Hidden champions: Out of the shadows and into the Light
While some of Japan’s best-known manufacturers have lost ground to regional rivals in recent years, it is the country’s Chuken Kigyo – strong, medium-sized companies – that continue to fly the national flag, enjoying strong global market shares in niche a
The success story of Japanese manufacturing is a well-documented one. A chief proponent of its post-war economic boom, Japan’s manufacturing industry – propelled by a great tradition for fine craftsmanship (or monozokuri) – usurped the United States in the 1970s and 80s to become the sector’s veritable global kingpin. Japanese corporations such as Sony, Sharp and Panasonic took over the world of consumer products; iconic brands that to this day remain synonymous with the famous ‘Made in Japan’ trademark, and its reputation for high-quality. It is this reputation for almost flawless manufacturing efficiency that changed international business practices and inspired countless corporate management manuals and business advice books.
The story of Japanese manufacturing thereafter is equally well documented. The period that followed, commonly known as the ‘lost decades’, suddenly marked an end to the incredible expansion of ‘Japan Inc.’. Simultaneously, regional competitors from Korea, China and Taiwan, learnt to replicate the manufacturing processes of monozukuri. For example, between 2002 and 2007, Japan’s global market-share for integrated circuits plunged from 75 to 34 percent, as low-cost Taiwanese and Korean products flooded the market. Naturally, the corporations to be hit hardest by these economic trends were the larger ones – slower to react and tied by their humongous size.
Whereas companies such as Panasonic, Sharp and Sony have lost market share to regional rivals, Japan’s smaller, lesser known manufacturing firms continue to dominate niches upon which the global technology industry depends. The Japanese even have a name for them: Chuken Kigyo (or strong, medium-sized firms).
The story of Chuken Kigyo is one that is more seldom told about the Japanese manufacturing industry – the story of the country’s economic backbone, or what one might call ‘the hidden part of the iceberg’.
Chuken Kigyo is also a symbol of Japan’s great manufacturing and technological prowess, and a constant reminder of its industrial strength – and never more so in recent history when Japan experienced years of economic stagnation.
Now though, the country’s strong, medium-sized companies are leading Japanese manufacturing into a bright new era – one that is defined by the technological innovation and efficiency that Japan excels in: the socalled Fourth Industrial Revolution.
In focus: Japan’s hidden champions
To understand the importance ofchuken Kigyo to the Japanese economy, one must first get a sense of its scale. In 2016, the Economic Census for Business Activity estimated that SMES and LMES (large mediumsized enterprises) accounted for nearly 97 percent of all Japanese enterprises. Smaller in size, greater in corporate flexibility and highly specialized in precise products, these ‘hidden champions’ – as they are affectionately called – have built upon their historical expertise to transform themselves into qualitative and innovative powerhouses.
Indeed, thanks to their extremely high level of technological prowess, Japanese SMES have become the undisputed market leaders in many B2B sectors and are responsible for providing the quality required to make complex end-products. While some of these are in the business of simple engineering (for example, Shimano Inc. supplies around 60-70 percent of the world’s bicycle gears and brakes); it is in the enigmatic areas of electronics and materials-science that Japanese companies truly reign supreme. As
“Japan Inc. has transformed into a hidden champion and an expert at making complex components and parts. Around 50 percent of all smartphone components are made by Japanese firms” Osamu Inoue, President, Sumitomo Electric Industries
these technologies are largely invisible to consumers, the firms remain mostly hidden (especially outside of Japan). However, as they are essential to making particular products, many enjoy vast global market shares. It has been estimated by the Japanese Ministry of Economy, Trade and Industry (METI) that within the past decade, Japanese companies served more than 70 percent of the worldwide market in at least 30 technology sectors.
It is within these very niche and specialist sectors that quality remains king. While many technology products have become commodities, certain components have not as they require continual innovation. This is what all Japanese technology champions have in common: a strict attention to detail and a tendency to invest handsomely in research and development.
Osamu Inoue, President of Sumitomo Electric Industries, Ltd. – which manufactures electric wire and optical fiber cables used mainly by the global telecoms industry – explains that while products that were originally made by Japanese firms have been replicated and, in some cases, lost significant market share to products made by other international
manufacturers, this does not mean that Japanese manufacturers have lost innovation capability.
“In today’s world,” he says, “Japan Inc. has transformed into a hidden champion and an expert at making complex components and parts. For example, around 50 percent of all smartphone components are made by Japanese firms, while products are indeed assembled in China.”
Hirokazu Saito, President of Ohara Inc. – a global leader in optical glass products – explains how such a transformation has helped keep its competitors at bay, especially the Chinese firms and other regional rivals who have based their business models on attempting to replicate Japanese monozokuri.
“The way we have been able to stay competitive and stand out amongst our competitors is by investing a lot of time and effort into our R&D forces,” he says. “As a result, we have successfully implemented innovative ideas into our manufacturing processes, thereby offering a quality of product that is truly unique to Japanese products and that cannot be emulated by rival companies in China.
“Chinese companies buy Japanese products in order to analyze them and attempt to recreate them. However, what has been demonstrated is that even though they can analyze the composition, they cannot maintain the same level of consistency that Japanese companies provide. Our company has always maintained a high-level of quality, consistency and reliability in our products, which has allowed us to continue living up to, and even exceed the expectations of what it means for products to be ‘Made in Japan’.”
For this reason, international manufacturers everywhere turn to Japanese makers for these sorts of specialized tools and components. Car manufacturers, for example, would want to avoid the PR disaster of a product recall owing to a car dashboard malfunction caused by an inferior part that cost only a few cents. Mobile phone manufacturers, too, would not want their devices’ screens to instantly a shatter as soon as they took the slightest impact.
Creating a high-end solution to the latter of these two examples has been one of the most recent innovations of Ohara Inc., a company which traditionally prides itself on providing the lenses for a range of high-spec technological equipment. These include high resolution telescopes used for astronomical studies, microscopes for biological studies, and top-of-the range cameras.
The Ohara Inc. president explains the reasons behind the company’s diversification strategy: “Over the past several years, demand for digital cameras has decreased significantly. In order to compensate for this drop in production, we have had to explore new types of markets and production lines, from which lithium-ion conductive glass-ceramics (LICGCTM) manufacturing came to fruition.
“Ohara now makes use of a new line of glass ceramics to create durable glass that can be implemented in the production of mobile phones. The reason mobile phone companies are interested in our glass ceramic products is because with the introduction of 5G, there is a need for a material that offers high transmission of signals but that can also remain durable. Glass alone can shatter too easily, so the use of glass ceramics allows the mobile phones to remain sturdy while giving the best available connection to the user.”
The ability of Japanese companies to continuously innovate – not just in existing product lines and technologies but through the creation of new solutions in order to adapt to rapidly changing consumer demands – stands its manufacturing industry in good stead, particularly as the aforementioned Fourth Industrial Revolution continues apace.
Chuken Kigyo and Industry 4.0
Also known as Industry 4.0, the Fourth Industrial Revolution is the global digital transformation that has been occurring since the middle of the last century, characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres. Evolving at an exponential rate, the possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited. And these possibilities will be multiplied in the coming years by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things and autonomous vehicles.
Recognized as an international hub of technological innovation, Japan is expected to cement its place as a leader of this global industrial movement in the coming decades.
To this end, as part of its ‘connected industry’ policy for boosting Industry 4.0, the Japanese government has recently joined hands with the private sector and is focusing on diverse ways in which it can de-
“We have successfully implemented innovative ideas into our manufacturing processes, thereby offering a quality of product that is truly unique to Japanese products” Hirokazu Saito, President, Ohara Inc.
velop the Internet of Things (IOT) within the manufacturing industry. Mitutoyo Corporation – a firm specializing in measuring instruments and metrological technology – is an example of one of Japan’s ‘hidden champions’ that considers itself ahead of the curve in this area.
“Since some of our clients operate in complex industries, such as automation and aviation, we are required to adopt IOT solutions,” explains President of Mitutoyo, Yoshiaki Numata. “We employ IOT as a means to utilize, analyze and treat the data captured by our measuring tools. This information is then sent to machine tools and relayed to the central server so that all relevant data can be centralized and observed. This method began long before Industry 4.0.
“While the democratization of smart factories is rather recent, this trend is not new to Mitutoyo. As we have been providing similar solutions for many years, machine tool and robotic manufacturers come to us to collaborate. In a smart factory, the machines, robots and measuring tools must connect and communicate with each other in order to keep the factory running. Therefore, our customers require an IOT system that connects with aspects of the production line, and this is exactly what we have to offer.”
The art of customization
If the Industry 4.0 is about innovation, one thing that is equally associated with it is customization. Over the past 20 years, manufacturing has been about mass production, with all consumers utilizing similar products and devices. With the Fourth Industrial Revolution, services are being adapted to individuals and products are customized to suit specific needs. As such, innovative technologies, including AI and IOT, are becoming means to personalize services to customers.
For the Japanese Chuken Kigyo, product customization holds equal importance as innovation – not just for the companies themselves, but their clients too. As Azuma Arai, President of Toyoda Van Moppes Ltd. points out, the components, tools and materials in which Japanese firms excel are already highly customized. By working closely with clients over many years, suppliers gain insight into their clients’ future technical plans and are trusted to come up with solutions to problems.
“In Japan, manufacturers abide by the Quality, Cost, Delivery (QCD) concept. As I see it, our quality is unrivalled, our delivery is customized to each client, and our products allow for cost reduction,” Mr. Arai explains in relation to his company’s specialties in automotive parts.
“To this perfect QCD model, I would also like to add an ‘S’ for ‘Service’. At Toyoda Van Moppes, not only do we supply customized products but we also provide related services. Service, or koto in Japanese, is embedded within our definition of monozukuri – so much so we sometimes change the word to koto-zukuri.
“One of our services is to propose best-practice solutions to our customers. For example, we give advice as to product utilization and production processes. We assist our customers on how to use our solutions. If a customer cannot process a certain material, we provide guidance as to how that issue can be solved.”
Such a trait of above-and-beyond customer service is one that is commonly shared across the Japanese manufacturing industry – and is something that Fumito Shinkawa of Shinkawa Electric Co., Ltd. believes helps differentiate Japanese companies from international competition.
“We want to differentiate ourselves through quality and also by grasping exactly what our clients want and need. We want our customers to be happy, and more im-
portantly to understand what they need. The most important thing is understanding what is happening in the field,” stresses Mr. Shinkawa, who is boss of the specialist firm that provides vibration and condition monitoring sensors, software and solutions.
“By analyzing what our customers are doing, we can see what we need to develop in order to make our customers happy. We try to build a healthy relationship with our clients, to build trust and to realize that we are here to make their factory as efficient as possible.”
Surviving in a globalized world
Close collaboration between companies, whether it be a supplier-client relationship, or a business-to-business affiliation, is not unusual in Japan. In fact, between the second half of the 20th century and early this century, the country became famous for its keiretsu model – a type of informal business group or set of companies with interlocking business relationships and shareholdings. While it is a structure steeped in Japanese business tradition, in more recent times, economic commentators have claimed that keiretsu would not survive in a globalized world.
Like so many of Japan’s hidden champions, Nswest Inc. – which makes high-quality automotive components – has a historic affiliation with one of Japan’s bigger, household-name manufacturers; in this case Mazda. The company’s president, Norio Minato, says that despite claims of a death knell for
keiretsu, there will continue to be a culture for “duel-creation” long into the future.
“The real question is: how do we stand out?” he says. “In today’s globalized world, having high technological skills is not enough to be competitive. To remain competitive, we therefore focus on enhancing the dual-creation we enjoy with Mazda and Daihatsu. As we are familiar with Mazda’s philosophy, we are able to anticipate their desires. This approach and familiarity with a client is an example of co-creation. I believe this is how we stand out, and we shall continue doing so in the years to come.”
The message then is clear: if Japanese manufactures are to retain their market shares amid increasingly fierce global competition, they must stick together and stay true to their values which made them world-leading manufacturers in the first place.
“Since some of our clients operate in complex industries, such as automation and aviation, we are required to adopt IOT solutions” Yoshiaki Numata, President, Mitutoyo Corporation “Our quality is unrivalled, our delivery is customized to each client, and our products allow for cost reduction” Azuma Arai, President, Toyoda Van Moppes Ltd.
I-line High Homogeneity Glass, by Ohara Inc.