Osaka’s Journey into Globalization.
What kind of economic trajectory has the manufacturing industry taken?
University of Technology, Sydney
Hai John Pham
10576991
Table of Contents
Cover Page 1
Table of Content 2
Executive Summary 3
Overview of Osaka’s Manufacturing Industry and its contribution 3 to the world
Osaka’s journey into globalization 4
i. Government and Business Policy 4 ii. Osaka’s rivalry with Tokyo as a World City 5 iii. The Ageing Population and its impact on the labour
Market 6 iv. Natural disasters and the threat to business continuity 6 and expansion v. Technology and the trends towards international 7 orientation Conclusion 8
Appendices 9
References 17
Executive Summary
Changes in the global business environment can create many opportunities for firms operating in any industry however, they can also create significant threats. Therefore, it is imperative that businesses understand the factors that will affect its survival and capacity to compete in an increasingly global market place.
The aim of this paper is to apply the PESTLE and Porter’s Five Forces framework to the City of Osaka, Japan and to understand the ‘big picture’ forces that have shaped and continue the landscape of the manufacturing industry from 2000 to date. The analysis reveals that downturns in the economic environment, attracting foreign investing and that an ageing population have a significant impact upon the survival of firms operating in the manufacturing sector. Similarly, our research shows business continuity is heavily influenced by the occurrence or anticipation of natural disasters. These conclusions advocate countermeasures imposed by policy makers who play a pivotal role in responding to uncertainty in the economic and natural environment and to the manufacturing industry’s capacity to thrive and penetrate the global market.
Overview of Osaka’s Manufacturing Industry and its contribution to the world
GDP (country rank), 2010-11 | Share of National GDP, 2010-11 | Population, 2011 (country rank) | GaWC Global City Ranking, 2010-11 | # Co in CNN Money’s Global 500, 2010-11 | Ave GDP Growth (2009) | USD $654.8B (2)(AGT International 2010) | 15.8%(approx.)(O-BIC 2011) | 11,37M (2)(Martin Prosperity Institute 2014) | 47(McKinsey Global Insitute 2012) | 9 (Money’s Global 500 2010-11) | -2.27%(Martin Prosperity Institute 2014) |
The city of Osaka, separate to the rest of Japan has the economic output 2 times the size of Hong Kong and 2.5 times of Singapore (La Salle 2014) (See Appendix 1). In fact, Osaka’s economy has a GDP of over US$654.8 billion ranking it in the top 25 counties of the world (Brookings, 2012).
Osaka has its strength in industrial manufacturing (15.8%) with popular worldwide goods such as noodles, video games and karaoke being historically stronghold items traded globally (Kansai Economic Federation 2010). However more recently, Osaka has departed from the manufacture of these goods and is trending towards a focus on the production of three (3) areas: green technology, life/pharmaceutical innovation and electronics. It is a global market leader the export of these goods to G7 economies such as China, Korea and the USA (Invest Osaka 2013).
However, Osaka fares rather weakly in benchmarks of talent due to its ageing population and its inability to attract skilled locals or foreign workers to live in Osaka. A comparatively closed approach to its labour force shows it ranks a mere 63 for human capital in the Global City Comparative Index. This is also true for foreign students despite a large concentration of universities and research institutes (private and public) established to draw intellectual resources into Osaka (Martin Prosperity Institute 2014).
Despite its small population, research gauges the general innovation capacity and knowledge ranks Osaka at a commendable 47 in the Global Cities Index. This can be attributed by several well-developed business clusters which result in the research and manufacture of innovative products notably in the fields of green, pharmaceutical technology.
Osaka’s journey into globalization
Osaka’s pathway into globalization has been exemplified by the establishment of more SMEs relative to other major Japanese city (Osaka Prefectural Government, 2006). This has been aided by careful government planning in relation to transport infrastructure, creating 2 major airports and complex shipping and train routes that ease the movement of goods and people to nearby cities and other major world economies.
In more recent times however, Osaka has not experienced the same economic growth compared to rival cities such as Tokyo.
Although Tokyo and Osaka have similar levels of productivity and the associated infrastructure, Tokyo has been able to marginally increase its GDP in the context of a protracting Japanese’ economy. This does not hold true for Osaka with gradual reductions in GDP growth since 1998 as shown in Appendix 2.
There are several factors which influence this. We turn to them below.
1. Government and Business Policy
One of the challenges faced by Osaka is its inability attract large conglomerates to establish headquarters in the region. In fact, Osaka only has about 5% of all large corporations in Japan electing to set-up headquarters there which is an extremely low figure, considering the size of its economic output (La Salle 2014).
Given high corporate taxes, stringent labour regulations and a higher Japanese Yen are frequent complaints by foreign executives, Osaka has attempted to ease the entry for large corporations by implementing business policy giving foreign corporations preferential tax treatment and generous fiscal and financial support in return for the more job opportunities and increased consumer confidence (The Japanese Times 2014). Examples of these include tax exemptions for acquisitions of land and buildings in regional industrial promotion areas (up to JPY200 m), low interest loans for businesses located in prefectural bass (up to 15 years) and subsidies for renting of high industrial headquarters (up to JPY60 m) (Kansai Bureau of Economy, Trade and Industry 2011). To assist the administration of these foreign investment support programs, they are facilitated by local government organisations such as Osaka Business and Investment Centre (O-BIC) and IBPC Osaka Investment Promotion Centre.
Despite these programs, given the governance structure of Osaka, it is inherently difficult to implement policy without the consensus of mainstream parties at local government, prefecture and municipality levels.
In 2011, an attempt was made by Toru Hashimoto, the Osaka Governor at the time to run as the Osaka mayor to strengthen his party’s plan to integrate Osaka Prefecture with Osaka City and to create a single metropolitan city of Osaka-to and streamline administrative functions across both cities (Nikkei Asian Review 2014).
Although this is a governance structure was effectively the same as Tokyo which was successful in stimulating economic grow, it was met with significant opposition from several other mainstream parties which resulted in Hashimoto’s resignation and no major business policies being implemented to stimulate the stagnant economy.
However, the Osaka government is not entirely to blame for the political paralysis with a large proportion of the population disinterested in politics. According to commentators of the local mayor election in March 2014, voter turnout was 23.59% which was reflective of the people’s dissatisfaction with mainstream parties and national leaders and is an impediment towards implementing positive change (Jain 2011) (Japan Today 2014).
2. Osaka’s rivalry with Tokyo as a World City
Although dubbed to be one of the most Liveable Cities in Asia, more than 70% of large corporations elect to establish their headquarters in Tokyo rather than Osaka (The Economist 2011) (La Salle 2014). This is partly because Tokyo has been able to benefit from being the Capital of Japan and built its image as also the capital of financial and commercial trade post-WW2.
In this regard, a big barrier for Osaka in competing with Tokyo for foreign investment and capital is not necessarily due to failed business policies or lack of incentives, rather its appeal of the city in terms of services and amenities. Tokyo’s development of the waterfront sub-centre on reclaimed land in Tokyo Bay is an example of Tokyo’s global image which is branding used by the Tokyo government to draw in foreign investors (Brookings 2010).
The Osaka government has attempted to compete by through O-BIC to voice the city’s potential to investors focussing on living affordability and a multi-dimensional transport system connecting Osaka to other major nearby cities. Regarding net earnings, there is less incentive for locals to remain in Osaka given historically the average monthly salary in Tokyo is JPY 50,000 above that of Osaka with the disparity in discretionary income forecasted to widen (see Appendix 3).
3. The Ageing Population and its impact on the labour market
Osaka’s population is ageing with 22% over the Age of 65 and 63.6% between the Ages of 16-64 ((Martin Prosperity Institute 2014). Although this is a major issue for Japan, it is exacerbated by Osaka’s manufacturing industry’s job shortage. As a result, competition amongst the “young and old” for jobs is high in the manufacturing sector with commentators reporting 1300 aging homeless people at labour centres looking for jobs in the province of Kamagashi (Pulitzer Centre on Crisis Reporting 2012).
In addition, there has been stiff competition for labour particularly amongst the service and manufacturing sector. A closer examination shows a reduction in employment in the manufacturing sector with 2 million jobs in the manufacturing sector reportedly lost to the service sector (The Japanese Times 2013). Similarly according to the Ministry of Labour Survey released in December 2012, it revealed employment numbers plummeting below 10 million for the first time since June 1961 (Ministry of Labour, Health and Welfare 2012).
Osaka has a relatively narrow breadth of national diversity is also a concern and is a barrier for foreigners who wish to compete on limited employment opportunities. Despite being a world-leader in green and pharmaceutical technology, a vast majority of universities research facilities sponsored by large corporations are staffed by Japanese graduates (Invest Osaka 2014). Although diversity continues to improve, the creation of jobs arising from foreign investment need to occur.
4. Natural disasters and the threat to business continuity and expansion
The expansion of Osaka’s manufacturing industry has always been contingent on the occurrence (or prediction) of a natural disaster.
To canvass the potential impact of a major earthquake above 9.0 in the province of Nankai Trough off the Pacific Coast, an Osaka prefectural government panel predicted that up to 8.32 million people in Osaka, or 94% of the population would be affected (The Japan Times 2014).
However the biggest impact of natural disaster on the manufacturing industry would be on the supply of power. Following the tsunami of which led to the structural compromise of Fukushima Daiichi Nuclear Power Plant, all of 50 of Japan’s operating nuclear reactors were deactivated. This led to the electricity supplier, Kansai Electric reducing its electricity output by 40% due its reliance on nuclear power and increasing utility rates (Kroilicki and Richardson 2012).
The impact was felt across the manufacturing industry with many companies taking measures to slash power consumption. Examples reported included dimming lights, turning off automated assembly lines and stockpiling inventory. Other manufacturers went to extreme measures to operate at odd hours such as 2am so they can shut down by the afternoon and avoid peak hour rates (Kroilicki and Richardson 2012).
Whilst there are government subsidies to encourage firms to invest in energy-saving technology, many cannot afford this due to the added expense on the business.
Efforts by manufacturing firms to increase productivity in this economic climate have led to workers performing multiple tasks in place of automated processes; the result is leaving less demand for labour. Prolonged periods of environmental uncertainty have also led to many manufacturers moving factories to foreign countries that have lower labour costs and greater access to growing markets. according to the Japan Spring Manufacturers Association, this is particularly evident in a 40% reduction of spring production in Japan since 1990 with a fivefold increase in Japanese spring makers electing to establish factories abroad in Thailand and China from 1995-08 (Business Insider 2012).
Separately, railway transport is heavily compromised with power outages and can potentially leave goods undelivered and 1.46 million people stranded (The Japanese Times 2013).
5. Technology and the trends towards international orientation
As alluded to previously, there is a strong demand for the manufacture of renewable energy technology and globalisation has effectively made Osaka a leader in this market.
The Kansai region alone is the home to many large base environmental high-tech industries, focussing on the manufacture of lithium-ion batteries and solar cells and is estimated to hold 22.9% and 8.1% share of the world’s global markets respectively (Invest Osaka 2014). Research into solar is a critical to solving Osaka’s energy crisis as a result of closures to nuclear power plants and Sakishima Smart Community Project which aims at using renewable energy to power pharmaceutical companies and possibly homes and offices (Invest Osaka 2014)
Turning to life innovation, this key area refers to the development and manufacture of pharmaceuticals and biotechnology. Osaka has a domestic share of 10.6% in 2010 in Japan alone and ranks as the number one in the world for the export shipments of pharmaceuticals (Invest Osaka 2014).
Critical to the success of those industries are high integration of businesses and research institutions industrial clusters like the Northern Osaka Biomedical Cluster in Osaka which house 23% of all research institutes in Japan and are advantageous in the development of new medicine (Invest Osaka 2014). Research is often linked or sponsored by private corporations such as Panasonic, Sharp and Takeda Pharmaceuticals which have a capacity to export technology globally. In this regard, the transfer of development and research outcomes into profitable manufactured goods echoes a thorough appreciation of the marketplace and respect for the commercial process entrenched in the culture of learning.
Conclusive Findings
Osaka’s economy relies heavily on small-sized to medium-sized corporations particularly for the manufacturing industry; thus its biggest challenge is to attract large corporations. In order to enhance the appeal of Osaka, which now houses sufficient infrastructure in place, major government intervention such as the provision of preferential treatment to firms and rental affordability, an adaptable approach such as the expansion of the scope of target companies from leading edge industries to other industries is required. This may involve understanding a foreign corporation’s decision to establish in Tokyo and bring to the forefront the difference in cost in rent between Tokyo and Osaka if the motivation is to simply have an Asian office. If Osaka can provide the same quality office space as Tokyo’s prime area at half the cost, this should provide enough incentive for foreign corporations to consider relocating their headquarters.
Although Osaka is faced with many environmental challenges, policy makers appear to have invested heavily in new technology particularly in the field of renewable energy. This is an effective long term generational strategy to overcome a shortage of power and at the same time, address environmental concerns and protect Osaka’s industries should a natural disaster occur. The manufacturing industry’s capacity to continue penetrating new markets will no doubt weigh upon this heavily.
Appendices
Appendix 1: Separate to the rest of Japan has the economic output 2 times the size of Hong Kong and 2.5 times of Singapore.
Source: Tokyo Metropolitan Government, Osaka Prefecture, JETRO 2008
Appendix 2
Although Tokyo and Osaka have similar levels of productivity and the associated infrastructure, Tokyo has been able to marginally increase its GDP in the context of a protracting Japanese’ economy. Source: Cabinet Office, Statistics Bureau Tokyo Metropolitan 2008
Appendix 3
The average monthly salary in Tokyo is JPY 50,000 above that of Osaka in 2011. Source: Ministry of Labour, Health and Welfare 2012
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