Economic Forum on Industrial Policy- for a Sustainable Development 2011/2/16

1. Economic Forum on Industrial Policy- for a Sustainable Development 2011/2/16 -Organizationfor SME & Regional, Japan(SMRJ) International Business Advisor -Vietnam・CLM Economic Research Inc, CEO TATSUYAHOSHINO Japanese Experiences of Industrial Development

2. HEADING The process of industrial development in Japan (2) The Government industrial policy (3) The key points for industrial development (i) Concentration on manufacturing(MONO-ZUKURI) and technical development (ii) The relationship between assemble enterprises (Big enterprises) and parts suppliers (SME: Small &Medium Size enterprises). Natural selection. (iii) SME Supporting Industry (iv) Overseas production base development (v) Main banks (vi) Government support in early industrialization stage

3. (i)The reconstruction period: 1945-54 Labor-intensive textile and food Industry and light industry Development of heavy & chemical Industry(steel, petro-chemical, electrical plant etc) and of export industry (ii)The high economic growth period: 1955-74 Decline of mass energy/resources consumption industry. Development of manufacturing , processing and assembling industry (iii) The stable economic growth period: 1975-89 Service industry and machinery industry (automobile, electronics,ITetc) . Promotingproductbases in ASEAN (iv) The structural reform period: 1990-2000 The process of industrial development in Japan

4. (i)The reconstruction period (after the War):1945-54 The labor intensive textile and food industry and light industry producing daily necessaries, led Japanese industrial and economical development. (ii) The high economic growth period : 1955-74 The heavy & chemical industrialization such as iron & steel, petro-chemical, heavy electrical plant replaced the position of textile & food industry. It was achieved by technical transfer from USA & Europe and also by the industrialization of substituting the import machinery. The intention of capital investment became stronger and its investment increased sharply. The competitiveness of

5. export of products was strengthened by up-to-date effective facilities and technical development. The main export products were steel, machinery, chemicals etc. produced by the heavy & chemical industry in addition to the products of textile and food. The high economic growth was achieved by the above capital investment and export. (iii) The stable economic growth period : 1975-89 The industry was led by the heavy & chemical industry which consumed energy and resources in large quantity. Due to the oil crisis (1973 & 1979) and to the shortage of crude oil and to the sharply-increased price, the Japanese economy forced to change the course from the high growth to the stable growth.

6. The manufacturing , processing and assembling industry took place of the heavy & chemical industry. (b) Because of Plaza Accord(1985), Japanese yen was appreciated from 1US$=240yen to 1US$=150yen (nearly 160%up), Japanese manufacturers sought for overseas places where they could manufacture at competitive cost. These area were Asian countries such as Taiwan, China and ASEAN countries. The investment by Japanese manufacturers to these area had been positively done in order to manufacture related parts and/or final products at competitive price and maintain high quality and quantity of their production.

7. (c) In the second half nineteen-seventies and the first half nineteen-eighties (1975-85), the main products for export became electric household appliance, semiconductor, automobile (especially compact car) etc. Due to trade friction between USA & Japan in early nineteen-eighties, Japanese car manufacturers, for example, started to manufacture their compact car in USA and in Europe, and then in ASEAN countries (Thailand, Indonesia etc). Because of the trade friction, the trend of overseas production had been promoted, and because of yen appreciation, the international division of manufacturing in and with ASEAN countries had been promoted.

8. (iv) The structural reform period: 1990-2000 (a) After thecollapse of the bubble economic boom in early nineteen-nineties, Japanese economy experienced the lost ten years. However looking from the Japanese industrial viewpoint, it was the industrial structural reform period. The price difference between higher Japanese price and lower overseas price was notified deeply in the field of electric power, communication & transportation. Further more service industry such as finance, wholesale/ retail was also notified to be isolated from international competitive market. In these fields the market competition rose severely domestically and also from overseas. Through its process

9. the cost and price had fallen considerably. (b) The main export items changed to machinery industry such as automobile, electronic equipment & parts, information service equipment etc. The overseas production bases were established for electronic products such as electric household appliance, semiconductor etc mainly in ASEAN countries and for automobile, precision machine etc in all over the world including ASEAN and China in order to produce competitive parts and products there.

10. (c)Japan have developed integral manufacturing which requires parts to be designed uniquely for each products and are mutually adjusted continuously for higher performance. Continuous efforts for technical development both by assemble-manufacturers and by parts-supplier (SME) have been made, of which success has influenced remarkably the promotion of such manufacturers and SME. In contrast, modular manufacturing uses common parts which are put together in flexible combinations to create new products quickly. In developing countries, modular manufacturing is easier to implement.

11. In order to promote the production in ASEAN countries, introduction of common parts and modular manufacturing had been made rapidly. This led to competitive price of the product at the final process. Sources: VDF report (June,2006)

12. (2) The Government industrial policy Basically enterprises in Japan have decided their company policy by themselves and took the risk to survive or disappear in the business world. However enterprises were influenced , directly or indirectly, by the Government industrial policy. The government policy regulated the behavior of enterprises materially and immaterially. The Government policies which supported the industrial development were as follows: (i) Financing (a)-1 At the first half of 1955~1974 high economic growth

13. period, the government fiscal investment and loan was used mainly for the transportation and communication infrastructure and then for agriculture and commerce & industry. Realization of bullet train was one of typical examples. After second half of nineteen-sixties the road construction became the main item of the investment. These investment gave strong effects to industrial development & for related enterprises. (a)-2 The Government financing ratio for Industry-wise capital investment as follows; (sources: Japanese Industrial Policy after the War issued by Nikkei-Shinbun 1982)

14. The above table shows that Government capital investment was concentrated on infrastructure and key industry at that time.

15. (ii) Special taxation measures There were three kinds of the above measures such as company income tax exemption, various allowance, reserve and special depreciation. The most important one for industrial development policy was Special Depreciation Act issued in 1951. Due to the special depreciation etc, manufacturers could replace the out-of-date equipment and machine with most modern high technology one, and then recovered the competitiveness in the international market.

16. Due to the enterprise rationalization act 1953, many machinery and equipment for rationalization had been installed. The target of this Act was for heavy and chemical Industry such as steel, non-ferrous metal, petroleum/coal, chemical, automobile, machine tool, electric communication machine etc. The capital investment in this field accelerated the development of Japanese Industry. (iii) Foreign exchange law, Foreign investment law1950 The above contributed to the export development and the import-substitute industrialization. (iv) Electronics development temporary measures Act 1957

17. Computer industry was appointed as its object by this Act and obtained subsidy, development fund etc which supported remarkably to promote computer industry in Japan. (v) The decline of the Government intervention According to the development of Japanese industry and through the high economic growth period, generally speaking, the Government intervention in the industry policy declined after late nineteen-seventies & eighties. Liberalization policy promoted. Free trade and investment have been realized and the industrial development plan have been made by each enterprises for their own sake.

18. Key points for Japanese industrial development Manufacturing & technical development Overseas production base Assembler & parts supplier relationship Main banks SME support industry Government support at early industrialization (3) The key points for industrial development

19. (i) Concentration on manufacturing (MONO-ZUKURI) and technical development The technical improvement (even if small portion) and technical development are vitally important for the industrial development. As mentioned before, integral manufacturing will contribute to high technical development taking longer period, but modular manufacturing will also contribute to the development of SME in shorter period in the field of common parts. The concentration on manufacturing (MONO-ZUKURI) may be the first step for the industrialization.

20. (ii) The relationship between assemble enterprises (Big enterprises) and parts supplier (SME). Natural selection. (a) In Japan the relationship between assemble enterprise (contractor, normally big enterprise) and parts supplier (sub-contactor,normally SME) are very strong and the closer relationship will continue usually more than 10years mainly due to integral manufacturing system. Both parties are interdependent technically and product-wise. (b) The enterprise and SME which have high profit products or which are expected to have big potential in future , will persist in the market. They will obtain the position of sub- contractor and get reasonable finance from banks.

21. On the contrary, the enterprises which are not financially viable or have no high potential for future, will have no choice but to disappear from the market. Natural selection shall be made. Actually there are many enterprises which are uncertain now whether they have high potential for future or not. (c) It is very important for the enterprises which are uncertain for future to make positive efforts to become promising in future in order to obtain sub-contractor business and get finance favorably from banks. This is critical point for the industrial development. The relation between assemble enterprise and parts supplier will be

22. positively kept if they make effective efforts to become promising as above-mentioned.

23. (iii) SME Supporting Industry Thanks to the integral manufacturing system, technical improvement and development for parts & equipment by SME have been achieved at higher level of international standard. The efforts have been made through more than 50 years and are still continuing. This was effective to the development supporting industry in Japan and contributes to the competitive high quality products. (iv) Overseas product base development AS mentioned in the above because of the trade friction and yen appreciation, the international division of

24. manufacturing in and with ASEAN countries have been promoted by Japanese Manufacturers. The overseas production bases in ASEAN countries have been positively established for electronic products such as electric household appliance, semiconductor and for automobile, precision machine etc. in order to produce competitive parts and products there. Although in some cases higher grade products have been manufactured in Japan, some high grade products have been manufactured in Asian countries by technical transfer & training, and middle＆lower grade products have been manufactured there.

25. (v) Main banks In order for SME to continue their business after start-up, it is important to have some local banks as “Main Bank”, who provides finance at reasonable conditions and other services such as business consultation, current economical & business information, introduction new customers, even if SME temporarily experienced a business slump or loss. To make this happen, SME need to try their best to improve profitability and pursue higher level. SME are required to make efforts for continuous improvement and advancement. Many enterprises & SME have implemented the above, which have contributed for the development of industry.

26. (vi) Government support in the early industrialization stage AS mentioned in the above (2) The Government industrial policy, the Government support of industrialization at early stage was indispensable for Japanese industrial development.

27. Important field of SME development High-TECH field field of increasing employment field of producing export goods eco-business field field of processing natural resources rrural manufacturing & business field Supporting Industry field