The Role of Small and Medium Size Enterprises in Japan's Business System - Case Study Example

University: Role and Future of SMEs in Japan’s Business System. Name: Date: ROLE AND FUTURE OF SMES IN JAPAN’S BUSINESS SYSTEM INTRODUCTION. Following the economic boom in Japan’s manufacturing sector in the 1970s and 1980s, the 1990s were a rather sharp contrast. There was a remarkably high recession throughout the next decade and a spillover effect to the first half the 2000. With the high investments taken to boost businesses, the years that followed in the 1990’s were marked with high loan defaults that ultimately led to a reduction in the productivity (Kuwayama, 2009, p.31). The purpose of this paper is to take an in-depth look at the role that the Small and Medium Enterprises have played over the years from the 1990s and the observable changes in the business models over the years. Further, the paper will analyze and assess the viability of the Small and Medium enterprises in the future. This will involve assessing the possibility and chances of growth of the SMEs in the Japanese dynamic manufacturing sector. JAPAN’S SUBCONTRACTING SYSTEM. SMEs have played a critical role in boosting the performance of the manufacturing sector in Japan’s economy. In the early 1970s, with the urgent need and limited resources to produce specialized parts, large firms turned to the SMEs luring them with the guarantee of buying the finished products thus providing market for the small firms. The Japanese economic model in the small and medium enterprises has seen major changes from the earlier business models that were in place in the earlier years of the 1980s. The multi-tier subcontracting business system has proved to project huge leaps in the production efficiency in the Japan’s manufacturing sector (Manifold, 2007, p.28). Moreover, the SMEs have made it possible for continuous production in the manufacturing industry and thus greatly boosted Japan’s business system. Through subcontracting, the core firms have also been able to shift costs such as factory overheads from the large enterprises to the SMEs (Manifold, 2007, p.63). One of the distinguishing factors that marked the period of high growth was the manner in which large firms engaged small firms to assist in the supply of materials for these fast growing firms. This led to the subcontracting system where large and fast growing firms such as Sony, Honda, and Toyota would engage these SMEs in the supply of labor and other parts in the manufacturing process (Schaede, 2008, p.135). A keen study of Japan’s manufacturing sector indicates that larger firms had a strong preference for subcontractors. This is not surprising considering the benefits associated with the subcontracting system. First, the subcontracting system led to the gradual growth of the SMEs as the buyer-supplier relationship became more concrete and as the large corporations expanded further (Hwang, 2011, p.58). Moreover, the theory of cost economics clearly outlines the economic comparative advantage that was rendered as a results of engaging in subcontracting (Macintyre, 2011, p.53). Additionally, large enterprises were able to focus on assemblage while the SMEs concentrated on developing specific components. Further, engaging subcontractors increased efficiency as it relied on division of labor between the large enterprises and SMEs. The subcontractors also enabled the large enterprises to focus more on their core manufacturing business which enabled faster production time. Increased specialization in production where different SMEs would be center on developing a single unit had the advantage of production of high quality products. The fact that the SMEs had minimum labor costs due to their size advantage meant that they could source cheap labor from the rural areas. This was unlike the large enterprises where laborers demanded higher pay and to be part of unions. However, even with these advantages, that is important to note that in as much as the subcontracting system was effectively put in place, there were major hurdles in the system. One of these involved the reality that it was becoming increasingly difficult to depend solely on a supplier if the supplier had several buyers (Mazumdar& Sarkar, 2013, p.42). These prompted the companies to develop strategies that would invoke some level of commitment and loyalty from the supplier. This involved the larger companies obtaining larger shareholding in the suppliers businesses. In this way, the companies were able to enhance technological cooperation as well as quality of the products supplied. This effective and prudent division of labor between the small and medium enterprises and the large enterprises has proved over the years to be a great contributor towards the competitive advantage that Japan’s economy has gained especially in the automobile industry market (Haak & Hilpert, 2008, p.34). CHANGES IN THE ROLES OF SMEs IN JAPAN’S BUSINESS SYSTEM. According to METI’s Basic Survey of Business Structure and Activity, it was reported that outsourced sales input had reduced by 5% in the early years of the 21st century to 12% from a higher 17% (Schaede, 2008, p.134). This changes are not surprising if the Japan’s changing business model is put in mind. Technically, with the high competition from external markets, the SMEs in the Japan’s manufacturing industry faced serious competition in the wake of the 21st century. While the core concept of subcontracting had not entirely shifted, the business model had major changes in the manner in which companies carried out outsourcing. First, the traditional concept of relying completely on suppliers for parts changed, leading to large firms developing some of these products in-house (Schaede, 2003, p.91). This was as a result of the high redundancy in the employees in the manufacturing companies. During the recession, there was reduced demand in the manufacturing sector, therefore a high redundancy of the employees and underutilization of their skills. This led to companies opting to use their own laborers to carry out the assembling and production of parts other than depending on the SMEs. Ultimately, this led to quite a marked reduction in the profit margins of SMEs in the earlier years of the new millennium (OECD, 2005, P.34). Moreover, with the increased dissemination of information majorly attributable to the advancement in technology, the large firms were able to gather more information about existing suppliers and the prices their quoted prices for the various products. This widely available information is what led to the gradual abolishment of the traditional policy where a buyer stuck completely to one supplier. With the stiff competition in pricing of the parts, suppliers were now in a position to supply their products to several buyers This was largely a positive change in the manufacturing sector as well as the Japanese business environment as it allowed the market forces to come in play. All factors held constant, buyers will ultimately show preference to the buyers whose products are priced competitively (Kuwayama, 2009, p.38). In a survey conducted in the year 2005, buyers were asked to provide what effective changes that they had appreciated from the changes in the supplier business model as compared to the state ten years ago. A large majority of the buyers quoted pricing to have been a major positive change. This turnaround was greatly appreciated, taking precedence over and above other important factors such as flexibility in the design of the products and delivery speeds. In addition to this, another major change in the business mode of the Small and Medium Enterprises in the Japanese Economy was the incorporation of modulization in the business model. Essentially, modulization refers to a process whereby the outsourced parts are preassembled by a single supplier and sold as a more compact and complete system. (Schaede, 2008, p.141). This paradigm shift proved to be of critical benefit to both suppliers and the buyers. The model saved buyers the hurdles of outsourcing the various parts from different suppliers. In the 1980’s buyers strived to find the best buyer and going to great lengths as to holding a stake in the SMEs in a bid to gain some control and loyalty from these businesses. However, the model shifted for the buyers as they could now make a single procurement which had several preassembled components (Hatch & Yamamura, 2006, p.124). Equally, modulation proved to be of great advantage even to the SMEs as they got in a position to build a highly customized component through adoption of unique technological approaches that could not be replicated by other suppliers (Katzenstein & Shiraishi, 2006, p.72). Therefore, the suppliers are in a position where they are the only ones capable of making technological upgrades of these components. This had the overall advantage of the large companies becoming dependent on specific SMEs for the supply of the particular components. This, coupled with the fact that the prices of these components were competitively priced, led to a major boost in the Japan’s manufacturing sector. Another critical factor that changed Japan’s small and medium enterprises was the role played by globalization. As business expanded from the boundaries of the Japanese country, it became clear that a wider and more competitive marked existed abroad. This led to establishments of highly successful Japanese business in other competing countries such as the United States. The high level of competition resulting from this shift had the potential of bringing huge losses to Japan’s SMEs. To counter this potential loss of their buyers, some of the small and medium enterprises were forced to also go abroad so as to render their services to these manufacturers in these emerging markets (Manifold, 2007, p.63). In addition to these, the high number of manufacturers going abroad resulted to making the SMEs in the manufacturing industry become more differentiated in the choice of the products that they manufactured. This was in a bid to stay competitive in a marked that was now saturated with cheaper imported parts. In fact, in the first half of the first decade of the 21st century, Japans manufacturing sector had expanded so much that it was collecting more revenues than it was making from exports from Japan. This has been a major change from the 1970s and 1980s where major competition in the SMEs was from different suppliers but within the borders of the Japan. (Macintyre, 2011, p.53).While the concept of concept of building businesses abroad did not start in the 21st century, the real impact of globalization on the small and medium enterprises began to be felt in the earlier years of the 21st century (United Nations, 2005). FUTURE OF SMEs IN JAPAN’S BUSINESS SYSTEM. According to the statues in the Japan’s laws, a small or medium sized manufacturing plant is defined as one that has capital amounting to less than 300 million Yuans or one that has employees ranging from 4 to 300 in number (Schaede, 2008, p.134). The number of SMEs in the Japanese economy has been on a worrying decline over the years. The number of SMEs in the economy stood at a mere 254,676 in the year 2008 down from the 434,759 that was there in the year 1984 (Cole, 2010, p.65). This is a rather worrying revelation as one would anticipate that with the growing economy, the business environment should have led to opening up of more opportunities for these enterprises. However, a critical look at the entry rate of the SMEs in the Japan’s economy reveals that there has been a great reduction in the number of new enterprises entering into the market (Watanabe, 1999, p.212). According to the Small and Medium Enterprise Agency report in the year 2006, the projections contained in the report warned of the risk of a further decline in the number of SMEs attributing the major cause of the decline to be the huge disparity in the employer-to-employee ratio (Hatch & Yamamura, 2006, p.136). This was especially with regards to the manufacturing sector. However, in analyzing the cause of this decline, t is important to note that the major reason that has led to this decline is the fact these SMEs were by and large sole proprietorship entities. The use of labor intensive methods in the 1980s prompted business men to set up businesses in the rural areas (Schaede, 2003, p.76). As the number of employees grew, the employer’s incomes greatly reduced and this had the effect of reducing the allure that came with self-employment. This relative reduction in the incomes of the self-employed is the leading cause of the reduced entry rates of SMEs into the economy. Moreover, with the more enticing prospects of furthering education and seeking for white collar jobs, most of the younger generation in Japan has slowly drifted away from setting up their own business or joining into the family businesses. It is, therefore, not surprising that as at 2009, 48% of the self-employed Japan’s manufacturing sector were at least aged 60 (Macintyre, 2011, p.85). This is owing largely to the absence of successors in these businesses. Consequently, many Small and Medium Enterprises are closing down due to a vivid lack of suitable successors. The future may not look very bright for SMEs in the manufacturing industry in Japan. However, to sustain and maintain competitive advantage in the SMEs will require that the business should incorporate advance technology through the use of advanced machinery to carry out the production process (Kuwayama, 2009, p.116). This ultimately requires that more capital should be invested in creating competitive businesses. Moreover, for SMEs in the Japanese market to flourish, the younger generation should be encouraged to take the helm in these businesses. In the years to come, however, SMEs that will have employees with special skills and outstanding technology are bound to survive and thrive in the highly capital intensive Asian market (Haak & Hilpert, 2008, p.49). Similarly, the SMEs in the urban areas will in the long run make more in profits if they concentrate on production of small amounts of many products rather than engaging in mass production. Erecting industrial apartments equally seems to be an effective long term strategy to ease the constraints associated with setting up factories by SMEs in the urban regions. CONCLUSION. The evolution of the SMEs in the Japan’s competitive manufacturing industry has been phenomenal. However, from the research carried out in this paper, it is clear that more can be done to improve the role played by SMEs in Japan. Survival of these business has been through efforts taken by lenders, government policies, and aggressiveness of the entrepreneurs. As such, even with the effects of the recession leading to reduced earnings for these businesses, banks increased loans that greatly aided in keeping the SMEs in the manufacturing sector at leverage. However, the role of the government should be emphasized to regulate trade and protect SMEs from unfair treatment by the larger enterprises. Moreover, through provision of incentives like tax concessions, subsidies, and loans at reduced interest, it is possible for the government to encourage the entry of SMEs and thus cushion the dwindling number of SMEs in the country (Mazumdar& Sarkar, 2013, p.106). REFERENCES. Cole, R. E. (2010). Japanese blue collar: the changing tradition. Haak, R., & Hilpert, H. G. (2008). Focus China: the new challenge for Japanese Management. München, Iudicium. Hatch, W., & Yamamura, K. (2006). Asia in Japan's embrace: building a regional production alliance. Cambridge [u.a.], Cambridge Univ. Press. Hwang, G.-J. (2011). New Welfare States in East Asia Global Challenges and Restructuring. Cheltenham, Edward Elgar Pub.  Katzenstein, P. J., & Shiraishi, T. (2006). Beyond Japan: the dynamics of East Asian regionalism. Ithaca, Cornell University. Kuwayama, M. (2009). E-commerce and export promotion policies for small- and medium-sized enterprises: East Asian and Latin American experiences. 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