Risk Management in the Japanese Auto IndustryEconomy
INTERVIEWER The earthquake and tsunami that struck Japan on March 11, 2011, dealt a serious blow to Japan’s automobile industry and, indeed, to the industrial sector as a whole. Nissan’s speedy response to this crisis received a lot of attention in the foreign press. Faced with the sort of disaster that comes along once in a thousand years, how did you decide what to prioritize in your response?
SHIGA TOSHIYUKI One of the biggest factors in our favor was the fact that we’d experienced so much in the period leading up to the disaster, and had built up know-how about what to do. In 2007, my third year as chief operating officer, the Chūetsu Offshore Earthquake struck Niigata Prefecture. A key supplier in the city of Kashiwazaki suffered serious damage, and we were unable to produce any vehicles for a time as a result.
Until then we had thought we were doing everything we needed to prepare for a quake—making our structures more quake-resistant and so on—but we weren’t ready for this kind of interruption to our flow of parts from suppliers. This experience taught us the importance of appropriate instructions from headquarters in a disaster situation, to support our suppliers and make sure our own sites can carry on functioning. In October 2007 we began running disaster response simulations as part of our training.
As the chief of Nissan’s Global Disaster Headquarters, I was in charge of these simulations, which were altered a bit each time we ran them to expose us to a variety of potential situations. Actually, the first simulation drill we did after moving to our new global headquarters in Yokohama took place on February 21—less than three weeks before the earthquake struck on March 11.
For this exercise, we set up an emergency headquarters on the eighth floor of our building, complete with a row of desks and telephones, and practiced the first-stage tasks to be carried out following a disaster: checking on employee safety and contacting our own plants, our affiliates, and our suppliers to see how they were faring. We also discussed what to do, as we learned the full picture of the damage, in terms of deciding when to restart production or addressing supplier and logistical issues as we moved toward getting back online. In the drill we covered all these tasks in the space of about two hours.
The real thing hit at 2:46 in the afternoon on March 11. I was on the twenty-first floor of our headquarters at the time, and I immediately gave the order for the Global Disaster Control Headquarters to go into action. Around a half-hour later, I’d made it down the stairs to the eighth floor, and everything was set up just as it had been three weeks earlier—the desks and phones in place, the emergency equipment all ready for use. To this day I remember clearly how this drove home the importance of being prepared for disaster.
In our February drill we worked on the assumption that we’d be opening our headquarters to people who were unable to return home following a quake. This preparation served us well, too. We figured we’d need to have food on hand not just for employees but for these stranded commuters as well. On March 11 we cooked all the rice we had and made it into 1,800 onigiri rice balls. We also had a stock of more than 2,000 blankets, which kept a lot of people warm that night.
INTERVIEWER So the planning and preparation you’d done in advance enabled you to make the right decisions when the time came?
SHIGA That’s right. I think three things are essential: being fully prepared for disaster, carrying out drills, and going into action as quickly as possible after a disaster strikes. Our preparations were not limited to our Yokohama headquarters. Our plants closer to the epicenter, in Tochigi Prefecture and in Iwaki, Fukushima Prefecture, also came through the day relatively well thanks to regular preparedness drills. These facilities suffered damage: conveyor machinery fell down from the ceiling and the cupola on top of the casting plant toppled over. But there wasn’t a single injury. This was entirely the result of preparedness.
Some time after the earthquake I spoke with people from the plants, and their comments boiled down to this: they had done the drills so many times that when the real thing came they had the muscle memory to do what was necessary without thinking. If a quake hits while you’re casting molten aluminum, for instance, you can’t just run away—if that liquefied metal spills onto the factory floor it could start a fire. So the workers’ first move was to close the lid, and only then did they head for safety themselves. I was amazed that these people had the presence of mind to do all this in the midst of that shaking.
Corporate Revival as a Formative Experience
INTERVIEWER In July 2011 Moody’s Japan upgraded your company’s rating, which I understand was in part a positive evaluation of your risk management. What lies at the heart of Nissan’s ability to handle disaster so skillfully?
SHIGA As I said, we were able to respond quickly thanks to our regular training and preparation. During the recovery process that followed, though, I think we drew heavily on the management methods introduced as part of the Nissan Revival Plan that Carlos Ghosn rolled out when he became COO in 1999.
Generally speaking, companies tend to split up the tasks of disaster response. If a factory is damaged the production division will deal with the situation; if a supplier is harmed the purchasing division handles things. At Nissan, though, we have what we call “cross-functional teams.” These bring together people from many divisions to tackle tasks. Each individual division has its own traditional ways of approaching an issue, which can lead to barriers between different groups within the company. Bringing them together in this cross-functional arrangement helps to create new ideas instead.
We’ve defined the business principles to be upheld by all employees in what we call the “Nissan Way.” The first mindset outlined in this document focuses on just this sort of cross-functional thinking: the importance of diversity and openness to different views.
To take one example, after the earthquake we received a report that a supplier’s facility had collapsed, leaving it unable to produce parts. People from our purchasing division got together with their counterparts from our manufacturing and maintenance groups, and they went right to work to get the supplier back on its feet. Once we realized that we could source replacement parts from a different firm, our engineering department began testing straightaway. When it became clear that delayed delivery of electrical parts was going to keep us from outfitting some vehicles with navigation systems, our sales division began contacting customers to let them know. There’s no roundabout discussion between different divisions, with one side saying “we don’t have parts” and the other saying “then have purchasing go and round some up.” An environment is in place where everyone can work as one team.
It was an especially pleasant surprise to me when our engineers, who normally work only day shifts, moved to an around-the-clock schedule to perform quality checks and testing on the replacement parts. I believe this may have been the first time in Nissan’s history for engineers to work night shifts. Their efforts let us know right away that these parts would work in our vehicles, and we got back to volume production in the shortest possible time.
All of this goes to show that the cross-functional culture that’s been nurtured at Nissan since it began its recovery in 1999 has truly proved its worth in this time of crisis.
I’d like also to note the positive effects of our “cross-regional” approach. The March disaster caused delays in the production of parts in Japan, in turn impacting Japanese companies’ production in plants overseas. In our case, though, we saw very little drop in our production outside Japan. Immediately after the quake, we brought factory managers from all over the world—the United States, Europe, China, Thailand, Indonesia, and so on—to the Nissan Motor Honmoku Wharf, our main distribution base in Japan. In all there must have been around a hundred people there. All these people from different parts of the world worked to coordinate the logistics. They looked at the production situation in their own countries and the progress in getting parts manufacturing back up to speed in Japan, and they figured out the most effective way to allocate the available parts worldwide. There was no scrambling to get shipments of rare parts for their own factories. This was cross-border teamwork aimed at keeping our global production from falling off. Diversity is one pillar of the Nissan Way, of course, but I was still moved to see how naturally our people achieved this level of cooperation.
INTERVIEWER It sounds as though you’ve successfully made crisis readiness an integral part of your corporate culture. Were there any difficulties along the way?
SHIGA I think one key factor is the way we came through our business crisis in the 1990s. Beginning in 1999, the year we entered our alliance with Renault, our performance started to improve steadily. Then in 2008 we were plunged into danger again due to the global financial crisis. This means that our employees know all about how important it is to make intensive efforts to get through times of crisis.
Our 1990s crisis saw us bleed red ink for eight straight years. This lengthy downturn accustomed us to a business that never improved. Even when we came up with a plan to turn things around, we wouldn’t implement it swiftly enough, necessitating further measures that were also too little, too late. Our situation went further downhill. If you’re constantly late in responding to problems you’ll never achieve a recovery. Through the Nissan Revival Plan, which we announced in 1999 to put our business back on a sound footing, we learned our lesson at last, and we came to understand the need for intensive effort—even if it involved some pain—in order to achieve a swift recovery.
We implemented intensive measures after March 11, too. For example, we put all new development on hold and cancelled all overtime throughout the company for three months. We put a stop to almost all expenditures, clamping down on cash flow in preparation for a possible worsening of the situation. I think our people were very receptive to the message that we needed to get these intensive measures in place right away. Now none of this was the sort of voluntary restraint you saw from a lot of businesses after March 11; it was all based on calculated decisions by Nissan’s management. I feel that our people showed a real understanding of our risk management approach and a willingness to go along with it.
It was around 2001, right in the middle of the Nissan Revival Plan, that we launched the risk management that has blossomed into what it is today. After that it was a process of trial and error. We identified risk factors that could impact the sustainability of our business, produced a risk map for the company, and tapped executives to serve as “risk owners” in charge of dealing with specific areas of risk. Once we had fairly reliable measures in place to handle a risk we removed it from our list and came up with new factors to address. This is the PDCA cycle—we plan a response to risk, do what’s needed, check whether our steps were effective, and act as required to improve the approach. And we put this PDCA cycle to use in preparing for earthquakes, as well as in putting together a business continuity plan for our supply chain.
A company with a functional risk management approach in times of crisis is also a company that can take on bold challenges in ordinary times. Nissan has become a firm that does not follow others but crafts its own unique strategy and pursues it to produce results. This can be seen in our strategy for emerging markets and the energy we’re putting into electric vehicles, for instance. Following other companies’ lead doesn’t involve any major risk, since you can make your decisions based on what they have done wrong. But Nissan is taking the lead in various fields, and this involves all sorts of risk. The more daring our strategies are, the more vital it is for us to manage risk in a way that takes all these possibilities into consideration.
Let me give an example. If we looked only at the dangers immediately in front of us, we’d be reducing investment because of worries about the end of the Chinese economic bubble or the euro crisis, and we’d end up not achieving any growth. I feel that the Japanese economy is in this sort of mindset now. At Nissan, though, even in times like these we’re committed to strategies that put us in the front of the pack. Our latest midterm business plan, Nissan Power 88, is also a bold, ambitious package in this regard.
Risk management means more than just regular preparations for disasters or global economic problems. It also means producing bold visions and strategies and preparing to achieve them.
Automobiles at the Heart of Japanese Industry
INTERVIEWER It certainly sounds as though Nissan has been striving to stay prepared for every eventuality. The Japanese government, in comparison, seems to have been late with everything it’s done in response to the March 11 crisis. Even on measures to conserve electricity, industry appeared to be taking the lead, rather than the government.
SHIGA Automobile manufacturing is one of Japan’s leading business sectors. Indeed, we see ourselves as a pillar supporting Japanese industry as a whole. After March 11 we did what had to be done out of the understanding that if we didn’t pull our weight, the entire nation would be in trouble.
Let’s look at the numbers. Including parts, the exports of Japan’s automotive industry in 2010 amounted to 12 trillion yen. The industry was also responsible for imports worth 600 billion yen. This means that automobiles alone contributed more than 11 trillion yen to the nation’s trade surplus. Japan’s total trade figures came to 67 trillion yen in exports and 61 trillion yen in imports, producing a surplus of 6 trillion yen—so it’s clear that if the automotive industry becomes unable to export its products, Japan suffers a trade deficit.
Sure enough, in April 2011, after the quake had shut down so much of the industry’s production capacity, Japan racked up a trade deficit for the month. When the country slips from a surplus to a deficit like this, it eventually impacts the current account balance and the potential for issuing new bonds. The auto industry bears enormous responsibility in this regard.
Unfortunately, the industry’s production was halted by the March 11 disaster. This dealt a serious blow to the Japanese economy. The region affected by the quake and tsunami is home to some five hundred suppliers, which employ a huge number of people. These small factories can’t get back into operation if there’s no automobile production taking place. The same can be said of the chemical product manufacturers and the steelmakers in Kashima, Ibaraki: if we aren’t working, they can’t work. So we’ve got to get moving as quickly as possible to be a locomotive for Japan’s economy. After the disaster we were very aware of this fact.
The rolling blackouts implemented in response to electricity shortages brought manufacturing to a halt, putting quite a damper on our attempts to get back to work. Initially we planned to boost production gradually in July and get back to full steam from later in the summer through the fall. In this way we hoped to bring economic benefits to the disaster-stricken zones and contribute to the national recovery. But the blackouts threw a wrench into this plan.
The alternative to these planned blackouts, though, was unplanned, widespread power losses, which we knew were unacceptable. The automotive industry consumes a considerable amount of electricity. As an industry, we decided to halt our operations on Thursdays and Fridays, traditionally the peak of our power usage, so that consumption could be smoothed out over the course of the week and other industries could continue to function normally. The auto industry moved as one to shift its weekends forward by two days.
We took this decision because we thought it was the most effective way for us to contribute to society at the time. This wasn’t an easy thing to ask of our workers and their families, whose lives were disrupted by this change in their schedules, and we caused hardship to other people in communities where our facilities are located. So it was gratifying to hear from all these people that despite the hardships involved, in the end they were proud to have done their part for Japan. We asked a lot from our people at that time, but I’d say it was a wise choice, considering how it gave each and every one of them the chance to sense our industry’s responsibility to society.
The Strong Yen and Prospects for Further Crisis
INTERVIEWER This winter Japan will likely confront an uncertain energy situation again. On top of that, we’ve got to deal with an excessively strong yen and rising fuel prices. Japanese manufacturing could face yet another crisis when all these factors come together. How do you intend to overcome these difficulties?
SHIGA The toughest challenge we face is the strong yen. As a nation grows more powerful and its people lead richer lives, it’s only natural for their wages to rise, pulling up the strength of the country’s currency. As the currency grows stronger, labor-intensive industries that add relatively little value lose their competitiveness, and they drain away overseas. This in turn helps to enrich the countries that were a bit lower on the economic ladder. A nation that has grown wealthy, meanwhile, may boost its imports to excessive levels. When its trade balance goes into the red, its currency’s value also falls. This makes it competitive once again on the world stage, and it can grow its exports. This is my basic view of how the global macro economy tends to function.
As this cycle progresses, there’s an undeniable industrial shift toward making products with higher added value. There’s no need to go out of our way to protect the industries that fall behind in this process. While there are certain traditional industries that are worth keeping alive even if they aren’t particularly competitive, we don’t need to extend this protection to normal industries as well. Once an industry loses its competitiveness, market forces push it out of the picture. Then we see the birth of new industries to form the core of the economy. These are all well-understood principles.
Generally speaking, this sort of industrial shift takes place over time, with uncompetitive industries making way for new, vigorous ones. As this takes place, the new industries improve their productivity and technologies. What we’re seeing today, though, with the rapid appreciation of the yen, is a total upending of this process. With the currency so strong, no Japanese industry can remain competitive. Japan is home to 120 million people, and 54.8 million of them are in the workforce. Around a fifth of these—10.4 million people—are employed in the manufacturing sector. If manufacturing vanishes from Japan’s shores, where are these millions of people going to find new work?
There are those who argue that manufacturers should just head overseas if the yen gets too strong for them to remain in Japan, or that sectors like agriculture, medical and nursing care, and childcare will pick up the employment slack. But these sectors cannot make room for more than ten million new workers. Japan will need new key industries. These might be environment-related industries, and they might be in the IT field. But today, the key industry is automobiles. And we can’t be so irresponsible as to pull up stakes and go overseas without a new key industry to hand off the baton to.
If you were to tell me to go out there and turn my company into one that could survive even at an exchange rate of 50 yen to the dollar, there would probably be a way to achieve it. But while Nissan Motor would stay afloat, it would no longer be the Japanese company Nissan Motor. And that’s something that I think must be avoided at all costs.
One thing that really worries me is that there’s no broadly shared sense of how serious the situation is. If the yen remains at this level for five more years, Japan is going to see its industry hollowed out completely. When manufacturing is no longer viable here, what are we going to do to support a country of this size? I can’t shake this unease about our future.
INTERVIEWER Listening to your comments today, I get the sense that the auto industry is almost a reflection of the nation as a whole. In this connection, could we finish with your thoughts on what makes Japanese cars special?
SHIGA I think it boils down to the sense of hospitality that we extend as automakers to the people who ride in our cars. When you get into one of our vehicles, we want you to be enveloped in a sense of pleasure. This is the sort of experience we want to deliver with the cars that we craft.
We also provide what we like to call the pleasure of driving: the joy you feel when you get behind the wheel. Japanese cars have a lot to offer in other areas, too—their painstaking consideration for the environment, like you see in the eco-friendliness of our zero-emission vehicles or our products’ low carbon output across the board, and their high level of safety. In fact, Japan’s automakers deliver unique quality in every aspect of their products.
Hospitality. The pleasure of driving. The environment. Safety. Quality. I think these are the five factors that ensure Japanese autos will remain attractive to drivers around the world.
(Translated from a November 17, 2011, interview in Japanese. Interviewer Harano Jōji is representative director of the Japan Echo Foundation. Photos by Kawamoto Seiya.)
manufacturing recovery earthquake disaster electricity economy cars energy yen Nissan Shiga Toshiyuki automobiles crisis risk risk management crisis response currency exchange rates revival electric vehicles JAMA