What The Manufacturing Industry Can Learn from the Development of the Overseas Shipping Industry

ABSTRACT

Though it may seem that the Japanese economy has achieved true economic expansion, problems such as the delay of supply system reform in responding to the changes in demand structure during the long term post-bubble stagnation show that Japan's structural reform initiatives remain lukewarm and inadequate. Moreover, trends such as the digitalization and increased modularity, and freer market access of the electronics industry demonstrate the growth of competition in the manufacturing industry in general. These are challenges that must be dealt with and overcome in order for the current profit recovery in the manufacturing industry to continue.

In considering the necessary policy measures for the manufacturing industry, the development of the overseas shipping industry in the past two decades may serve as a valuable reference. The remarkable improvement in the profits of the overseas shipping industry became the center of attention in 2003. While it is a fact that the more recent increase in shipping activity in and out of countries like China has been an important factor, even an even more important cause was the remarkable profit recovery that began in 1994. What we are seeing in 2003 are the first real results of the policy measures implemented after the sharp fall in profits in the 1980s.

This report focuses on the three main overseas shipping companies and the companies that have now been acquired by them. After a peak in '81, the profits of these companies dropped sharply. The main reason for this was the decrease in sales volume and a rise in the variable cost to sales ratio. This was brought about by (1) the upward shift of the yen in the yen-dollar exchange rate after the Plaza Accords in '85, (2) a decrease in the importation of raw materials due to the changes in the Japanese industrial structure, (3) the growing prominence of shipping companies in the Asian countries, Asian regions, and the communist states, (4) the lowered barrier of entry into the liner cargo sector due to the fast proliferation of container ships, which in effect transformed the sector from a integrated-type service to an open module-type service, and (5) the weakened influence of the shipping conferences, groups that had been exempt from the anti-trust law for liner cargo shipping, due to the enactment by the US of the Shipping Act of '84.

Though the industry showed some recovery from the late 80s to the early 90s, the real comeback began after '94, and here we see the important influence of the rise in sales volume. This rise in sales volume was the result of concentrated initiatives in each sector: (1) with the liner cargo shipping sector, the structure of the industry was reviewed and reformed, global alliances were made, and foreign port to foreign port trading increased as a result of increased localization, (2) with the non-liner shipping sector, automobile ships increased the amount of foreign port to foreign port business, and (3) in the tankers sector, LNG shipping was actively pursued.

In order to assure sustained profit recovery in the Japanese manufacturing industry, the following policy lessons can be drawn from the overseas shipping industry : (1) considering the utilization of foreign labor, (2) promotion of localization, and (3) company-wide effort to make sustained reductions in cost.

As for the consideration of utilizing foreign labor, it is important to consider the ways in which this could mitigate the disadvantages, or more fully realize the advantages that production in Japan has over production in other Asian countries and Asian regions. The problems that most often arise with the utilization of foreign labor are (1) the creation of social costs, (2) the friction that arises from difference in culture, customs, and religion, and (3) the difficulty of communication in the workplace.

In Japan's manufacturing industry, as can be seen from the experience of the overseas shipping industry, localization is necessary in order to raise competitiveness. Japanese manufacturing companies must pursue a product development that will cater to the sophisticated needs of American and European customers, and this can only be done through localization. Localization is further necessary in order to acquire market share in large BRIC markets, which are expected to enter long terms of growth in the near future.

Finally, manufacturing corporations should follow the lead of the overseas shipping industry in initiating continued and company-wide cost reduction programs. Cost structure reform is now like DNA in the overseas shipping industry. Even more than 10 years after the beginning of reform efforts in the industry, these efforts continue surely and steadily. In the same way, the manufacturing industry, giving no regard to recent profit recovery, must show no sign in letting up, and make concentrated and continuous efforts at reform.