Business

Loyalty to 1960s machine shows risk from Japan's aging factories

by Keiko Ujikane and Masatsugu Horie

Bloomberg

The oldest piece of equipment at Osaka Machine Tool Co. has been there so long that only the company’s 70-year-old chairman, Katumi Takata, still knows how to use it. He isn’t planning to replace it anytime soon.

Many other Japanese manufacturers are equally reluctant to spend money. The average age of their facilities and equipment is the highest in at least three decades, according to Dai-ichi Life Research Institute, and has risen faster than in rival industrial powerhouses such as the U.S. and Germany.

The aging of Japan’s industries threatens to worsen the hollowing-out of domestic manufacturing experienced in recent decades, undermining Prime Minister Shinzo Abe’s efforts to stoke an economic recovery from a recession last year. The latest signals underscore the concern: a central bank survey of companies this month indicated they plan to cut investment this year, even amid near-record holdings of cash.

“Facilities and equipment getting creaky isn’t good for Japan’s economy,” said Toshihiro Nagahama, Tokyo-based chief economist at Dai-ichi Life Research. “Japanese companies could fall behind their foreign rivals.”

The average age of Japan’s manufacturing facilities and equipment is 15 years, the oldest on record, according to Nagahama, who made the calculation based on government data going back to 1981. The average grew by 5.1 years between 1990 and 2011, compared with a 3.6-year increase for the U.S. and 3.2 years for Germany, according to a 2013 report by the Cabinet Office.

At Osaka Machine Tool, a maker of industrial parts, including components for jet aircraft fuselages, more than half the equipment is more than 15 years old, said Takata, who joined the company in 1964. At that time, the economy was growing rapidly and the company was buying new machine tools “one after another,” he said at an interview at the factory in Higashi Osaka.

During the 1980s asset bubble, most manufacturers again bought new equipment as business was booming, Takata said. His company used land as collateral and borrowed money to buy many machines.

These days, the firm won’t give up on any machine tool that still functions.

“I know new equipment is always better than old equipment, of course, especially in terms of productivity,” Takata said. “But so far, we have no problem using these old machines. We’ll keep using them until they don’t work anymore.”

Japan’s “lost decades” of stagnation and deflation that began in the early 1990s prompted companies to restrain business investment and let their factories age. Prolonged bouts of yen strength before Abe took power in December 2012 also prompted manufacturers to accelerate a shift in production to other countries with faster-growing demand and lower wages.

Domestic business investment fell to ¥72 trillion ($603 billion) in 2014 from ¥76 trillion in 2007, the year before the global financial crisis, according to Cabinet Office data.

Bank of Japan Gov. Haruhiko Kuroda has urged companies to reverse the trend by using their growing cash hoard to invest in facilities and boost workers’ pay. With the weak yen and profits improving, companies now have leeway to upgrade old facilities and equipment, said Hiroshi Miyazaki, an economist at Mitsubishi UFJ Morgan Stanley in Tokyo.

Some are doing so. Canon Inc. and Nissan Motor Co. have said they plan to boost domestic output, while Panasonic Corp. and air conditioner-maker Daikin Industries Ltd. may bring some work back to Japan. The nation remains known for having some of the world’s most modern factories and is home to world-leading industrial robot-maker Fanuc Corp.

Exedy Corp., a maker of transmission parts and clutches whose customers include Toyota, started upgrading aging facilities and equipment in its main plants in Japan last year.

“We need to have production lines with more highly developed technology than the current ones in order to strengthen cost-competitiveness,” said Kazuhiko Miwa, a spokesman for Exedy.

Still, the Bank of Japan’s tankan business sentiment survey released April 1 showed companies as a whole plan to cut capital expenditures by 5 percent in the current fiscal year. For the manufacturing sector, growth in capital spending will slow to 1.3 percent from 7.1 percent last year.

Toyota, which is projecting a record ¥2.13 trillion profit for the year that ended March 31, forecast domestic capital spending of about ¥500 billion for the period, according to Kayo Doi, a company spokeswoman. That’s down from ¥863 billion in fiscal 2007, as the company increases cost efficiency.

The automaker put a freeze on new plants after the financial crisis that began in 2008. Toyota said April 15 it will end the freeze by building two new plants — although both will be overseas, in Mexico and China.

Companies may be reluctant to build new factories in a domestic market where the population is declining and workers are aging, said Hiroaki Muto, a Tokyo-based economist at Sumitomo Mitsui Asset Management Co.

At Osaka Machine Tool, Takata said he feels emotionally attached to his oldest piece of equipment, a Spiramatic Jigmil made by the DeVlieg Machine Co. in Michigan more than half a century ago. He’s now the only one of about 30 employees at the company who knows how to handle the machine properly, and it helped the parts-maker earn a lot of money in the 1980s, he said.

“I have no plan to abandon this one,” Takata said. “The question is whether I’ll stop working before it does.”