When you buy something in your daily life, do you unconsciously pay attention to which country the product is made in? I imagine that when you buy something that is made in Japan, you feel a slight peace of mind. There was a period of time when inbound tourists from China and other countries came to Japan to purchase large quantities of Japanese consumer electronics and daily supplies due to the reputation of Japanese products evoking peace of mind as well as feelings of safety and the image of high-quality. Japanese products are trusted not only by us Japanese, but also by people around the world.

The Changing Competitive Environment Facing Manufacturing Companies

However, if you take a look at the management indicators in Japanese manufacturing companies, you'll see a different situation. For example, the total sales of electronics giants Panasonic and Sony in 2017 were 7.9822 trillion yen and 8.5440 trillion yen, respectively^*1. The numbers alone may look large, but if you take a look at Samsung in South Korea and Foxconn in Taiwan, their sales reached around 20 trillion yen during the same period. In other words, Panasonic and Sony are already being surpassed in scale by companies with shorter histories emerging in Asia. This trend was clearly demonstrated in 2016 when Sharp, which was experiencing a financial crisis, was acquired by Foxconn.

Let's also take a look at the automotive industry, which, along with the electronics industry, is representative of Japanese manufacturing. If you look at the number of cars sold worldwide in 2018, first place is Volkswagen (10.834 million cars), second place is the Renault - Nissan - Mitsubishi Alliance (10.757 million cars), and third place is the Toyota Group (10.594 cars)^*2. These figures are a stark contrast to electronics in that Japanese companies are still leading the world. However, Akio Toyoda, the president of Toyota, has repeatedly claimed that the automotive industry is going through a major, once-in-a-century transformation. He claims that it is not a matter of winning or losing, but a matter of life or death. The fact that Toyota is a global leader with regard to the number of cars sold does not guarantee a sense of security.

Of course, the competitive strength of a company is not decided merely by its scale. It must be assessed from a broad perspective that includes profit ratios, customer satisfaction (loyalty) and brand image. One thing that can be said for certain is that regardless of the industry, manufacturers in Japan are facing a major transformation in the competitive environment.

What we often hear today with regard to the changes in the competitive environment is the advancements in IoT, developments in AI and the spread of the sharing economy. For example, in the automotive industry, self-driving technology is becoming a reality, with ICT companies like Google and Apple entering the automotive market. In addition, ride-sharing is becoming the norm overseas, with providers like Uber in the U.S. and Grab in Singapore growing in scale while utilizing ICT to provide ride-dispatching services. The sense of impending crisis Akio Toyoda feels is due to the rapid spread of these trends.

These changes in the competitive environment can be summarized in two concepts: digitization and connected networks. In the era when analog products existed as stand-alone items, the key to maintaining competitive strength was to focus on developing high-quality products. This was demonstrated when Japanese brands swept the world in the era of cathode-ray tube (CRT) televisions. Today, in the age of digitization and connected networks, what is the lifeline for manufacturers?

Designing Frameworks Instead of Being Forced into Them

Today, products becoming digitized and connected to networks means that products are being used within the frameworks of systems and rules. In this environment, companies can acquire more added value by considering the compatibility with systems and rules and taking the lead in their construction, rather than focusing on improving the quality and performance of individual products. Apple created the iPhone, which brought about major innovations worldwide. However, iPhones are manufactured by three Asian EMS providers^*3, not by Apple itself. Apple is a fabless company^*4 that focuses on product development and concept design for the iPhone. Furthermore, while iPhones are also used to play music, Apple focused more on the types and the sheer volume of music distributed through iTunes, their media player, rather than the sound quality of the media player itself. Apple recognized from the beginning that in the age of digitization, what impacts consumer satisfaction is not the sound quality of the media player, but the service system that distributes higher volumes of music. Apple is not really a manufacturer, but rather a company dedicated to creating the framework of a society structured around digital products.

Meanwhile, if you take a look at the state of Japanese companies, they are unfortunately merely being forced into the systems and rules designed by European and American companies. Even if Japanese companies design frameworks, they only tend to extend within the boundaries of Japan, with very few global standards that originate in Japan. Many have voiced the opinion that to address these concerns, Japan should simply devote itself to manufacturing as it has done in the past from the perspective of comparative advantage. However, even if this is correct from a macro-economics point of view, it is not the appropriate message to send to the people who are leading Japanese manufacturers. This is because there are more growth opportunities for companies to create products within systems and rules that are advantageous for the company. In addition, if the leaders of companies ignore the growth opportunities in designing systems and rules, shareholders may blame them for the inability to take action.

We are also in an age where we have to reconsider the way we use the term "manufacturing." The word conjures images of industrial manufacturing, secondary industries and the production of commodities. However, this established understanding of industrial classifications no longer fits in with the reality of the times. For example, Apple is a company that operates in both the manufacturing and service industries. Companies that lead in the creation of systems and rules like Apple are able to cover an extensive value chain.

The Importance of Global Alliances

In order for Japanese companies to shift from manufacturing to framework-building, a proactive pursuit of global alliances is necessary. Especially when it comes to covering a wide-reaching value chain, relying on your own management resources is not enough, even for major corporations. Furthermore, creating systems and rules is not a traditional strength of Japanese companies, so proactive efforts to work with overseas companies are becoming increasingly crucial. Once the alliances are made, Japanese companies can provide their partners with the manufacturing capabilities that are their strength. Many of Japan's manufacturers have been stuck in conventional business models that rely on vertically integrated self-sufficiency, manufacturing in pursuit of high performance and high-quality products, and the sales of stand-alone products. This has brought them to the verge of management crises. As a result, even the advanced manufacturing capabilities are being sold cheaply to foreign companies. This is not the kind of global alliance we should be striving to achieve. It is crucial for Japanese manufacturers to take the initiative to start building global alliances while they still have strong business resilience and advanced manufacturing capabilities.

• ^ https://www.panasonic.com/jp/corporate/ir/pdf/2017_full/financial_results_j.pdf and https://www.sony.co.jp/SonyInfo/IR/library/presen/er/17q4_sonypre.pdf (viewed on March 28, 2019)
• ^ https://response.jp/article/2019/01/31/318614.html (viewed on March 28, 2019)
• ^ Electronics manufacturing service
• ^ Companies that do not own production lines