Sending Production Abroad: Learnings and Lessons From Japan (Part 1)

Over the long Thanksgiving weekend, I had the chance to catch up with a few kid-free moments of the actual printed edition of The Economist -- what an indulgence!! -- and a story caught my eye on how Japan is continuing to move to an outsourced manufacturing economy. In my view, there might be some policy lessons here for the US when it comes to keeping competitive production onshore or as close to home as possible. According to the story, Japan is increasingly producing more abroad and has approximately doubled its percentage of overseas manufacturing to 30% in the past two decades. And for some companies, the rate of manufacturing outsourcing is accelerating.

Consider that "Toshiba's foreign-made share has grown from 52% to 56% in the past year alone" and "Fuji Xerox and Yamaha Motor boast levels of 80% and 94% respectively." Corporate taxes are one of the reasons The Economist cites for increased overseas production. In Japan, the corporate tax rate of 41% makes domestic manufacturing prohibitively expensive. To combat the tax rate, "Many carmakers have moved production to Thailand not only for low taxes but also because of that country's free-trade agreements (FTAs), which let them export across the region free of tariffs." In other words, just as US companies like Google and Microsoft keep foreign-earned dollars offshore to avoid paying US taxes, Japanese companies are doing the same.

Aside from taxes, the article suggests that Japanese companies are locating firms overseas to take advantage of regional productivity and cost advantage (e.g., "Overseas subsidiaries have profit margins about one-third higher than those of domestic operations") and access/proximity to fast growing markets with increased consumer spending. And there's also the matter of the strong appreciation of the yen, but we'll leave that can of currency worms to debate over a good bottle of sake. All of this begs the question as to whether the most common language for Kaizan event feedback will shift from Japanese to Mandarin. After all, Japanese manufacturing and production models have become the standard with which global operations hold themselves to, regardless of where factories and workers are located.

Postscript: After reading the article, I came across Bob Ferraris' commentary on the same subject which is worth featuring and analyzing in a follow-up post.

Jason Busch

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