Reverse imports on the rise thanks to strong yen

by Andy Sharp

Bloomberg

Japan Inc. has found a new export market: Japan.

For the first time, companies are building products abroad and shipping them back home as the strong yen, aging workforce and improved skills overseas erode the century-old mantra that what’s sold in Japan should be made in Japan. Nissan Motor Co.’s decision to begin importing foreign-made vehicles in 2010 paved the way for some of the biggest domestic companies to follow suit, including cosmetics maker Shiseido Co. and electronics giant Toshiba Corp.

Imports from overseas plants operated by Japanese manufacturers have more than doubled in the past decade to record levels, including a 31 percent jump in the past two years alone, compared with a 61 percent gain in total imports over the same period, government data show.

“Nissan’s decision was epochal,” said Masato Sase, an auto industry analyst and partner at Deloitte Tohmatsu Consulting Co. in Tokyo. “Before then, there was a tacit assumption that cars sold in Japan would be made in the country.”

The shift reflects one of the biggest departures from an industrial strategy initiated by the Meiji Era leaders who followed the end of the shogunate in 1868 and set up Western-style factories. However, the “made by Japan” ? as opposed to “in” Japan ? business model, under which manufacturers base operations paying less heed to nationalism, could end up boosting corporate competitiveness at the cost of jobs in the world’s third-biggest economy, deepening deflation pressures.

“People see the sale of cars made abroad as a sign of the times, as globalization,” said Shiro Kakinuma, a salesman at Nissan’s Shibaura Chuo showroom in Tokyo, which offers the Thai-made March subcompact. “When the new March came out there were some articles questioning the quality of a car produced in a developing country. Not anymore.”

In other moves, Shiseido will introduce its Za range of makeup made in Taiwan and Vietnam to domestic customers from next month, the first time Japan’s biggest cosmetics maker will import one of its brands, while major leading manufacturer Kubota Corp. started domestic sales of Chinese-made rice-planting machines and U .S.-built lawn mowers last year.

Toshiba ended domestic fabrication of its Regza television sets during the last fiscal year after almost half a century of domestic operations, and Panasonic Corp. has shifted all production of its mobile phones to factories in Malaysia and China “to improve price competitiveness,” company spokeswoman Yuko Hosaka said. Domestic manufacturers will make a record 39 percent of their products overseas in the year through March 2015, up from 33 percent two years ago, according to a survey conducted by the Japan Bank for International Cooperation last December.

Earlier forays into overseas production were typically designed to serve the markets in which the factories were located. I n the wake of World War I, Japanese textile companies set up plants in China for the Chinese market, according to Tetsuji Okazaki, a professor of economic history at the University of Tokyo who edited book “The Contemporary Japanese Economic System and its Historical Origins.”

That strategy accelerated in the 1980s amid trade tensions with the United States and an appreciating yen.

With Japan’s currency having surged 45 percent over the past five years, business leaders are again moving more production to countries that offer skilled workforces and lower costs. In a report released in April, Goldman Sachs Group Inc. estimated that a \1 gain against the dollar cuts Nissan’s operating profit by 2.4 percent and Toyota Motor Corp.’s by 3.3 percent.

For companies listed on the Topix index, profit margins at their offshore factories are typically 2.5 to 3 times higher on average than their domestic operations, said Jesper Koll, head of equity research at JP Morgan Chase & Co. in Tokyo.

“The deindustrialization of manufacturing means a structural increase in the profitability of Japan Inc.,” Koll said. Nissan, which makes 3 in 4 of its vehicles overseas ? the highest ratio among Japan’s eight biggest carmakers ? also became the most profitable for the first time in the last fiscal year, logging net income of \341.4 billion. I n the past two years, Nissan’s stock has gained 15 percent, compared with 8 percent for Toyota, which produced 54 percent of its vehicles abroad in the year to March 31, according to the company’s website.

In the same two-year period, the Topix has fallen 8.5 percent. The 12-month return potential on Nissan, Japan’s second biggest automaker, stood at 36 percent Wednesday, some 50 percent higher than Toyota’s 24 percent, according to a consensus of analysts surveyed by Bloomberg News.

The lure of shifting abroad will contribute to the elimination of 4 million manufacturing and construction jobs in Japan this decade, according to the Tokyo-based Works Institute, a research arm of staffing agency R ecruit Co. Factory jobs accounted for 16.5 percent of the country’s total workforce in December, the lowest level since comparable data began to be compiled in 1953.

But while industry may be retreating in importance, Japan will probably remain one of the world’s largest manufacturers, especially for higher-end products, according to Yuqing Xing, an economist at the Tokyo-based Asian Development Bank Institute.

From its base at the foot of Mount Fuji, Fanuc Corp. makes control systems that operate more than half of the world’s automated machine tools, helping production lines at Boeing Co., General Motors Co. and Toyota among others. Meanwhile, Shin- Etsu Chemical Co. and Sumco Corp. control more than 30 percent each of the global market for silicon wafers used to make computer chips, according to the two companies.

“Japan still has stocks of engineers, skilled workers and technologies that are essential for making top-end products,” said Xing, who also teaches at the National Graduate Institute for Policy S tudies in Tokyo. “I don’t see any possibility that Japan would be left out of global supply chains.”

Nissan will continue to make 1 million cars a year in Japan “to maintain our strength in ‘monozukuri’ (making things),” its chief operating officer, Toshiyuki Shiga, said.

Automakers, which are facing a temporary drop in domestic demand when eco-friendly government subsidies run out later this year, will continue to move production abroad, said Satoru Takada, an analyst at securities research company Toward the Infinite World Inc. in Tokyo. “Reverse imports, especially for compacts, will increase,” said Takada.

Policymakers will need to take steps to bolster services in Japan as the economy transitions away from manufacturing, and should loosen regulations, said Martin Schulz, a senior economist at Tokyo- based Fujitsu Research Institute. Exports have accounted for almost half of Japan’s economic growth in the past decade, and contribute about 16 percent of its gross domestic product. Although Prime Minister Yoshihiko Noda’s government has set a target of creating 2.8 million jobs in the medical, health and nursing care sectors by 2020, qualification hurdles for such positions have so far prevented such payrolls from swelling, according to Koll at JPMorgan Chase. “The barriers to entry into nursing and care-giving are very, very high,” said Koll. “Barely 50 percent of Japanese applicants pass the test.”

For the Bank of Japan, the increasing share of goods made overseas that consumers buy may deepen the challenge of quelling the deflation that has plagued the domestic economy since the 1990s. I n June, core prices excluding fresh food products fell 0.2 percent from a year earlier. “Reverse imports make deflation even worse,” said Xing at the Asian Development Bank Institute. “If you move production overseas, it increases room for cost reductions, and that (in turn) will reduce price levels further.” Back at Nissan’s Shibaura Chuo showroom, the new March retails from a little more than \1 million, compared with more than \1.6 million for the bigger, Japan-made Juke compact on sale at the dealership. Kakinuma noted that sales of the March have increased since production moved to Thailand, as companies that run fleets of vehicles try to trim costs.

“Consumers are far less concerned about where things are made,” said Robert Feldman, head of economic research on Japan at Morgan Stanley in Tokyo and an ex-economist at the International Monetary Fund. “A Nissan car made in Thailand is still a Nissan car.”