The Lessons of the Great Tohoku Earthquake and Its Effects on Japan’s Economy (Part 5)

A Suggestion for Japanese Industry after the Great Tohoku Earthquake

Tadahiko Abe
Senior Executive Fellow

November 17, 2011 (Thursday)

1. Introduction

The recent great earthquake showed us vividly Nature’s awesome power and delivered a great blow to factories and businesses all across the Tohoku and Kanto regions. At some of these facilities, precious lives were lost as well. Currently, companies are anxiously working towards restoration, and all we can do is pray for a speedy recovery. There is no question that this disaster was of a scale that defies understanding. We must therefore recognize that post-earthquake Japan is different in many respects from pre-earthquake Japan, and we should treat it as such.

2. What Has Changed Since the Earthquake

What has really changed? Let’s take a look at the industry side of things.

First of all, the future of energy sources has become murky for the entire world, not just Japan. Uncertainty about nuclear power plants has increased, great expectations have fallen low, and policy reevaluation is in the offing. For the people who saw the nuclear power plant accident and sat in fear of the worst case scenario, it will be difficult to simply accept nuclear power as they have up until now. It has been reported that the plans to build 9 more nuclear power plants in Japan by 2020 and a further 5 by 2030 have been put in deep freeze.

Second, the risk of having production plants in Japan, which has long supplied core parts and materials to the world, especially the remarkably fast-growing Asia, has been recognized by the rest of the world. Japan’s exports of manufactured products, including finished products, have increased explosively since 2004. A complex supply chain has been created for these products (e.g. parts or materials are exported to South Korea, where they are processed or assembled into a finished product before being shipped to China) and has provided underlying support to production throughout the rest of Asia. These finished products are sometimes even shipped from China as Apple products. Trust in Japan, which is a vital mainstay of this supply chain, has been shaken in one fell swoop. If Japan missteps in dealing with this problem, it may lose its position as the world’s core parts factory, fall out of the black in trade, and see a sharp increase of production moving overseas and significant drops in inward investment.

Third is the concern that the Tohoku region has been enervated. The damage there was caused by a power beyond human comprehension, and so the entire country must make a special effort and bring all its power to bear on helping with the restoration. There is also a movement towards transferring production from damaged factories in the Tohoku region to factories in other regions. The tsunamis caused grievous damage to the way of life of people in the region as well. On top of that, there is the fear that radiation damage may force people to move. Japan needs both emergency support measures to deal with the present and to create new industry that takes into careful consideration the country’s future.

3. Suggestions for Japanese Industry in the Future

How should Japan’s companies cope with this never-before-seen situation? I propose the following in the hope that it will provide a goal and a source of greater effort for those people who are desperately working towards restoration in the Tohoku region.

I. Energy Measures Inside and Outside Japan

First of all, when it comes to energy measures inside and outside of Japan in the future, there will be an unavoidable shift in the policy of advancing nuclear power. However, considering the current percentages of power sources, not using nuclear power at all is unrealistic. The issue is how to maintain the power generated by existing nuclear power plants using a method to ensure their safety (which will likely become clear via the recent incident) while at the same time promoting the development of alternative energy. This shared issue has been thrust upon all the nuclear power plants of the world, and there are likely to be countries that have recently introduced nuclear power but are not yet able to develop the necessary technology. It is therefore important to communicate this new know-how to such countries as well.

As a future countermeasure, Japan should immediately strengthen its development of robots that can perform work under dangerous radioactive conditions. There are various jobs that must be done, from taking sensor readings to cooling the reactors, and development should not rely solely on Japanese companies, but Japan should introduce technology from the American military as well. This is a common issue for all of mankind and we must all pool our knowledge to solve it. While due to an unfortunate circumstances, Japan has acquired hands-on experience of this type of accident and is expected to take the lead. On a related note, robots that can be used to deal with scenes of nuclear-related terror attacks are not expected to be technologically feasible until 2013 or real-world ready until 2020. The development of radiation-resistant robots must be accelerated.

In terms of alternative energy development, two points must be considered. First, we must not give up the basic goal of building a fossil-fuel-free society. Just because nuclear power is dangerous does not mean we can simply rely on fossil fuels. In particular, the price of oil is expected to rise and oil wells to run dry, and augmenting oil-fired thermal power cannot be done so easily. Therefore, we must try any and all kinds of renewable energy sources, such as geothermal power, which has not been given much attention in the past. The Tohoku area is a particularly promising place for geothermal power plants.

However, realistically it is unavoidable that fossil fuels such as liquid natural gas (LNG) be given precedence in the future. In which case, it is necessary that Japan prepare for the worst and aggressively advance R&D towards creating a new carbon (dioxide) industry, for example artificial photosynthesis, which would use the CO2 produced by such power sources as a raw material. Japan, which is a science powerhouse, should take the lead and promote this idea globally as well.

II. Maintaining Japan’s Position as a Production Base for Core Parts and Materials

Secondly, how can Japan maintain its position as a base of production for core parts and materials? There have already been examples of overseas companies which have begun to diversify their procurement by shifting to countries other than Japan: companies which have had to enter production adjustment due to stalled procurement of core parts and materials from Japan; and companies which have fallen afoul of high costs due to price hikes brought on by other companies in the area hoarding parts and materials. This sort of shift will doubtless provide opportunities to companies in other countries, for example South Korean and Taiwanese companies in the electronics sector. However, those companies’ factories will not be able to quickly and entirely fill the production void left by Japanese companies in terms of production ability. Furthermore, in the long term, there will be increasing demand to have production plants currently in Japan located closer to overseas clients. The unfavorable winds will blow ever stronger. However, in the future Japan will need to continue to secure a certain amount of exports in order to obtain funds to import oil and food. For this reason, continuing production of the core parts and materials that are indispensible to other countries’ companies is very important, and Japan must do everything it can to maintain domestic plants. While they have very complex global supply chains and will be heavily affected by the future power shortages, Japan’s electronics and automotive industries, which are the core of the country’s trade surplus, are especially important.

Japanese companies are already desperately trying to do so, but they must immediately fulfill their supply responsibilities to companies around the world. As can be seen in the automotive industry, the quick recovery and restarting of supply should not be seen as the problems of individual companies but should be taken as the responsibility of the industry as a whole, and every company must put systems in place such that the industry as a whole can deal with the problems. Japan’s reputation as the world’s supply base must be protected by industry as a whole. Some flexibility in part production between companies may be necessary as well. China sees Japan as taking 6 months to a year to recover from the recent earthquake and has already begun trying to escape from reliance on other countries.

At the same time, companies must quickly and clearly explain the situation at factories (e.g. expected restart of operations, no expected restart, closing of factories, possibility of moving factories, moving production to another factory and maintaining supply, etc.) and endeavor to hold on to clients, although this is likely already being done. What clients inside and outside of Japan want is just such fast and accurate information.

III. Cultivating Industry and Companies in the Pacific Tohoku and Ibaraki Area

Third is the mid-term goal of cultivating industry and companies in the Pacific Tohoku and Ibaraki area, which was hit very hard by the recent earthquake. The rebuilding of industrial infrastructure such as roads, bridges, and railroad tracks is of primary importance. The next necessity is funding support, such as finance loans, to help maintain business activity for the time being. We must not lose the precious capabilities and resources that will uphold the industry of tomorrow.

When looking at economic activity in Aomori, Iwate, Miyagi, Fukushima, and Ibaraki prefectures, in 2007 these prefectures comprised a total of approximately 7.85% of all manufacturing in Japan at current prices. When broken down by industry, transportation equipment is rather small at 2.26%, but electronics equipment is 9.34%, precision instruments 9.40%, general machines 8.02%, and metals 8.02%, showing an overall economic scale of 8%. For this reason, when one considers the factory stoppages due to the recent earthquake and, furthermore, the less than encouraging outlook of power supply, one cannot help but worry about the large effect that supply shortages in these industries will have inside and outside of Japan. Therefore, Japan’s current efforts towards a rapid recovery of supply are absolutely necessary.

However, while unfortunate, recovery is not expected and there is the possibility of production shifting to other regions, including overseas, and therefore the creation of new products, businesses, and industries in this area is needed. Together with the methods mentioned above, we must also draw up an overarching plan of future industry.

Due to the intensification of global competition, it will be difficult in the future to find locations locally for the large-scale assembly type factories of large corporations of the past. Given the current situation, factories will have to be based on the unique managerial resources of each region, and each one will have to find a way to independently create direct ties with overseas markets. It is important that this area base products on traditional crafts or local agricultural products and foodstuffs to develop overseas markets.

When looking at the region’s industries in such terms, we see that the region comprises large percentages of Japan’s foodstuffs (11.07%) and agriculture, forestry and fisheries industries (15.83%) relative to its overall industry percentage. For this reason too, the region’s image of radioactive contamination is particularly damaging, and we can only pray that the contamination does not spread any farther.

If companies are going to go independent, they will need global personnel who will help develop sales channels overseas. The most effective way of acquiring these people would be for the region as a whole to invite specialists who have retired from Japan’s trade firms and have them lead the development of overseas sales channels. Japan’s manufactured goods, which are its specialty, are very often made up of many various element technologies. It is important for university professors to become the nuclei of various projects and gather together the element technologies of the region and fuse together agriculture, industry, medicine, and service and create new products. In this way, we must form viable cooperations between government, industry, and academia in order to develop new businesses and products. Tohoku’s focal universities, such as Tohoku University, should form a network, and the country should support a project which promotes the R&D of the aforementioned robots that can work safely in high radiation environments and CO2 chemistry. Companies that are formed based on this R&D would then be promoted as regional corporations. Here too, it is important to gather personnel from not only the rest of Japan, but from all over the world, and borrow the strength necessary to rebuild.

4. In closing

Over the mid term, the most important question is how industry will deal with the planned power outages which are likely to continue for the foreseeable future. Taking Japan as a whole, when power is decreased by a single unit, infrastructure such as process industries (cement, paper/pulp), heat supply, rail cargo transportation, and water suffer a much larger decline. The issue of how to distribute the limited power becomes an important point of discussion. Of course, human life is given priority, but other factors such as importance of infrastructure, ripple effects, and products whose input into other products is large must also be considered, and when it is not simply a blackout, the direction of power distribution must also be decided. We must create a power distribution plan that will allow companies to produce easily.

At the same time, industry must accept that a large change affecting the way Japan works is necessary, and they must unfold various ingenious energy-saving techniques and methods such as in-house power generation, night-time operation, summertime shift, and working from home and using IT to reduce travel.