Turning Things Around for Japanese Companies: An Interview with Komatsu's Sakane MasahiroEconomy
At a meeting on June 14, the cabinet approved Abe Shinzō’s Japan Revitalization Strategy—the last of the three arrows of Abenomics. Sakane Masahiro, vice-chairman of Nippon Keidanren (Japan Business Federation) and councilor and senior advisor at Komatsu, served as a private-sector advisor on the government’s Industrial Competitiveness Council. We spoke to him about the main points of focus in the government’s new growth strategy.
Abenomics and the Potential for Change
INTERVIEWER As someone who was involved in the discussions, how do you evaluate the government’s strategy to reenergize the economy?
SAKANE MASAHIRO One problem we’ve had in Japan recently is that we’ve had a new prime minister almost every year. And this is in spite of all the serious problems we face in terms of the structure of our industry and society. Even Koizumi Jun’ichirō, who lasted longer than anyone else over the past ten years, concentrated on reforming politics and the bureaucracy. The big topic during his time in office was post office privatization. Unfortunately, his reforms never extended to the private sector and never really became a true national movement.
If Koizumi had used his strong leadership to push through a series of economic policies similar to Abenomics, things might have been different. Abenomics is all-encompassing. It takes in the whole picture.
The structural issues we face will not be easy to fix. First of all, we need a stable government. We need to have a single leader who can stay in charge of the government for four years or so.
INTERVIEWER Both the Liberal Democratic Party and the Democratic Party of Japan have introduced a number of similar strategies in the past. What is different this time?
SAKANE This was the point I stressed most during our meetings. Some of the committee believed that since various governments have already issued growth strategies over the years, there was no need for us to come up with another one now. I argued that this was the wrong way to look at it. The problem with the Koizumi reforms was that they did not involve ordinary people. Passing liberalizing reforms is not enough on its own. Unless you can inspire the people to take part, the reforms will have little effect.
Shared Awareness of the Problems
INTERVIEWER What kind of points were discussed at the Industrial Competitiveness Council meetings?
SAKANE At our first meeting in January 2013, I told Prime Minister Abe, “The country can’t afford bystanders. Everyone needs to come together and work as a team. As prime minister, you should ask people to start the reforms by implementing change in their immediate surroundings. Everyone needs to take responsibility. I’m sure the people will support you.” My idea was that we needed to make sure that the whole country shared an awareness of the issue. How should Japanese industry address the problems we are facing?
Companies create additional value worth 275 trillion yen across the country as a whole. Some 177 trillion yen of that goes to employees’ salaries. That’s the money that drives personal consumption, which makes up roughly 60 percent of GDP. Increasing this by just 1 percent could create new jobs worth 1.7 trillion yen. It’s not easy to create that kind of money just from new business fields alone.
In many cases, Japan has the best technology but loses out on the business front. The reason is that many of Japan’s leaders lack the willpower and determination to build business models and create global standards. There is a lot of wasted effort in the Japanese model. In Japan, all the players in the private sector are competing horizontally to create innovation—in addition to government-led efforts on a national level. There’s no point having so many people all doing the same thing. Each company needs to take a top-down decision and work to develop its own innovations out of the distinctive characteristics of the company.
The Illusory Disadvantages of Cost
INTERVIEWER Japan’s economy has been locked in a deflationary spiral for twenty years now—the so-called two lost decades. This has led to a dramatic decline in international competitiveness for many of Japan’s products, including the electric appliances that were once the country’s specialty. What needs to be done to revitalize the culture of manufacturing that drove Japan’s success in previous decades?
SAKANE I can certainly sympathize with people in electronics and consumer electrics. At Komatsu, we make machinery for the construction industry. This meant that we were among the first to feel the effects when the bubble economy collapsed. The market shrunk until there was practically no demand at all. That’s why we looked overseas. We had no choice. But the situation for the electric companies was different. Their domestic market was so huge that they were able to continue as they were for a while. This meant they were slower to expand overseas. One of the dominant players in our industry is Caterpillar, an American company roughly twice the size of Komatsu. It’s as though Japanese companies find it easier to survive in an industry with a strong American competitor.
I worked eight years in our American subsidiary. Having spent those eight years looking at Japan from overseas, I think there’s no way that Japanese companies should lose out just because of exchange rates. For our company, there is really no difference in terms of our core manufacturing. This gave me the confidence to believe that so long as we do what needs to be done, we’ll do all right. That’s the question I’d like to put to a lot of Japanese companies: “Are you really losing out to foreign companies because of manufacturing costs, or is there some other reason?”
Learning from Germany’s Example
INTERVIEWER Do you think that this new growth strategy will make Japan competitive again?
SAKANE I think it’s possible, if there’s change at the top. This means change across the board: in government, the bureaucracy, the private sector, and academia. The comparison I always make is with Germany. Germany has done a very impressive job in terms of revitalizing its manufacturing industry. There’s a lot we can learn from Germany.
INTERVIEWER What kind of things do you have in mind?
SAKANE Germany is a country with a strong manufacturing tradition, just like Japan. They joined the EU, introduced the euro, and established the common currency. It’s a federal republic made up of sixteen regional Länder, with major companies situated right around the country. The German government took steps to reduce the corporate tax and social security burden on companies and made changes to company law to boost corporate metabolism. They also revitalized primary industry—agriculture, forestry, and so on. In the 1960s Germany and Japan both produced around 70 percent of their own food. Today, that figure has fallen to around 40 percent in Japan, but in Germany it has risen to 88 percent. There are lessons to be learned right across the board.
In the 1980s there was a lot of talk of “Japan as number one.” I think maybe that’s when we lost sight of the importance of learning from other countries. In our industry, it’s a little different. Because our strongest competitor is an American company, we have always been aware of the need to learn from other countries. We still haven’t been able to overtake Caterpillar and become the world leader. I think in the consumer electronics industry, Japanese companies became complacent after they overtook their American competitors. And that was part of what caused them to be overtaken by competitors from the newly emerging economies. They lost sight of the need to be constantly learning.
INTERVIEWER Do you think there’s a sense in which Japanese companies have been blind to their own weaknesses?
SAKANE You need to be aware of where your true strengths lie and constantly work to improve them. That’s the bedrock of my approach. That means it’s vital to analyze honestly where you are falling short. If you find an area where you’ve overreached, you need to be ruthless. If there’s room to cut something out, or you come across a problem with some part of the process, you have to take a knife to the problem and cut it out. Before we can start talking about restructuring industry as a whole, top managers need to come up with clear plans of what they can do to improve their choices and focus. This will help invigorate the company. If the people at the top make the right decisions and take the steps that need to be taken, the country can change. This goes for politics as well as the private sector.
Japan’s Role in China
INTERVIEWER Business with China is obviously an important part of Japan’s growth strategy. What are your thoughts on the situation there?
SAKANE Komatsu actually managed to increase our sales in China to 21 percent of total sales for fiscal 2010, when the world economy was in the grip of the credit crunch. But demand started to fall around June 2011, and China now makes up only around 7 percent of our sales. In Japan, on the other hand, demand driven by reconstruction projects after the 2011 tsunami disaster has helped to push sales up to around 17 percent of the total, roughly the same as our sales in North America.
Ironically, the China market has rebounded again since the demonstrations and ill-feeling over the Senkaku Islands dispute in autumn 2012. And since spring this year our figures have been steadily higher than last year. The problem is that liquidity has dried up within China itself. There are still plenty of plans for building projects, but a lot of them get stalled before any actual work starts, because the companies involved are struggling to pay off previous debts or other obligations. Even so, the central government is increasing investment in areas like the environment and agriculture--- small-scale irrigation projects and the like.
INTERVIEWER What is the outlook for the future?
SAKANE From the perspective of our industry, the situation is that the Chinese economy has bottomed out. In that sense, things can only get better. I think if the domestic economies in Japan, China, and South Korea were in slightly better shape, relations between Japan and its neighbors would probably not have deteriorated so badly.
When the economy is struggling at home, people tend to look overseas for someone to blame. Japan plays an important role in the Chinese economy. Even when riots were breaking out last year over the Senkaku issue, Komatsu’s Chinese employees remained calm. It’s out of the question for us to simply run away from China. And today, we don’t feel any effect of the demonstrations at all. It’s all blown over.
Flying the Banner for Regional Industry
INTERVIEWER Tell us about the work Komatsu is doing to revitalize Japan’s regions.
SAKANE Komatsu is the biggest company to have emerged from the town of Komatsu in Ishikawa Prefecture; we basically represent the town. So of course we are keenly aware of how important it is to make a contribution to revitalizing the local area. The Hokuriku region has the cheapest operating costs for factories in the whole country. If more industry were based in the region, Japan would be better placed to deal with any further increases in the value of the yen against other currencies. By getting women involved, we are also helping to deal with Japan’s low birthrate. Basically, our efforts can be summed up by the question: “How do we appeal to women and young people?”
It’s not just Japanese society that is aging—our factories and social infrastructure are aging too. At Komatsu we’re in the process of replacing old factory structures that were built more than forty years ago. The new factories use less electricity, and by introducing the latest equipment we are able to increase productivity by 30 percent. Rather than limp on using old factories and equipment, in the end it makes more sense to take the plunge and replace everything. The end result is lower costs, and you soon earn back more than what you invested.
INTERVIEWER Considering the vital role played by the individuals at the top, making sure you have the right person in place must be very important.
SAKANE It’s the most important thing of all. The final judgment on how successful a company president has been should be made after he has chosen his successor and once you’ve seen how that succession goes. When I was president, my aim was to ensure that the company would grow stronger with each generation and with each change of management. I was always thinking of what I could do to make that a reality. In the end, I decided the best way to achieve that was to establish a clear set of corporate values and to put together a series of frameworks and courses of action for how to achieve them. This became known as the Komatsu Way, what you might call the company constitution. If the people who work to further develop the content of this “constitution,” and this approach becomes established as an integral part of the company culture, this company will only go from strength to strength with each new generation.
(Interview conducted on July 4, 2013, by Harano Jōji, representative director, Nippon Communications Foundation, and Harada Kazuyoshi, senior editor, Nippon Communications Foundation. Photos by Kimura Junko [Jana Press].)