My entry for the Japan Foreign trade council essay contest for 2009

First Published on /12/2009

 

  1. Introduction

1.1 The World scenario

Why, you may take the most gallant sailor, the most intrepid airman or the most audacious soldier, put them at a table together- what do you get? The sum of all their fears.

Winston Churchill.

The current economic recession, in many ways, is the sum of all wrongs that could go wrong with capitalism.

The amusing thing is that everyone has an opinion about it and every opinion, from the insightful to the absurd, is partly true in some way or the other. This is to be expected, what with globalization impacting the lives of people around the globe in the way it has. Gone are the days when people could claim to belong to self-dependent and self -sustaining communities; the world has shrunk, it has become flat and everyone is connected in interminable knots.

Capitalism, with head offices at New York, London & Tokyo and branches all over the world is gradually getting recognized as the panacea for all the modern economic ills; if for nothing else but the lack of a plausible alternative. The abrupt fall of the Soviet Union, starting with the collapse of the Berlin wall & Red China’s whole hearted embrace of the free market system also give credence to the voices of its advocates. Some people believe that socialism is yet to be realized to it’s true potential, there are others who feel that there is a middle ground between socialism and capitalism; however, the wind is blown out of such opposition; making money is now generally regarded as sacred.

Not just the theory; the times we are living in have played a hand too. The world is changing like never before, and people are getting to learn about these changes quicker. In a striking similarity to the way the industrial revolution changed the world in the 18th century, the information and telecommunication revolution is rapidly changing the world we inhabit today. Soviet style economy was all about masses of faithful, unquestioning workers, who worked together in the industries they allegedly, owned together; today’s economy is about the next big idea which emerges from the backyards of a bright college student.

If not anything, capitalism and its sisters, I.e. liberalization and globalization have changed the way finances are made available across borders. Banks are no longer the sole providers of capital; a variety of non banking financial institutions (NBFI) have emerged; they promise higher returns and hence have to take higher risks. As they innovate with the products they offer, the task of regulating them needs to keep changing.

It is in this context[1] that a major French banking conglomerate, BNP Paribas, froze three of its accounts on August 9th, 2007; to paraphrase what happened next, “All hell broke loose”.

The series of events which followed were well chronicled and well debated, and an one-assessment-fit-all may well be on its way; however, some things are certain:-

  1. Unavailability of demand has now become the roadblock to economic success, as versus the inability to supply.
  2. The world is now so inter-connected that the failure of a bank in France could easily affect the fortunes of an African or an Asian nation.
  3. Money, and resources need to be managed in a better manner; people need to be more accountable for them.
  4. Organizations and people can no longer afford to think in the short term, a long term vision is equally important.

1.2 Japan-the enigma

Nations, over a long period of time, tend to behave like individuals. True to this axiom, Japan and its people are still, to most of the people in this world, incomprehensible. Said Rutherford Alcock[2], the First British Prime Minister to Japan (1859~1864)-“Japan is essentially a country of paradoxes and anomalies where all- even familiar things-put on new faces and are curiously reversed. Except that they do not walk on their head instead of their feet, there are few things in which they do not seem, by occult law, to have been impelled in a perfectly opposite direction and a reversed order”. It is human behavior that something which is not understood is feared. I remember reading a book called “Rising Sun” by author Michael Crichton, the central theme of which was the rising influence of powerful Japanese corporations in America through increased investments in high technology sectors. The ‘Fear Factor’ stands out throughout the pages of the book.

My personal interaction with the Japanese goes a bit further. Ever since I read “The Toyota Way” by Jeffrey Liker and ‘Made in Japan’ by Sony’s Akio Morita, I have been an outspoken admirer of Toyota and, in general “Made in Japan”. If I was fortunate to get a job at Toyota’s India plant, I was blessed to have been chosen to work for a term at Toyota Motor Corporation at Toyota city, Japan. I have tried to make use of this opportunity to learn more about this wonderful culture through my work, travelling, learning & speaking the language and trying out a bit of the local flavors(not much choice there, because I am vegetarian!). Japan, like my country India, is not just a country; it is an experience.

In recent times, there exists no parallel to the kind of nation building that Japan has done post World War II. From the 1950s to the 1980s, Japan had made rapid advances mainly in the industrial sector and has emerged as an economic superpower. Tokyo was added to the list of economic power centers; Made in Japan was now a powerful brand, its consumer electronic goods and automobiles flooded the markets of the world and the standard of living increased exponentially.

And then, all of a sudden, the brakes were applied. From the late 1980s onwards, the economy kept shrinking every year. Some attributed it to the real estate bubble caused by speculators which went bust; others said that the keiretsu system was operationally flawed. The government also seemed quite at discomfort when having to take hard decisions about which way the interest rates had to move. However, it was apparent that people were spending lesser. The government did try some artificial stimuli like spending more on infrastructure projects and providing a lot of soft loans; however, it was a case of too little, too late. Japan was growing at a lesser rate.

But then, you cannot write off Japan as a failed cause. The earlier witnessed growth was mainly due to hard work, high savings and a strong impetus on providing good education; all of which are still prevalent. It is still a world leader in technology, still among the largest creditor nations, still blessed with wise corporate leaders, still has a functioning government with lots of cash in its pockets and still a very large economy by itself. One source of worry which is very apparent could be the demographics; Japan’s people are ageing and dwindling in number.

  1. Does Japan have the answers?

In this part of the essay, I talk about the solutions that Japan may provide to the world in these troubled times. Because I work for a Japanese company, much of my learning about Japan and its economy is through the understanding of how my organizations itself works. Hence, there is bound to be a lot of direct references to ‘The Toyota way’.

2.1. Short term, effective Solutions.

It is said that countries interact with the world economy in four distinct ways, they being trade and commerce ties, direct or indirect investment, transfer of technology, skills & knowhow and migration of labor forces. Since very few Japanese have migrated abroad, it is not such a major factor.

  1. Trade & commerce: – Because it is such a huge economy (in fact the world’s second largest), Japan, like the USA, has the powers to sway things in the world markets. Despite its miniscule population, it has a huge domestic market for all types of goods. Hence, it is imperative that Japan’s economy does not slow down as it has done for many years now. The Government should take pro-active measures to ensure that public spending does not come down; it could take the lead through investments in huge infrastructure projects.
  2. Foreign direct and indirect investments: – Japan is among the largest creditor nations in the world. According to Reuters, it held the top creditor status for 17 straight year’s upto 2007, with close to $5900 billion in foreign investments. As nations begin to rebuild, they will need huge lines of credit in order to rejuvenate their economies. Japan can, through its huge cash reserves, help. Though it’s slowing rates of saving and investments are a worry, the fact that individuals and institutions can now park a larger portion of their money abroad is a welcome sign.
  3. Transfer of technology, skill and knowhow: – . Toyota had, at a point of time this year, begun to reconsider its India plans. After much deliberation, my farsighted bossed decided that India was indeed a market which was worth investing a new plant in. This meant new technology, which would improve the skills of not just Toyota India but its suppliers. As we face newer and newer problems everyday, it is vital that experience is shared. And what better way to do this than sharing of technology?

2.2. Long term solutions

I believe that the greatest way in which Japan can help the world in addressing the problems of capitalism is to share what it has learnt on its way to development & advancement. But then, why does the world need to learn from Japan?

  1. Despite all that people seem to say about it, Japan is doing very well for itself. It is the world’s second largest economy and a huge investor in the markets of other countries.
  2. It clearly knows how to learn from others. Think about the Meiji era and how well the Japanese learnt from the westerners and beat them at their own capitalist games.
  3. The Japanese know a thing or two about nation building. Two things that come to my mind are the years of rebuilding which followed the atomic bombings and the rebuilding of Kobe city after the massive 1995 earthquake.
  4. It still has one of the largest pools of skilled and dedicated workers, and hence its efforts into building up human capital should be keenly studied.
  5. Its technological know-how is at par with the best in the world; and the keenness in implementing kaizen among Japanese companies ensures that it remains that way.

2.2.1. Hard work

In his book “Japan’s dynamic efficiency in the global market”, Charlie Turner [3]says that the success of Japan’s economic reforms can be attributed to two traits of it’s people; hard work and thrift. Simple as it seems, it is actually hard to comprehend that they alone contributed majorly to Japan’s emergence. However, if a nation has these traits embedded in its DNA, they form a potent force, often overriding external inhibitors.

A group of us Indians climbed Mt. Fuji in August. Apart from the spectacular landscape of Fujisan, what fascinated us the most was the number of very young and very old people who were climbing the path, not an easy trek at all. Even the smallest of kids had come prepared with all his stuff neatly packed and was bent on climbing the mountain the hard way, without relying on his father to carry him up. Immediately afterwards, we saw an old (almost ancient) lady actually running up the mountains! The sheer thought of doing a difficult task perhaps brought joy to this lady who had surely gone through many a test in life.

In my opinion, two factors contribute to this attitude towards work:-

  1. The harsh terrain and rough climate; which deem necessary such a hard working culture.
  2. The education system where working together and working hard on shared goals are inculcated to students from a very early age.

This viewpoint about work and the prominence it holds in the everyday life of the Japanese is clearly visible through their greetings; the phrases ‘Osukuresamadeshita” and “Gochisousamadeshita” are rarely paralled in other cultures.

It is not just hard work but also continuous improvement. The word “Kaizen” is so overused, yet so misunderstood. Very few nations or organizations outside of Japan have practiced it effectively. From my learning at Toyota, I have begun to understand that kaizen is not just a tool but a mindset;. And the Japanese, from what I have observed, persist in doing this day in and day out. To quote my manager from Toyota India, “The difference between good and great companies is that great companies are good all the time”.

But why harp about hard work? In this era of instant name, fame and money, we somehow seem to underscore the importance of good old hard work. Just as talent without hard work is not enough to guarantee success for an individual, possession of natural resources alone is not enough to make a country wealthy, the hard work and perseverance of it’s citizens is required. As the saying goes, “Easy come, easy go”. Japan’s success has not come about easily, and hence it will not go away easily.

2.2.2. A mix of pragmatism and idealism

By the mere mention of the word sensei, two masters come to my mind; the wise tortoise master Oogway in the movie Kung fu panda and the samurai Shimada in that Japanese master piece, Shichinin no samurai. Though the two are set in different locations (ancient China & ancient Japan respectively), were made in different eras and are of different genres, I was impressed by the word of wisdom of the masters. The words were often directed towards achieving a higher sense of purpose; yet they were steeped in the reality of the present.

A mix of idealism and pragmatism is required of young diplomats, says India’s external affairs minister and former UN diplomat, Dr. Shashi Tharoor. He explains that if you are not idealistic, you may be better off making a more lucrative career; if you are not pragmatic, you cannot solve the real problems of this world. This is at a juncture in world history when socialism has been written off as a failed cause, and capitalism is the undisputed champion of isms. Could we learn from the Japanese masters as to how to bring about a welfare state in a Laissez-faire setting? Can socialism and capitalism work together?

My senseis and senpais at work are among the most vocal advocates and the most avid practitioners of this theory.

Consider two of the fourteen fundamental Toyota way[4] theories which strike a chord:-

Principle 1: Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals.

Principle 9: Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others.

Another illustrative example is the practice of using hoshin-kanris to align to and achieve team and organization goals. The senseis dream up the vision; the kenshuseis chalk out plans and schedules to control their activities such that those visions are achieved.

2.2.3. Dynamic efficiency[5]

Dynamic efficiency refers to an economy that is able to balance short run concerns with long term ones. In his book “Japan’s Dynamic Efficiency in the Global Market”, Charlie Turner says that the key to Japan’s strength is its ability to make effective use of its internal domestic resources to leverage itself into the global marketplace. He also says that it is using the lessons it has learnt from the rebuilding era post the atomic bombings to conceive strategies for grabbing business opportunities worldwide.

Because Japan is bereft of natural resource, it has had to make use of its human and capital resources to the greatest extent possible.

  1. A stable macro-economy: – Despite the fact that Japan has experienced long periods of high growth, it has been able to avoid the traps of high growth, like high inflation and trade deficit for a long time. It has managed to survive major shocks like the oil crisis and the real estate bubble because the fundamentals of the economy are intact and are focused on attaining the right goals. Reforms have largely been driven by the state. In times of crisis, the government has increased spending through public projects to get cash flowing into the system. It has also reduced protectionism within the country, a welcome sign and has implemented policies which have enabled a shift in Japanese portfolio holdings; more Japanese can invest abroad now and vice-versa.
  2. Skilled and dedicated human capital: – Japan can easily boast of having the best among workforce. This has given them the strategic advantage, as a nation, to build strong organizations. The factors which make it’s workforce enviable are:-
    1. The education system: – With their efforts to inculcate hard work and team spirit at a very young age, Japan’s schools ensure that their students are industry-ready. The education is not about how to be ahead in the rat race(as is the case in my country); it is also about how to align yourself to the aspirations of others around you. Its universities are also outstanding in the amount of research they do; an important indicator of the quality of its student output.
    2. The concept of lifelong employment: – Has ensured that people are less uncertain about their futures in the company and are hence more willing to do things which may, at the outset, seem to hamper their individual growth. This is often required in highly structured and process oriented companies (which Japanese organizations typically are) where the end result of your activities are not always apparent.
    3. Super-specialization (or senmon, in Japanese):- among its employees has enabled organizations to be extremely flexible in their operations; the employees know the work so thoroughly (through On-Job-Training and experience acquired over decades) that they are able to respond to any situation that the market conditions thrust upon them.
  3. The Keiretsu system: – The keiretsu organization is really a group of similar minded companies cluttered around a huge bank which takes care of all the monetary needs that these companies could find themselves in. The keiretsu system has a huge advantage for companies as :-
    1. It protects them from hostile takeovers.
    2. It Provides them with a longer line of credit than is usual
    3. Enables them to plan and implement long term visions.

The 1990s crisis has adversely affected the keiretsu. Whereas the banks have made a bad loans, which has hurt their credibility, companies like Sony, which are outside the keiretsu have outperformed their counterparts from within.

Nevertheless, the keiretsu has been a valuable experiment in capitalism, in the sense that a new model in capitalism has been tried, with at least some success.

2.2.4. Smart & simple technology

Think Japanese technology, think Shinkansen, Sony’s electronic goods and Toyota’s Prius. The Japanese, in my view, produce technology which is simple, slim and speedy, thus making it smart. In an age when development is equated to technological advance, it pays to look at the Japanese view on technology, which proclaims that technology needs to be used only to the extent unto which it is required to meet the goals of social and economic welfare; it is thus only a tool for development and not its parameter. Another term which may be used for Japanese technology is elegant; providing optimum results with minimum investment.

Technology matters in debates about globalization and capitalism because:-

  1. Almost every significant upheaval in the social and economic conditions of mankind(over a relatively short period of time) has been brought about by significant technological developments(think the industrial revolution in Great Britain & the ongoing information technology revolution in countries like India)
  2. A significant part of capitalism is about foreign investments; a bulk of those investments is really about investments in plants and machinery; hence, selecting the right technology translates into optimum utilization of investment.

Some aspects of Japanese technology which have appealed to its admirers are listed below. Though some of them are not the brainchild of the Japanese, they have certainly been implementing them in the most efficient manner possible.

  1. Using technology which is thoroughly tried and tested. By this, every aspect of using the technology is thoroughly understood and the end results are well defined. Often, the technology is demystified with the help of visual displays around them (like kanbans) which make them easy to understand.
  2. The people associated with these technologies are highly skilled. This helps in
  3. Root cause analysis of any problem which may occur during usage.
  4. Carrying out Kaizen, which improves the efficiency and effectiveness of the technology.
  5. The technology is flexible and can adapt to a variety of conditions with a minimum amount of change. This is

particularly relevant in a demand oriented economy, when consumer requirement keeps changing very rapidly and

companies need to be in tune with those changes. Fantastic examples for this are the Toyota plants, in which a wide

variety of vehicles, sometimes having different platforms, are assembled in the same production line!

2.2.5. Sogo Shoshas[6] (traders of the world)

Perhaps the closest parallel to the soga shoshas from the past were European companies like the British East India Company. They are particularly relevant to a small island nation whose main income is through trade and commerce. Since the 1950s, Soga shoshas have helped Japanese companies to trade in the international market. They have also had a major hand in acquiring technology from other sources. However, the shoshas have traditionally been identified with high volume, low end (and hence low margin) commodities. By using the economics of scale, they have been able to reduce risk for their clients.

The shosha trading system is not without problems. Whenever companies have established subsidiaries abroad, the role of their trading companies has bordered on irrelevance. They have not been able to leverage their experiences in dealing with Japanese companies to obtain business from non-japanese ones. Whereas they have thrived in times of acute price fluctuation, they have suffered huge losses during relatively stable times with very less profit margins.

If Soga shoshas have to survive in the coming years, they have to make a few strategic adjustments:-

    1. They have to make the shift from serving only large companies to also serve medium and small term ones. This requires greater specialization of a greater range of commodities.
    2. They have to make inroads in serving Non-Japanese companies. This requires them to set up bigger foreign operations and also, necessarily to speak other languages. Clearly, trading companies cannot survive in the international scenario when they speak only one language.
    3. The trading companies can learn a thing or two from the outsourcing industry in India, which is slowly creating a niche for itself. One area in which they can expand in a huge way is engineering turnkey projects, which requires them to acquire technological skills. However, the profit margins will also be bigger.
  1. Conclusion

Japan is clearly a poster-boy for other nations, particularly the developing nations around the world. It has had relatively high rates of growth while avoiding the traps of the same, which are high inflation and high trade deficit. Though it lacks natural resources, it has used resources obtained in the world markets to produce top quality goods which are being sold through out the world.

By using its internal factors like human resources effectively, it has had a major role to play in the markets of the world. The benefits of a good education, sound economic policies, the right utilization of technology and a policy of focusing on the long term are the lessons which developing nations need to learn and benefit from. Last, but definitely not the least, Japan is an example of the success that could emerge out of international trade and hence, a success symbol for capitalism.

[1] Paul Krugman(2008), The Return of Depression Economics and the Crisis of 2008.Penguin Books

[2] Kenneth B Pyle, Japan Rising: The Resurgence of Japanese Power and Purpose. Century Foundation Books

[3] Charlie G Turner (1991), Japan’s Dynamic Efficiency in the Global Market. (Quorum Books)

[4] Jeffrey K .Liker (2004), The Toyota Way-14 fundamental principles from the world’s greatest manufacturer. Mc Graw Hill

[5] Charlie G Turner(1991), Japan’s Dynamic Efficiency in the Global Market. (Quorum Books)

[6] Professor Paul Herbig Japanese Marketing lecture series Lecture #13:Sogo Shosha

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