Demonstrative experiments on smart community technologies
Environmental and energy solution business ・Enforcement of the Act on special Measures Concerning Renewable Energy ・Storage battery strategy ・Bill to amend the Act on the Rational Use of Energy
Creative industries (fashion, content, etc.) ・Introduction fund by strategic partnership between the government and private ・Adoption the projects to cultivate overseas
Medical, nursing, health, and child care services ・Bill to Promote Businesses to Address Economic and Social Issues ・Promotion of Japanese-style medical care with integrated devices and services overseas
Frontier fields (robots, space, etc.) ・Promotion of R&D in Frontier fields ・Identification of seven strategic fields of International standardization(next-generation automobiles, etc.) 19
Reducing the effective corporate tax rate by 5 percentage points
Effective corporate tax rate (including local taxes) (FY2011)
(FY2012-2014)
(FY2015~)
40.69%
38.01%
35.64%
Cut by 5%
20
New Economic challenges after the Great East Japan Earthquake
０．Repair of Fragility of supply chains against earthquake and flood →Relatively repaired ”reconfirming Japanese strong point”
１．Continuous deflation ２．Risk of hollowing-out by further appreciation of the yen exchange rate ３．Supply shortage and cost increase of electricity and energy (by the accident at the Fukushima Dai-ichi nuclear power station and unstable Middle-East politics)
４．Financial problem in Europe
22
Current status: Shrinking equilibrium and gradual decline
Shrinking equilibrium and gradual decline of the private sector ・Households: With suppressed consumption, savings continue to increase. ・Corporations: Weak domestic investments lead to excess savings.
National wealth keeps shrinking
Nominal GDP has decreased by over 40 trillion yen in the last four years
Difficult to reallocate a shrinking pie
Nominal GDP (2007FY)
(2011FY)
513 trillion yen
470 trillion yen
▲ 43 trillion yen 23
Limitation of business management based on patience and cost cutting ① During the recovery phase starting in 2002, domestic demand failed to provide a sufficient driving force for the Japanese economy as the benefits of increased exports did not trickle down in the form of higher wages U.S.A.
Japan
180
Export
170
160
160
150
150
140
140
130
130 Private-sector Investments
120
Export
Employees’ compensation
120
Private-sector Investments
110
110
Employees’ compensation
100 90 ⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣ 2002 2003 2004 2005 2006 2007
100 90 ⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣ 2002
2003
2004
2005
2006
2007
(Sources) “National Accounts,” OECD; net values
24
Limitation of business management based on patience and cost cutting② Japan’s import price index has risen significantly while export price index has been on a downward trend (i.e., deterioration in the terms of trade). (Year 2000=100)
(Year 2000=100)
Japan
U.S.A.
Import price index Import price index Export price index Export price index
(Year 2000=100)
(Year)
Euro Zone
(Year)
(Year 2000=100)
Asia Import price index
Export price index Import price index Export price index
(Year)
(Year)
【Note】 (Source) IMF International Financial Statistics Import prices are U.S.dollar-denominated. Asia includes India, Indonesia, Malaysia, Philippines, Thailand, etc.
The Japanese industry today may be poor in its ability to increase or create value added (i.e., ability to pass costs on to prices). 25
Limitation of business management based on patience and cost cutting③ ■Despite reduced compensation for employees, the labor’s share of national income remains high in Japan. Labor’s share of national income (Labor share = Compensation of employees / national income: %) （労働分配率＝雇用者報酬/国民所得：％）
70
Japan 65
フランス
United States ドイツ
U.K.日本 イギリス France Germany アメリカ
60
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
55
（年） (Year)
(Source) OECD National Accounts
Unless Japanese companies build ability to create and increase value added, Japan will never be able to stave off shrinking equilibrium and gradual decline. 26
Consumers also exercise patience out of anxiety about their future
With more people feeling anxious about post-retirement life, the savings rate of wage-earning households is on the rise. People with post-retirement concerns tend to have additional savings of two million to three million yen. → Worries about post-retirement life cause consumers to suppress consumption (patience for restrained consumption)
Impact of anxiety about post-retirement life and pensions on saving behavior measured in the amount of additional savings
Relationship between the savings rate and post-retirement concerns
Thousands of yen
2,846
3,000
Savings rate (%) 29
2,500 28
2,000
27
25
1,000
24
500
23
0
22
1985 20 30 40 Ratio of people with post-retirement lconcerns
50
Sources: Ministry of Internal Affairs and Communications, “Survey of Household Economy”; Cabinet Office, “Survey on People’s Life.”
1,786
1,500
2008
26
1,982
60 (%)
Extremely worried about overall postretirement life
Worried about the sufficiency of pension and insurance benefits
Worried about possible cuts in pension benefits
Source: Cabinet Office, “Annual Report on the Japanese Economy and Public Finance 2009.”
27
Structural factors of the current scenario of shrinking equilibrium and gradual decline
Business management based on patience → Low value added
Continuing deflation → Decrease in the expected rate of growth
Worsening employment environment → Decline in labor income
Downward spiral of the shrinking equilibrium and gradual decline Weak domestic consumption
Increasing anxiety about the future →Increase in domestic savings
Efforts need to be focused on enhancing value added and increasing households’ labor income. 28
Strong yen poses the risk of driving entire industries out of Japan 【Conventional offshoring】 ◆ Serving the growing local markets of host countries ◆ Taking advantage of cheap labor
【Ongoing offshoring】 ◆Burdened with six handicaps, Japan has lost locational advantage ◆Foreign exchange risk is too big to be dealt with by a single company
①Processing and assembling factories established to produce for local markets ②Capital equipment-intensive industries and certain materials industries giving priority to the “black-boxing” of their technologies tend to stay in Japan.
①Processing and assembling factories producing for the Japanese market transferred overseas (e.g., Nissan’s production lines for the March transferred to Thailand) ②Materials industries are joining the offshoring bandwagon (e.g., Toray’s carbon fiber production in Korea; Downstream steel processing operations in Asia) ③Increasing dependence on overseas suppliers for parts procurement (e.g., Nissan Kyushu’s import dependency ratio for parts procurement: 10%→40%)
Offshored operations may not return to Japan even if the yen weakens in the future 29
Why Japanese manufacturers find themselves in a difficult situation ■ A Japan-Korea comparison of automobile manufacturers’ profit-making structures shows that while declining cost competitiveness and shrinking profit margins are factors behind why Japanese automakers are thrown into difficult situations, the yen’s appreciation is having the biggest impact at the moment. 【Comparison of Japanese and Korean automakers in profit-making structures】 Japan Sales
Korea 100.0
100.0
－67.8 －1.0 －3.2 －10.1 －4.8 －1.9
－64.4 －0.5 －3.2 －7.3 －5.5 0.0
(Total cost)
88.8
80.9
Operating profit
11.2
19.1
Interest paid
－0.1
－1.0
Profit before tax
11.1
18.0
－4.4
－4.0
6.6
14.1
－12.8
－0.4
－6.2
13.6
Raw materials Fuel Outsourcing etc. Labor Depreciation Customs
Corporate tax※ Profit after tax Foreign exchange impact Profit net of forex impact
A. Cost competitiveness B. Profit margin
※Effective corporate tax rates: Japan 40%, Korea 22%
C. Appreciation of the yen
Source: Table was prepared by the Mizuho Corporate Bank’s Industry Research Division with some adjustments made by the presenter based on data from industrial and other statistics issued by the Ministry of Economy, Trade and Industry and other information.
30
Japan may fall into a current account deficit as early as the second half of the 2010s
(Trillion yen)
Japan’s current account balance (estimate)
If nuclear power plants resume operations and the yen depreciates
If nuclear power plants remain shut down and the hollowing out continues
Current account balance may turn negative in the second half of the 2010s.
31
How to tackle?
【Survival Plan①】 “Defensive” measures to cope with industrial hollowing out “Defensive” measures are needed in order to prevent the rapid hollowing out of industries. Ⅰ. Developing globally comparable investment and business environment Coping with overshooting yen appreciation
Establishing new economically viable energy policy and global warming policy Promoting economic partnership for high-level liberalization Reducing public service burden on companies e.g., the effective corporate tax rate, the equipment investment tax (depreciable property tax), the employers’ share of social security contributions Ensuring sustainability in social security and public finance → Promoting integrated social security and tax reform Ⅱ．Measures to counter the strong yen Assisting companies to keep investigation in Japan Supporting small- and medium-sized enterprises in restoring operations, making capital investments Addressing the mismatch between job openings and job seekers 33
【Survival Plan ②】 Package of “Proactive” measures (Creation of new industries) <Industries that cultivate potential domestic demand> New energy industry Healthcare Industry (Rechargeable batteries, (Medical and nursing care; electricity-saving health-related services) services etc.)
<Industries that capture global demands> Creative industry Infrastructure, (Agriculture, next-generation foods, content, automobiles “Cool Japan”)
Bill to Promote Businesses to Address Economic and Social Issues
Act of Support for Strengthening the Management of Small and Medium Enterprises
Aging society and fewer children ○Healthcare services ○Support services for working women ○Development of new medical care equipment, care robots, automatic cradles, etc.
Support SMEs to expand overseas operations Energy and environment ○Development and production of energy-saving and renewable energy technologies and products ○Commercialization of energy management services
Basic policy (collaboration with other ministries) →Plans approval and authorization
Financial support
Quality evaluation
Diversify and revitalize SME support service providers Exploring overseas markets ・Exporting infrastructure systems and reviewing the trade insurance ・TPP, Japan-China-Korea FTA, EU-Japan EIA, etc. Social regulations reviewed for changes Bill to amend the Act on the Rational Use of Energy
34