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Insight: Tsunami town epitomizes Japan Inc's dilemmas

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By Edmund Klamann

KAMAISHI, Japan (Reuters) - After the waters unleashed by Japan's March 11 tsunami receded, Sakae Kushida toured the big mobile phone makers that buy his electronic components, pleading with them not to dump his firm as a supplier.

He assured them his company Hirose Electric was preparing to shift some of its high-tech production to South Korea, after the tsunami wiped out the factories of a manufacturing partner in Kamaishi, an old steel town in the northeast, disrupting its supply chain.

"I told them, along with my apologies, that the impact of the March earthquake had largely been resolved, that we would establish dual production sites, so please don't abandon Hirose," said Kushida, Hirose Electric's senior executive vice president.

Hirose and companies like it may end up abandoning Kamaishi and other greying towns in Japan's manufacturing heartland, after the events of March 11 exposed the vulnerability of their intricate supply networks -- and the impact on the global supply chain, which seized up after the disaster.

Japan's manufacturing sector has been shrinking since the early 1990s and the onset of the "lost decades", moving core assembly and manufacturing operations overseas both for expansion into new markets as well as declining markets and rising business costs at home.

Japan had started to lose top talent and advanced operations well before the disaster. This is a country where electronics companies have been known to collect engineers' passports on weekends, fearful they might hop on a flight across the Sea of Japan to moonlight for Korean rivals.

"Since the 1980s, the trend has been to keep the production of the most advanced products in Japan and to shift lower value-added production overseas," said Katsunori Nemoto, director of industrial policy for the influential Keidanren business lobby.

"Now the Japanese market is shrinking and the advantage of Japan as a place to carry out advanced R&D is in question ... We are very worried that companies will shift their 'mother factories' overseas."

Those worries have only deepened since March 11.

TO THE MOUNTAINS

"The tsunami came over the road, over the railroad tracks and into the factory buildings," said Michiyuki Kimura, president of Omura Giken, the electronics parts maker in Kamaishi that sold about half its output to Hirose Electric.

All 160 workers on the day shift escaped the more than 20-meter (66-foot) wave that Friday afternoon, he said, calling it a miracle. "When the second wave appeared on the horizon, they could see it was higher than they were, and they fled to the mountains."

But all five of his buildings and the machinery within -- custom-designed presses, moulds and automated assembly machines to make microconnectors used in smart phones and flat TV screens -- were destroyed.

"This was devastating," Kimura said. "They can't be rebuilt."

That was what sent Kushida scurrying across the globe on his damage control mission to his mobile phone customers.

Yet the ructions in the global supply chain that the March disaster caused have recovered more quickly than expected, in no small part due to the cooperative arrangements that underpin Japan, Inc.

Industrial output has rebounded from the deep slump after the disaster as companies and local communities quickly mended broken supply chains and factories.

For Omura Giken and the town of Kamaishi, recovery will be far more problematic.

"There are a lot of places that had been giving us work that have now taken it elsewhere," said Kimura, who grew up in Kamaishi, a fishing and steel-making town of nearly 40,000 perched along deep-water bays and river valleys in a mountainous stretch of Japan's northeast.

"I've heard that we caused quite a lot of problems for finished-goods makers because we couldn't supply them."

Kimura has restarted some production at small plants elsewhere in Japan, convincing most of his top engineering talent to relocate to other company plants. But he has no plans to rebuild in Kamaishi, deterred by the government's lack of concrete plans for the tsunami-hit region. He said he had no choice but to lay off the plant's 230 workers.

That's bad news for a town that has struggled to create jobs and staunch an exodus of young people since Nippon Steel, Japan's biggest steelmaker, began cutting operations there nearly 50 years ago. Kamaishi's population has since fallen by more than half and its proportion of elderly has climbed to more than one-third.

WOOD-BURNING STOVES*

One source of hope for Kamaishi is the small businesses that sprang up after steel plant started to scale down, many of which have bounced back quickly from the disaster without waiting for government reconstruction plans.

Shinichi Ishimura's factory in an industrial neighborhood along the bayshore southeast of the town center is one of them. Piles of rubble still litter vacant lots, while blankets and other debris dangle from the trees.

"This was supposed to have been cleaned up last month," said Ishimura, a stocky, soft-spoken middle-aged man. His workshop has gone "back to the future", making seafood processing equipment and wood-burning stoves after years of supplying Nippon Steel.

Bulky iron stoves are lined up neatly in the yard behind a stairway to his second-floor office, where he pulls out a leather-bound photo album, warped and water-stained by the tsunami.

"Suddenly, our business with Nippon Steel went to zero," he recalls in his office in the factory grounds, flipping through pictures of cranes and equipment his company specialized in maintaining until the last blast furnace was shut in 1989.

For Ishimura, who had reluctantly returned to Kamaishi to work for the company his father founded, cutting the umbilical cord to Nippon Steel was a golden opportunity.

"I'd wanted to get out of it. Even though it was stable, it wasn't interesting. We wouldn't have tried anything new when we were doing work for Nippon Steel," he said.

Ishimura is content for now to continue doing business a stone's throw from the seafront. His steel frame building survived the waves, he believes, because a deep breakwater at the mouth of Kamaishi Bay weakened the tsunami as it neared the town.

But Omura Giken's Kimura does worry about the wisdom of staying in a tsunami zone. Had it come after dark, he fears, his night-shift workers might not have seen how big a wave was headed their way.

LOYAL TO JAPAN

On a national level, Kimura's dilemma about abandoning his home base is playing out elsewhere in Japan. The disaster has prompted a range of disaster recovery strategies, including diversifying supply sources and transferring design and production capabilities across manufacturing sites, including overseas, such as Hirose Electric is doing.

Hirose Electric's Kushida acknowledged that cost concerns fueled by the yen's strength, as much as disruption to production from the disaster, were pushing his company to move abroad.

But Nippon Steel Executive Vice President Kosei Shindo, who said his company was committed to its remaining operations in Kamaishi making steel wire, argued that Japan's strong corporate sense of responsibility to workers and communities would temper moves abroad.

"Japanese managers fully understand the need to move abroad and they're doing that, but they also want to continue manufacturing in Japan," he said. "Manufacturing often means making things in one place for a long period of time, developing technology, having a lot of employees, and employee loyalty is also a necessity. It's not like finance, where you just look at a screen and push buttons."

While Japanese manufacturing's supply networks proved to be most vulnerable after the disaster, it is an ecosystem Japan Inc is eager to maintain despite the increasing pressure to relocate.

Hirose's Kushida said that, while his company will boost technical expertise at its Korean subsidiary and shift more high-tech production there, it wants to keep its suppliers in Japan. Hirose outsources 80 percent of its domestic manufacturing under a "fabless" or factory-free model, which enables it to focus on more profitable design work.

"We don't want our fabless network to fall apart," he said. "We'll gradually shift to Hirose Korea, but we'll keep (the network) from shrinking inside Japan, passing them our new products so they can hold up ... The global economy is off the rails and so we're worried how things will go. But we won't break up (our network)."

Omura Giken's Kimura also worries that dispersing his engineering talent, once concentrated in Kamaishi, to other sites will dull the pace of innovation, which was spurred by staff interaction.

Some experts see an opportunity to wean Japan from a system that relies on guidance and largesse from the ministries and big corporations in Tokyo, which they consider an outmoded model for a high-tech, globalised economy.

"What I think will support the manufacturing sector in the disaster-hit areas, including Kamaishi, is not the old vertical networks of subcontractors, but horizontal networks based more on common concepts of trust and regional reconstruction," said Yuji Genda, a professor at Tokyo University's Institute of Social Science.

"These networks could unfold with their center in the regions rather than in Tokyo."

(Additional reporting by Kaori Kaneko and Nathan Layne; Editing by Bill Tarrant)