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Not the time to junk the factories

by Kevin Rafferty

HONG KONG — While President Akio Toyoda and his Toyota Motor Corp. search for the vehicle pedal that says “damage control,” economists and political commentators are increasingly speculating whether the multimillion vehicle recall by Toyota presages the beginning of the end of Japan’s mighty manufacturing machine.

Some economists claim that Toyota’s accident could prove a good thing for Japan if it drives manufacturing away and re-engineers the economy toward services. Such an idea is premature and damaging unless and until Japan Inc. can remedy major economic and social defects.

More than Toyota’s reputation was smashed in the recall of its vehicles, some for problems with a sticky accelerator pedal, others for braking difficulties. The sight of president Toyoda belatedly groveling apologies in Japanese and in English was enough to underline that the company and the country have serious issues to solve.

In terms of customer satisfaction, Toyota’s record is good, and American owners made fewer complaints per vehicle sold between 2001 and 2010 than on the American Big Three. Even so Toyota certainly drove over a public relations cliff in the way it handled the recalls. The first lesson is to admit mistakes, then fix them. But Toyota initially blamed the cars’ drivers for problems, and had to be pushed into action by the transport authorities of both the United States and Japan. The damage is the more devastating because Toyota is Japan’s pride and joy, its biggest company by sales and hitherto by taxes, the industrial equivalent of Mount Fuji, without which Japan would be diminished.

Japan’s problem is that this is not an isolated case of deficiencies in the factories. Honda also recalled vehicles for faults with their air bags.

Koito Industries, a subsidiary of Koito Manufacturing, a Toyota Motor group company, also fell foul of Japan’s transport ministry for falsifying results of safety tests on seats that it makes for 32 airlines. The company president admitted that it was an “organizational practice.” Japan’s transport ministry moved in after an insider claimed that the company had cheated on the tests since the mid-1990s.

It is not as if Japanese carmakers design such marvelous cars that customers are compelled by their beauty. Toyota’s hybrid Prius is regarded as an ugly beast even by its loving owners. The top marquee Lexus brand is neither as majestic as a Rolls-Royce nor as stylish as a Jaguar, BMW or Mercedes.

Toyota cars won their reputation for value for money, quality engineering, longevity and highest safety standards. That reputation is at stake. The questions are not merely whether the company sacrificed quality and safety in the quest to beat General Motors to be the world’s biggest carmaker, but whether engineering was sacrificed to the sales drive and whether the managers lost honesty and trust on the road there.

If Japan’s best company can’t be trusted, what price will the rest of Japanese manufacturing pay?

But it is a leap too far from saying that Japanese manufacturing is on the skids to advocating that the country would be better off clearing out the factories. The arguments for doing so are familiar enough: Let mass-market manufacturing go to China and Vietnam and, maybe eventually, Africa and thus get out of cheap pay and dirty jobs into high value, creative services.

The arguments against also have force. It is dangerous for national security for a country to give up manufacturing capability. As for shedding industry except for specialized products, robotics, sophisticated machine tools, alternative energy and suchlike, it is not easy to draw the line, and in any case the boutique skills depend on a history and geography of general manufacturing competence.

Most dangerous of all is the argument that Japan (or any other manufacturer) should get rid of products that demand quality control. Precision and quality control are hallmarks of successful manufacturing. A Rolls-Royce engineer with a Ph.D. from Cambridge said he spent his first three months writing numbers from one to 10, nothing else, day in and day out, until he could form them perfectly.

“Precision and perfection, every time, small and large,” he declared. “If Toyota has lost that, it’s lost.”

Japan’s manufacturing has declined from 28 to 22 percent of gross domestic product since 1990. This is still higher than the 12 percent of the U.S. Even in the face of the rising yen, Japanese have resisted exporting skilled work and final quality assembly — with good reason.

Advocating British- or U.S.-style services economy as a better contribution to mankind must surely be a morally hazardous proposition, considering where the creativity, innovation and financial engineering took them and the world.

Japan lacks the flexibility, imagination and openness to be a major center for services. The authorities keep a tight grip and are reluctant to allow anything that may undermine — in their stern and often blinkered view — Japanese traditions. That means strict limits on foreigners, cozy relations between government and big business, exaggerated respect for authority and rules, all of which have created inefficient, uncompetitive and expensive services in Japan that are in no shape to take on the world, let alone lead it.

The Toyota shock should prompt Japan’s politicians, bureaucrats, bankers, business leaders and educationalists to take an overdue hard look at the country’s competitive readiness in a world of swirling change. This is particularly urgent given Japan’s rapidly aging and declining population and the remorseless rise of giant China on its doorstep.

Japan today seems at risk of regressing. Go to China, Korea, Southeast Asia and you see students eager to explore and learn from the world, like the Meiji generation, heading for foreign universities.

Come to Japan and you see students heads bowed to their iPods with apparently little thought of anything except their daily grind. Are these the best bright hopes for the future of aging Japan? If so, Japan will soon no longer be the second economy in the world. More like 22.

Kevin Rafferty is the author of “Inside Japan’s Powerhouses,” a study of Japan Inc. and internationalization.