The Two-Tiered Economy

One of the most distinct characteristics of the Japanese economy when it is compared to the economies of most developed nations is the high productivity of large multinational corporations and a few internationally competitive retail and wholesale distributors and the relatively mediocre to poor productivity of those manufacturers that serve primarily the domestic market as well as almost all of Japan’s services and distribution industries. This lower tier of industries (as well as small shops and restaurants) is inefficient, often have too many employees, and since World War II have often been subsidized or protected from foreign and, even at times, potential domestic competition by the Japanese government.

Beginning in the late 19th century, the Japanese government gave high priority to economic development in such heavy industries as steel, railroads, and communications because they were vital to national security. By the end of World War I, a clear division was developing, especially in urban areas, between high-quality, productive heavy manufacturers that produced such products as aluminum, ships, and plastics and smaller manufacturers that produced such goods as processed food and consumer goods that were not for export. Employees in the upper-tier manufacturing sector enjoyed higher status, more attractive salaries and benefits, and secure employment in contrast to workers in small manufacturing and services. As Japan attained world economic prominence during the high-growth years and into the 1980s, most foreigners conceptualized that all of Japanese business and industry was among the best in the world and were ignorant of this second tier of the economy. The discrepancy between the two tiers was one structural problem that contributed to Japan’s recent economic problems, and improving the second tier remains, to a certain extent, a still unresolved challenge for Japan. Perhaps the best way to realize just how stark the differences are between industries in the two tiers is to contrast the Toyota Motor Corporation, and the Japanese automobile industry, with the food processing industry.

Toyota Motor Corporation is probably Japan’s most famous business concern. Toyota’s (originally spelled Toyoda) roots go back to the early 20th century when Toyoda Sakichi established Toyoda Spinning and Weaving. Automotive operations began in 1933 with the establishment of an automobile department within the Toyoda Automatic Loom Works, and in 1937, Toyoda Motor became an independent company. Before the war, a few large industrial concerns called ‘‘zaibatsu’’ controlled key sectors of the economy. After the war, such large corporations as Toyota used some of the advantages of the zaibatsu system by forming keiretsu, affiliated groups of suppliers that, along with the parent company, were serviced by member banks. Other foundations of Toyota’s success today were laid in the years immediately after World War II. Toyota first concentrated on improving the production process by better organization and helped supply U.S. forces with trucks during the Korean War. As it slowly but surely improved the quality of its industrial plants, Toyota also continued to be a leader in human capital development. It introduced highly effective employee training programs and in the 1960s pioneered the now world-famous quality control circles, which were discussed earlier in this chapter. Toyoda Kiichiro, the motor company’s founder and the son of Toyoda Sakichi, is said to have developed the ‘‘just in time’’ manufacturing system in which inventories of parts are kept low, thereby promoting efficiency and lowering costs in the 1930s, but this revolutionary manufacturing procedure was implemented in the 1950s.

Already a successful automobile company in Japan, Toyota along with Nissan (then named Datsun) began exporting cars to the United States in 1958. The venture was experimental, and the Japanese government did not think the venture would be successful. Many in the automotive industry shared the bureaucrats’ viewpoint. For more than a decade, Japanese auto companies including Toyota were not particularly successful in the American market, but management and dealers listened closely to consumer feedback and systematically created small, fuel-efficient, mechanically reliable vehicles designed for consumers with modest economic means. Toyota and other Japanese car companies realized increasingly impressive sales results in the 1970s and early 1980s. In response to U.S. government pressure to limit exports, by the mid-1980s Toyota was moving into the mid-range and luxury American car markets and building manufacturing plants in the United States.

Today Toyota and other Japanese automotive companies such as Honda and Subaru occupy worldwide technological leadership in motor vehicle production with an array of popular vehicles. Toyota, which is in close competition with GM for worldwide leadership in motor vehicle sales, is also a pioneer in cutting-edge hybrid car design and production. Currently, Toyota and its subsidiaries produce close to 8 million motor vehicles annually, of which 6 million are produced outside of Japan. Auto sales for all companies in Japan have recently been stable and declining. Toyota, like many of Japan’s leading-edge manufacturers, built plants in various parts of the world and sells so many of its products worldwide that its profits keep growing despite lower Japanese demand. Currently, Toyota and its affiliates have 22 manufacturing plants in Japan and 520 overseas manufacturing plants in 26 countries in Asia, Africa, Europe, and North America. Toyota markets vehicles in 170 different countries.

The robotics, machinery, chemicals, consumer electronics, biotechnology, and steel industries are all examples of Japanese manufacturing firms whose productivity approaches or exceeds that of the United States and leading Western European and Asian economies. They are globally successful and clearly belong to the top tier of Japan’s economy.

The food processing industry, all those firms that process food after it leaves the farm, is a gigantic industry in Japan, employing more people than the automobile, steel, machine tool, and computer industries combined. Currently, it alone is responsible for employment of about 11 percent of Japan’s manufacturing workers, and the industry is only approximately 40 percent as productive as the American food processing industry. The United States, with more than double Japan’s population, has one-third the number of food processing firms as is the case in Japan, where many small and mostly inefficient firms exist.

Much of the domestic food processing industry, one of Japan’s least successful industries by world standards, has been protected by government from foreign competition. Largely because of government protection and discouragement of imports of processed food, Japanese consumers still buy a relatively small percentage of processed food from foreign sources. Competition in the food industry is stagnant, and low foreign imports and investment in food products means little pressure on the domestic industry. Partially because of the inefficiencies in this industry and what most analysts believe to be excessive government protection and regulation, Japan’s consumers pay much higher prices for food on average than is the case in the United States and Europe. This hurts not only millions of consumers but also the entire economy. However, Japanese worries about food self-sufficiency if markets are liberalized, and a tolerance for protecting jobs, make a number of consumer groups reluctant to pursue reform of this industry.

The contrast between not only Toyota but also other successful automobile companies such as Honda and Nissan and the food processing industry is a clear example of the stark difference between higher-tier and lower-tier Japanese industries. Toyota and other Japanese car manufactures constantly compete against each other in a vibrant domestic market. These companies, as has been true with other highly competitive Japanese industries such as electronics and software firms, hone their business and manufacturing skills domestically and then aggressively compete globally. These companies also gain enormous competitive advantages through their global investments in manufacturing plants as they gather constant ‘‘on the ground’’ information.

Japan’s food processing industry is not as automated as food processing industries in other developed countries, which hurts its productivity; local food processing industries often enjoy monopolies, which tend to create disincentives for product quality; and because of government protection, Japan’s food processing industry does not gain economic benefits from foreign direct investment (FDI). The industry also, unlike top-tier industries, is not export oriented. In addition to food processing, construction and textiles are two other major manufacturing industries that clearly fit into the second tier of the Japanese economy as their productivity levels range from 25 percent to 60 percent of comparable industries in the United States and several other developed countries. Their disadvantageous economic positions and low productivity are a result of virtually similar economic environments as those that influence the food processing industry.

Much of Japanese services, retail, and wholesale distribution industries are also less productive on average than Japan’s first-tier manufacturers. These sectors of the economy often tend to employ more workers than are needed, and such firms as banks and small and middle-sized shops tend to be less automated than is the case in other developed economies. Collectively, 60 percent of all jobs in Japan are in industries that average between 50 and 60 percent of Japanese manufacturers’ productivity levels, and productivity in the former industries is currently stagnating. Improving performance of the second-tier industries has become a priority for several government agencies and privately funded research institutes and think tanks. Japan has improved considerably in the last few years in the application of information technology to manufacturing. In retailing and wholesaling distribution, most business analysts and economists believe that more widespread use of microcomputers, optical scanners, and corporate reorganization, in addition to more government deregulation to promote competition and foreign investment, are all steps that can address some of the problems discussed.

A few distribution industries have, through excellent management, focused consumer-friendly goals, and superb marketing, become successful multinational firms. Japan has been famous for mom-and-pop shops since the Tokugawa era, but sole proprietorships are fast giving way to chain retail shops. Convenience stores seem to have taken Japan by storm in the last two decades, and although there are other chains, Seven-Eleven Japan is now the country’s biggest retail business, with annual sales of almost 2.5 trillion yen. There are more than 11,500 Seven-Eleven Japans in the country. The chain, originally American-owned, first entered the Japanese market in Tokyo in 1974, and many erroneously predicted that U.S.-style convenience stores would fail because they were not suitable for Japanese culture.

Seven-Eleven Japan is now a wholly owned subsidiary of Japan’s biggest retail conglomerate, Seven & I Holdings. Seven-Eleven sells a wide range of Japanese and Western products including food, magazines, and a variety of alcoholic and nonalcoholic beverages including green tea, whiskey, fruit and yogurt drinks, and many iced coffee brands. They also offer such services as photocopying, faxes, Internet shopping, and ATMs. Customers can even pay their utility bills. Seven-Eleven’s success has become international, and there are now more than 31,600 stores in 18 countries including the United States, Turkey, Thailand, and Sweden (Okada et al. 2007, 16–17).

The 100-yen shops are larger stores that have also become quite popular in Japan and internationally. These stores sell everything from office supplies to bags, books, and CDs and all for the same 100-yen price. Although there are some similarities to American dollar stores, Japanese argue that the quality of the items is better in the 100-yen stores. The 100-yen stores certainly seem to occupy a greater portion of the retail market than the American variant. Currently, 100-yen stores are the fourth-largest retail category in Japan, ranking behind only department stores, supermarkets, and convenience stores. Daiso is the biggest 100-yen shopping chain, stocks 90,000 products, and in a recent year enjoyed sales of more than 320 billion yen. Although they aren’t called 100-yen shops, Daiso now has 400 outlets in 15 countries including South Korea, the United States, Thailand, and Macau (Okada et al. 2007, 16–17).

Recent changes in Japanese legal constraints for financial services investments and sales also constitute very positive developments for both Japanese consumers and the nation’s economy. Over the last decade, lifts on prohibitions of sales of a variety of such financial securities as annuities, mutual funds, and other investment packages by brokerage firms and banks, 2008 global financial situations notwithstanding, have resulted in many more profitable investment opportunities for millions of Japanese whose previous savings and investment options were primarily limited to postal savings or other bank savings accounts that paid almost no interest and a stock market in which low dividend payments were the general rule. Since these changes, both domestic providers and such foreign concerns as Merrill Lynch, the Bank of New York, and Ivy Investments have either entered or dramatically expanded their Japanese operations.

Liberalization of market entry and relaxation of dense government regulation in both manufacturing and services are often a slower process in Japan than in other countries because traditionally Japanese place a high priority on maintaining societal harmony. The airlines are a good case in point. After observing U.S. air deregulation efforts in the 1970s, Ministry of Transportation (MOT) officials began to consider deregulation in 1980. However, MOT officials wanted the procedure to be fair for all companies, advocated giving the companies time to adapt, were reluctant to confront recalcitrant airlines, and worried about the effect of deregulation on employment. This meant that the deregulation process took 20 years, during which time those Japanese who flew were paying excessively high prices. Additionally during this time, Japanese airlines were losing business to their American competitors. Many economists believe the nature of international competition probably makes it important that despite the great premium placed on harmony in Japanese culture, the pace of deregulation proceed more rapidly than was the case with the airlines industry.

Cell phones probably offer one of the best examples of how a Japanese industry improved performance dramatically because of deregulation, and millions of consumers made cell phones an integral part of their lives. In 1994 cell telephones were deregulated in Japan, and that policy change led to a 22-fold rise in ownership of cell and car telephones in the ensuing six-year period—from 2.13 million phones in the beginning of fiscal year 1994 to 47.58 million at the end of November 1999. The Japanese fascination with electronic gadgets certainly is a stimulus for mobile phones’ increasing popularity, but general costs for cell phone use dropped dramatically after deregulation.

Since that time, the number of cell phones used in Japan has continued to rapidly grow and is now more than 100 million. Estimates are that about 75 percent of the Japanese population use mobile phones ( 2008). Japan’s high level of technology and a seemingly cultural affinity for gadgets that is pronounced in Japan has created an environment where cell phone industry innovations appear to occur on an almost weekly basis. Japanese were using cell phones to access the Internet, interface with home computers, trade stocks, do automated grocery orders with delivery included while coming home from work on the train, and convert currency considerably earlier than Americans and Western Europeans.

As reform proceeds in Japan, a number of economists argue that in the case of large businesses in both tiers, significant corporate restructuring is an unfinished agenda item. Although widespread cost cutting has occurred and, at least in the successful companies, the problem of excess full-time employees has been addressed, some business analysts contend that a more focused approach to product prioritization and core objectives than in the past needs to occur. More Japanese than American and Western European firms still seem to be producing a wide variety of unrelated products without really distinguishing between profitable core products and products that would be best produced elsewhere. Economist and Japan specialist Richard Katz contrasts the example of an electrical machinery firm that produced blood pressure monitors, made automotive testing equipment, and ran a catering service and insurance company with the highly successful Canon Corporation, whose goal is a global reputation for quality in a few products based on optical technology: cameras, photocopiers, and printers.

The above story has a happy ending in the case of the machinery company, whose top management has since decreed that any business divisions that were clearly not profitable be sold. In the last few years, the company, which asked not to be named, has acted on this decision and shed unprofitable divisions and product lines. Company employees in these divisions represented 15 percent of the firm’s workforce. Management either gave them incentives for early retirement or transferred younger employees to other divisions in the firm. When Katz asked the machinery firm executive in charge of corporate planning why these decisions were made, he was told that globalization was the motivational factor. Foreign investors who were eager for profits owned 40 percent of the firm’s shares.

Globalization is also driving some big Japanese companies that are not experiencing immediate economic pressure to divest themselves of major divisions. All Nippon Airways (ANA) sold 13 hotels it operated to Morgan Stanley. Although ANA is a successful company, the hotel division was losing money. ANA received a good price for the hotels and probably made an excellent strategic move to better position itself to take advantage of the planned conversion of Haneda Airport to an international facility.

Throughout Japan there are too many companies engaging in what Katz labels ‘‘mindless diversion,’’ and it is uncertain whether they can make the kinds of difficult short-term decisions that most likely result in a better economic future for the companies and for Japan (Katz 2007, 2).

Since the negative experience of the 1990s, Japan’s economic and business culture has experienced widespread changes that, as noted, are moving the country toward an even more competitive and freer economy than is now the case. However, it is important to bear in mind that Japan is not the United States or Western Europe. Because of a deep concern for personal relations and cultural harmony, even the ‘‘winners’’ in Japan often don’t aggressively push for an end to protection for such industries as food processing, which employ large numbers of people. The two-tier economy model is useful in understanding Japanese industrial successes and failures, but sometimes Western economists forget that because of cultural differences, it is much more complicated in Japan to initiate long-range economic reforms than is the case in different environments.