Japan's Lean Mfg Becomes the World's Problem

It's not always that you feel sorry for Japanese automotive behemoth Toyota, but I'm sure we should all wish it well at the moment. For several years now, the Japanese have been the world's "lean manufacturing" innovators as exemplified by the likes of the Toyota Production System. During conventional times--therein lies the rub, but more on that later--they have sought to minimize muda or waste, which comes in seven forms: (1) overproduction, (2) overprocessing, (3) unnecessary transportation, (4) excess inventory, (5) excess motion of workers and equipment, (6) product defects, and (7) downtime. Certainly, we can all do without excess pollution, busywork, and material use. These are goals we can applaud.

However, these are obviously not conventional times in Japan as many supply disruptions occur: lack of electricity, water, transportation, and what else have you. Add in the human element of fear given what has occurred on top of the possibility of harmful radiation spreading. Given the highly interconnected production chains in Factory Asia (to use cheaper labour where available, inter alia), it may thus be detrimental that Japanese manufacturing has become too lean. Given that several Japanese wares are at the top of the production value-added pyramid, a lot of processing and other less knowledge-intensive activities elsewhere will have to wait while our Japanese friends get back to speed at doing what they do best. In the meantime, however, disruptions are noticeable. Be prepared for shortages of all sorts of manufactured goods in the near future, then. From Reuters:

Automakers, shipbuilders and technology companies worldwide scrambled for supplies after the disaster in Japan shut down factories there and disrupted the global manufacturing chain. Technology companies were particularly hit since Japan accounts for one-fifth of the world's semiconductor production, including about 40 percent of flash memory chips used in everything from smartphones, tablets to computers.

Multinationals that buy parts from Japan or have plants located there were grappling with power blackouts, factory closures and transportation problems after roads, railways and ports in north east Japan were destroyed by Friday's devastating earthquake and tsunami.

Toyota Corp was hard hit as many of its plants were near the epicenter of the 8.9 earthquake, and Sony Corp has suspended production. Texas Instruments warned its two suspended plants would take until July to return to full production, though it had managed to re-direct 60 percent of their output to other sites. Of the two, its Miho facility churns out about 10 percent of its analog chips by revenue.

Intel Corp was managing better. It buys wafers from Japan but relies on flights to transport goods. "Right now the main issue is trying to sort through the issues associated with moving materials within Japan," Intel spokesman Chuck Mulloy told Reuters. ON Semiconductor said unreliable power supplies kept one its six factories off line.

These disruptions pushed shares down worldwide in the industry. The Thomson Reuters G7 Semiconductor & Semiconductor Equipment Industry Group Domestic Float Price Return Index was off 1.1 percent late on Monday. Rolling power blackouts are set to hit Tokyo and surrounding areas over coming weeks, adding to the challenge of inspecting and repairing northern Japan manufacturing plants. Aftershocks and radiation leaks from damaged nuclear power plants also threaten production in the region.

Companies and analysts said it was too early to gauge how long the problems would last. Power supply is critical, as is transport. Ports handling as much as 7 percent of Japan's industrial output sustained major damage from the quake, with most seen out of operation for months.

Toyota plans to halt production at all its 12 Japanese plants in Japan through Wednesday to support relief efforts, slashing output by 40,000 vehicles. "Not only is the struck region one of our production bases, those directly hit and vastly affected include our dealers, suppliers and numerous other partners," Toyota President Akio Toyoda said in a statement on Monday.

Honda Motor Co said it would suspend production at its Japanese plants at least until March 20, and it was closely monitoring the supply of parts to its southern England plant in Swindon..."I'm looking at it as mostly a temporary issue for the industry," Standard & Poor's Efraim Levy said. "The question that no one can answer is what the duration will ultimately be...It seems to be the automakers' plants themselves are in OK condition, but some suppliers have issues that stop production of a whole vehicle line of a certain car or a certain truck."

Others warned the long-term impact may be more severe than anticipated. Dave Andrea, economist with the Original Equipment Suppliers Association, said the earthquake could have the largest impact on the global auto industry since World War II. Unlike now, past disasters had not hit as many segments of the infrastructure -- rails and roads to plants and electricity -- of a country with major auto manufacturing. "This is going to have an impact on every vehicle manufacturer and every supplier," he said.

As an illustration of a clear supply chain jam, many Korean firms have been left in the lurch:

South Korean companies, which depend heavily on Japan for LCD glass, chip equipment, silicon wafers and other materials to make semiconductors, are likely some of the worst hit. Hynix Semiconductor, the world's No.2 memory chipmaker and a rival of Japan's quake-affected Toshiba Corp and Elpida Memory, said it was concerned the quake may weaken consumer demand and disrupt supplies.

"It could give a boost to battered chip prices but that's a short-term impact from disrupted supplies," said Hynix CFO Kim Min-chul. "We are more concerned about the quake reducing overall consumer demand and disrupting supplies of chip components and equipment, which could interrupt our production as well."

Toshiba, which supplies more than a third of the NAND memory used worldwide in devices such as Apple's iPad, was restarting a chip factory in Iwate, northern Japan. The disaster also led to a rise in spot prices in China for DRAM chips, mostly used in personal computers, said chip price tracker DRAMeXchange. Nokia, said it was investigating supplies. About 12 percent of its components are sourced in yen, but Japanese components are likely to represent a larger share due to a recent renegotiation of supply contracts.

Japanese steelmakers halted production at some plants, a possible problem for South Korean shipbuilders since Japan exports 40 percent of its steel. South Korea has the world's top three shipbuilders -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine and Samsung Heavy Industries

While I understand the win-win of higher profitability and lower waste of just-in-time manufacturing, the flip side occurs in times like these. Given that there is so little margin for error in supplying critical materials and components abroad, a major event in a key nation like Japan jams many of those lying downstream.

If you're a follower of organization science, Factory Asia with lean manufacturing Japan at its head is a tightly coupled system where slight changes have widespread systemic consequences. There is often very little slack or room to accommodate, sorry for the term, slippages in the process. While redundancies can indeed be muda or waste, they may also serve as buffers to shocks administered during extraordinary situations. A system that relies so much on the right things being at the right place at the right time for the right folks to work on them is not resilient when the work flow is upset. Why did the stocks of several global manufacturers drop in recent days? Either their supply chains rely significantly on Made in Japan stuff--or at least certain folks think they are.

BTW: An incident which I recall had fairly marked knock-on effects was the 1999 Taiwan earthquake. Prices of computer memory (DRAM) of which it was a major manufacturer went up quite drastically in a matter of days after it occurred.

Why Aren't There Famous Chinese, Indian Brands?

A very fair criticism I do understand as an undergraduate and masters level business major is the non-emergence of internationally recognized Chinese and Indian brands. While there is no shortage of world-renowned German (think automakers) and Japanese (think automakers and consumer electronics) makes, there are no real Chinese brands with similar name recognition, let alone one amongst Interbrand's Best 100 Global Brands in terms of valuation. It is very odd, don't you think, that the world top merchandise exporter which surpassed Japan and Germany in fairly quick succession during the past couple of years has singularly failed to develop recognizable brands. To no small extent, the South Koreans have managed this feat with Samsung (#19--my favourite brand and that of the computer I'm pecking away at right now BTW) and Hyundai (#65). Taiwan is no slouch either. While not on the list just yet, the likes of Acer and Asus do ring a bell among the electronic hardware cognoscenti. While India's rise has not been as rapid as that of China, something it shares with the PRC is a lack of recognizable brands.

A reply I've used in the past is that it is very expensive and time-consuming to build brands. Hence, firms from both countries may have thought it better to buy established brands. So if you can't build 'em, buy 'em! A few years back now--my blog is becoming "venerable"--I discussed the phenomenon of "reverse colonization" wherein Indian concerns were buying up British marques at a rapid clip. Think of the Tata Group which I like to think of as "ICME": Indian Company Making Everything for those of you weaned on a steady diet of Road Runner cartoons. Especially for Anglophiles, don't the names Tetley Tea, Jaguar, and Land Rover ring a bell? The same holds for China to some extent with the example of Lenovo buying the rights to use the IBM name together with its ThinkPad line of laptops.

However, these examples should not obscure the broader fact that a lack of recognizable brands is truly a handicap with IPE implications. Most of the value-added in the global supply chain emanates from higher-level, intellectual property-heavy concepts such as branding. Indeed, many global corporations like Apple are little more than a logo stamped on products largely manufactured elsewhere to their spec. With labour and other manufacturing costs in China not bound to stay at a permanently low level forever, there is certainly pressure to move towards these value-added upper echelons of the supply chain instead of being stuck with the grunt work. Despite much criticism about China's efforts to promote national champions to the exclusion of foreign competitors, it remains true that the Chinese haven't managed the feat which Germany, Japan, and South Korea have. Ditto for India with a somewhat longer time frame in mind.

While perusing a recent Business Horizons issue in which I myself have a contribution (more on this later), I came upon an interesting article by marketing bigwig Jagdish Sheth and folks at Interbrand and the National University of Singapore discussing this very conundrum: How can we speak of the rise of China or India if they are still stuck in the second division at building recognized brands? Make no mistake; this erstwhile "marketing" issue may have important social and environmental consequences insofar as China may hold on too long to labour and environmental arbitrage when it's in its best interests to move up the value chain. Here is the abstract:

During the past quarter of a century, Asia has risen to become the world's factory. This trend has, however, coincided with the relative decline in value of manufacturing compared to other value adding activities, including R&D, design, and branding. This significant “value shift” has eroded the margins of manufacturing firms and sparked considerable interest among executives in Asia to design, brand, and market their own products. To date, though, this transition from being manufacturing oriented to becoming brand owners has largely only been accomplished by Japanese and Korean firms. In the rest of Asia—including in the rising giants of China and India—there are very few valuable brands. In fact, there is not a single Asian brand from a country other than Japan and Korea in Interbrand's 2008 valuation of the world's top 100 brands. Our article discusses, in depth, the challenges that Asian manufacturing firms encounter as they try to become “branders” and how these challenges can be overcome. Based on our collaboration spanning academia and consulting, we have been able to tap a wealth of information made available through research, case studies, and Interbrand's database of completed brand related assignments across Asia.

Why does branding matter more than manufacturing nowadays? Here's a brief history:

During the past few decades, we have seen a significant shift in value away from manufacturing toward design, marketing, and customer service. This is in sharp contrast to the Industrial Age, when manufacturing contributed the most to value creation of all activities undertaken by firms. The Industrial Revolution was largely a revolution in manufacturing that led to a mobilization of resources and an increase in productivity beyond anything previously achieved throughout millennia of human civilization. The industrialization recipe also proved highly replicable, spreading across countries in Europe and North America before arriving in Asia. In just a few decades, industrialization catapulted Japan from an isolated feudal state to a modern industrial nation capable of defeating Russia, a major European power, in war. Industrialization subsequently spread across Asia in what was often labeled the “flying geese” pattern during the 1980s. This initially transformed the “tiger economies” of Hong Kong, Singapore, South Korea, and Taiwan. Industrialization subsequently spread to other Asian countries including China, India, Malaysia, Thailand, and Vietnam.

However, during the past 25 years the rules of the game have changed significantly. In the post-industrial world, manufacturing is no longer the same engine of value creation that it was during the Industrial Age. As high quality products can now be produced anywhere, manufacturing has increasingly been re-located to emerging markets with low labor costs. As a result of these changes, manufacturing has largely become a commoditized capability characterized by substantial competition and declining margins. Those capturing the most value in the post-industrial economy now are firms which control critical capabilities relating to design, marketing, distribution, and service. The actual manufacturing of products is increasingly outsourced to manufacturing specialists. In this new world of outsourcing, companies no longer necessarily compete based on the manufacturing assets they own.

And here is what I believe is a key takeaway concerning the need for increased customer-centric focus as opposed to building "national champions" and similar nation-centric notions that have so far failed to achieve what they aimed for:

Defining the offering becomes the next key priority. This includes specifying the products and services that the company seeks to offer its target segments based on the key hooks identified in the market research. For many firms, this seems to be the end of the process to define the offering. We argue that it is equally important to look at the customer journey across all touch points; this includes marketing communications, sales, payment, installation, ongoing usage, and customer service. In short, it takes the perspective of the prospective customer, and follows how the customer will interact with the company at all stages. Only by aligning all touch points will the customer undergo a consistent brand experience. This means tilting the company away from traditional functional silos toward an end-to-end process thinking, with the customer at the center. Many firms we have worked with lack strong cross-functional teams that are empowered to operate transversally across the organization. Such teams are critical to conduct comprehensive feasibility studies and specifications of what it takes to deliver the offering. As previously discussed, it is important that the underlying quality and performance of a company's products and services are sufficiently high in order for the emerging brand to become successful. Achieving this usually requires a high degree of cross-functional collaboration.

It's a rite of passage that China has yet to make, but the authors do provide some thought-provoking ideas on how to get this task done. Needless to say, it's better accomplished through clever marketing than through protectionism. Proton, anyone?

And no, I will not spend good money on something called a "Chery Tiggo." More focus group work on naming products, pretty please.

Korean & Indian Carmakers Rise, Japanese Stumble

Let's talk about cars as affected by international currency war. We begin with more Japanese tales of woe involving the mighty yen among other things before shifting focus to more dynamic manufacturers in South Korea and, perhaps surprisingly, India. It may be true that Japanese carmakers have become less sensitive to the strength of the Japanese yen by locating more production abroad, but its home market is still quite important. And, with Japan entering its third decade of moribund economic growth, the current prognosis for local demand looks bleak. A mighty yen is sure to eat into sales figures as well after conversion. In particular, the recent withdrawal of government subsidies for retiring older models reveals that they might have stolen from future sales:

New vehicle sales in Japan tanked 23.2 percent in October, the first full month after government subsidies to replace cars older than 13 years expired, industry data showed. Excluding 660cc minivehicles, sales in Japan slid 26.7 percent, the lowest on record for the month of October, an official at the Japan Automobile Dealers Association (JADA) said. It was also the first time that sales fell short of 200,000 vehicles in October in 42 years.

"We have no way of telling how weak demand will be in coming months," said Michiro Saito, a manager at JADA. But he added: "Many dealers were fearing bigger falls of 30-40 percent, so in that sense we're a bit relieved." There was one fewer selling day in October compared with a year earlier. Among the worst hit were brands with a relatively high ratio of models eligible for the government subsidies, Saito said.

Nissan Motor Co's sales, excluding 660cc microcars, dropped 30.6 percent, Honda Motor Co's fell 29.9 percent, while Mazda Motor Co's sank 52.5 percent. Leader Toyota Motor Corp, whose hybrid models still enjoy exemptions on some taxes under a separate government incentive scheme, saw a comparatively tame fall of 24.7 percent, including its high-end Lexus brand.

However, the picture is not as bleak across the Asia-Pacific. South Korean carmakers appear to be doing quite well not just locally but globally as the balance of automotive power (OK, so I made that up since it sounds cool) shifts. There's also the matter of a Korean won that's relatively less mighty than the yen that's helping price competitiveness:

South Korean companies are expected to continue to outperform the global market in a weak recovery, driven by new model launches. Although the Korean won is firming, the Japanese yen, which hit a 15-year high against the dollar on Monday, remains far stronger, hurting the price competitiveness of Japanese vehicles sold overseas. Growing optimism for Korean car makers sent their shares surging on Monday, with Hyundai Motor shares jumping 6.2 percent and Kia Motors shares up 10.2 percent up in a broader market up 1.7 percent.

"Things cannot be better for Korean automakers," said Michael Sohn, an analyst at Macquarie Securities...Korean automakers are expected to log higher profits than Japanese peers this year, but their valuations are cheaper than Japanese makers. I expect rallies of Korean automakers to continue for the time being," Sohn said.

While demand for cars in developed markets [like Japan] is stuck in low gear on anaemic economic recovery and the end of government subsidies, global automakers have been increasing their focus on emerging economies such as China, now the world's largest auto market, and India.

Hyundai Motor, South Korea's top automaker, saw its sales rise 10.4 percent at home and abroad in October from a year earlier, while second-ranked Kia Motors saw its total sales jump 29 percent. The latest figures marked record highs and reinforced the bullish outlook for South Korean carmakers, which are expected to post strong earnings in the current quarter after reporting forecast-beating profits for the third quarter last week.

And let's hear it for Indian manufacturing! Long derided as a laggard compared to India's dynamic services sector, it is actually making it big:

Indian carmakers maintained double-digit sales growth in October on robust demand in one of the world's fastest-growing markets as a rapidly expanding economy, expected to grow over 8 percent this fiscal year, boosts incomes and consumer spending. India's top car maker Maruti Suzuki reported a 39 jump in October auto sales from a year earlier, while Tata Motors posted a 21 percent rise in sales. Mahindra & Mahindra's vehicle sales for the month rose 34 percent.

India's automobile industry is likely to grow by 18-20 percent in the fiscal year that ends in March, according to the sector body, Society of Indian Automobile Manufacturers (SIAM). Demand in India usually rises during the festive season that starts in September and peaks in November after Diwali, the Hindu festival of lights, when most employees get their annual bonuses.

It wasn't too long ago in 1997 that Kia declared bankruptcy amid the Asian financial crisis, but look at it now. The world has moved on and Japanese carmakers should have ample cause for alarm.