International Competitiveness of Automotive Industry in Japan

Global Economic Competitiveness
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Global Economic Competitiveness
Executive Summary
Japan’s automotive industry boasts of being one of the world’s largest and most profitable. In 2019, the country’s motor vehicle exports totaled 15.9 trillion Yen, while the production rate was 9.68 million units (Japan Automobile Manufacturers Association, 2020). These numbers are indeed indicative of an industry that contributes greatly to the nation’s GDP. Further, the industry employs 8.1% of the country’s total workforce, which translates to 5.42 million people. Such figures clearly show the industry’s importance to the country. However, how has Japan managed to attain such growth through its automotive industry? How has the automotive industry in Japan managed to innovate and showcase improvement consistently? How have they managed to overcome the many innovation challenges? The answer lies in four attributes: factor conditions, demand conditions, supporting industries, and firm strategy and domestic rivalry.
These four attributes are key in helping a country build an environment that fosters growth, innovation, and consistency. In Japan, factor conditions are limited to labor and infrastructure, and the country has managed to develop an unbeatable industry against consistent efforts to enhance the skills of its workforce and build an enabling environment. With regards to demand conditions, the demand from home has helped the automotive industry to master ways in which they can continue to innovate to match the needs of their target market. Further, regarding supporting industries in Japan, the country has an integrated supply chain of companies that help to maintain and sustain its production. Finally, regarding firm strategy, the management in Japan’s companies are known to emphasize individual’s best effort at all times, which greatly contributes to increased production. On domestic rivalry, it is highly competitive within the Japanese market, and this greatly contributes to increased innovation and consistency within the automotive industry.
Introduction
The automotive industry in Japan is considered one of the largest in the world. According to Japan Automobile Manufacturers Association (2020), in 2019, the automotive and related industries employed more than 5.42 million people, representing 8.1% of the country’s total workforce. Further, the country boasts of having some of the biggest automotive companies in the world, including Toyota, Suzuki, Honda, Daihatsu, Nissan, Mazda, Subaru, Mitsubishi, and Isuzu, among others. These companies have helped to enhance and propel the Japanese economy forward for decades. Further, they have also helped to consolidate the thousands of suppliers in the industry, thus causing a ripple effect in growth. Japan’s global leadership and competitiveness in the automotive industry is anchored on unmatched domestic support. Gorka (2022) notes that though other automotive manufacturers continue to grow globally, Japan’s domestic market remains dominated by its own companies. On the global stage, Japan’s automotive companies have also shown their mettle, especially in terms of competitiveness. According to an OICA ranking (2017), in 2017, six of the top 20 leading vehicle producers in the world were from Japan. This is indeed a show of global dominance in the world and one that is still unmatched. Further, such dominance is also a testament to the favorable conditions that allow the industry to flourish. Provided herein is an analysis and evaluation of the factor conditions, demand conditions, supporting industries, and firm strategy and domestic rivalry as key aspects propelling the Japanese automotive industry.
Factors Conditions
Factor conditions are key aspects or factors in a country that assist in enhancing its competitiveness in the world. Factor conditions entail elements such as the availability and quality of infrastructure, availability and quality of labor, physical resources available, knowledge, and capital. As part of the determinants of national competitive advantage, factor conditions play a crucial role in helping nations create prosperity. Porter (1990) indicates that national wealth and prosperity is created and not inherited as is often assumed. Further, he adds that the attributes of national competitive advantage have to align or work in tandem for a nation to benefit or attain the expected growth level. The implication of the above is that a nation cannot have excellent factor conditions with poor supporting industries and expect to have extensive growth and serious global economic competitiveness.
One of the major disadvantages of Japan as a leader in the automotive industry is the scarcity of natural resources. This disadvantage traverses all sectors and heavily impacts production. However, Japan has found ways to bypass this disadvantage by leveraging the other elements of factor conditions, including labor, the availability and quality of infrastructure, and knowledge.
One of the crucial and major investments Japan has made is in the education sector, which directly impacts labor in the country. Currently, Japan’s labor market is characterized by high employment and low unemployment rates (OECD, 2021). One of the greatest causes of the above is that the country focuses on providing its citizens with an education of the highest quality. Chawala (2021) writes on Japan’s education system, noting that its high quality helps to complement the country’s labor needs. According to the International Labour Organization (2011), the quality of a country’s basic education directly correlates with economic growth. The ILO continues to indicate that the quality of education forms the foundation for further development and potentially leads to productive employment. Japan’s emphasis on education and its commitment to giving students a high-quality education is a precursor to its growth. In an industry in dire need of employees with a knack for sciences and engineering, the automotive industry benefits the most in Japan because of the country’s education system. Further, the ILO affirms that a high-quality education is indicative of a country’s economic trajectory (2011). The implication of the above for Japan and the automotive industry is that the likes of Toyota will continue to grow and lead the world because of its labor force. Further, as the automotive industry continues to grow and enhance technologically, Japan is still better positioned to maintain its leadership. The ILO (2011) opines that the higher the education level of the average citizen, the higher the likelihood that a country will be able to take advantage of new technologies.
Aside from labor and the advantage Japan’s education sector provides the automotive industry, there is also the investment Japan has made in its infrastructure. Currently, Japan boasts of having one of the best, if not the best, infrastructures in the world. Investment in infrastructure continues to position the country as a leader in the automobile industry. Japan has invested immensely in its road network, railway network, air transport, and sea transport, which have helped enhance its reach to the outside world. One of the crucial things Japan did was invest in urban and regional transport. Currently, the country’s road network is believed to be more than 1.2 million kilometers (Shibayama, 2017). Shibayama (2017) breaks it down further, noting that the country’s roads include municipal roads that make up about 1 million kilometers, expressways that make up 7,641 kilometers, prefectural roads that make up about 130,000 kilometers, and national highways that amount to 54,736 kilometers. Such an extensive road network gives Japan’s automobile industry an easy time, especially concerning raw materials distribution and sourcing.
Aside from the road network, Japan also boasts of having some of the world’s busiest airports. Air transport in Japan is extensive and is one of the world’s most efficient and profitable. Shibayama (2017) notes that the country has 97 airports that aid in transporting goods to and from the country. Gorka notes that the country’s international freight by volume amounted to about 3.2 million tons in 2020. Considering the effects of COVID-19 in 2020, this was a decline compared to 2019. The country has also invested quite extensively in sea transportation, which further boosts the automotive industry. Japan boasts of having more than 1000 ports that aid in transporting the country’s millions of tons of cargo that is moved by sea. Gorka (2021) notes that Japan was able to transport 306.08 million tons of cargo in 2020, a credit to the country’s investment in sea transportation. The automotive industry, which heavily depends on sea transportation greatly benefits from the investments the government made in sea transportation. Therefore, consistent growth should be expected in the industry.
Finally, Japan’s infrastructure is also heavily supplemented by its railway network and technological growth. Shibayama (2017) notes that Japan’s railway network is approximately 20,100 kilometers. Such an extensive railway network is crucial in the country’s internal transportation, whose urban transport infrastructure is considered the best in the world. The transportation of the country’s workforce is quite efficient, which means that little time is lost and productivity levels are maintained at a higher level in all industries. Investment in technological advancement has also boosted the automobile industry. Currently, Japan is leading in the world in automotive and mobility technology, which is partly aided by the country’s government (Yamaguchi & Gettleman, 2020). The major advantage that Japan’s automotive industry still holds over other countries is that its labor force is well-equipped to deal with the upgrades in the industry. Infrastructure in Japan is a big part of the country’s success in the automotive industry.
Demand Conditions
Demand conditions mainly include factors or attributes of the consumers in a country or on the global stage. Consumers or customers affect an industry’s progress directly because of their purchasing habits and their demands on the quality of products being produced. Japanese consumers are famous for their demands and are considered one of the world’s most demanding consumers. While this culture might be changing slowly, Japanese consumers still expect value for their money, contributing greatly to the country’s growth in innovation and global competitiveness. Salsberg (2010) notes that Japanese consumers have been known to be highly extravagant, especially regarding quality products. He notes their willingness to spend top dollar for high-quality goods stands unmatched. In his study, Synodinos (2001) agrees with the statement above, noting that Japanese consumers are known to attach a lot of importance to quality. Further, Synodinos indicates that their insistence on having a product match their specific needs greatly contributes to innovation. In line with the above, the Japanese automotive industry had to adapt to meet the needs of its consumers, especially within the country’s borders. According to Gorka (2022), the automotive industry had to innovate and evolve its production mechanisms to match the limited space in most of the country’s cities. Gorka (2022) notes that the idea of kei cars came from a need to match the needs of urban consumers. Further, he explains that the kei cars grew in popularity, and in 2020, they became the country’s most-sold car. The implication of the above is that the automotive industry has and will continue to evolve as it seeks to match the changing needs of the Japanese population. However, there is a likelihood that this innovation will not remain in Japan and could spread to other countries as well. Currently, the population of urban centers worldwide is on an upward trend, and this is likely to open the door for the automotive industry in Japan to produce more kei cars. Another example of how demand from the Japanese consumers has enhanced the innovation entails the traffic jam pilot, which is basically autonomous driving in traffic jams. So far, Honda has already acquired approval from the Japanese government and launched the product in 2021 (Templeton, 2020). Such innovations align with the needs of Japanese consumers and further enhance the country’s automotive industry.
Aside from the Japanese consumers being the most demanding in the world, there is also the aspect of brand loyalty which is incredibly high in Japan, especially in the automotive industry. Japan’s automotive industry was able to leverage the loyalty of Japanese consumers and softly nudge the same brand loyalty from consumers on the foreign stage. As earlier indicated, the country boasts of more than six automotive companies in the world’s top 20 largest vehicle producers by volume. Like in other countries, the automotive market in Japan has been receptive to numerous brands from outside the country. However, in spite of the above, the Japanese consumers maintain loyalty to the country’s automotive industry. As indicated in the graph below, the Japanese domestic market is highly dominated by Japanese cars, with Toyota and Suzuki leading the way (Gorka, 2022). In reality, the top ten most popular car manufacturers in Japan are from Japan. The preference for cars made in Japan is further enhanced by the simple fact that the home-based brands understand the needs of the consumers and, therefore, produce cars that match their needs. Even though other brands like Mercedes have made headways in the Japanese market, their reach and share in the market is still low. Further, as a show of Japanese consumers’ quest for quality and value for money, the three bestselling brands in the country are Mercedes-Benz, Volkswagen, and BMW (Gorka, 2022). Though their preference for high-end products still shows, the majority prefer what works, which has helped the automotive industry find ways to enhance loyalty elsewhere. For example, Toyota, Nissan, and Honda are by far three of the most popular automotive brands in Africa. One of the major reasons this happens to be the case is because these cars are affordable, convenient, and fuel-efficient, and these are some factors driving the demand for cars in Africa. However, to chart this path, companies within the Japanese automotive industry had first to study their consumers, understand what drives their loyalty to their brands, and then follow a similar approach in Africa. Additionally, considering that a significant percentage of Africans cannot afford high-end cars that mainly come from Europe and the U.S., the Japanese automotive industry continued to produce easily affordable cars in the region. The lessons from their consumers helped chart the way forward and enhance its dominance beyond its borders.
Supporting industries
Manufacturing vehicles in Japan, like in any other country, is a complex process. A vehicle can have about 20,000 individual parts. Because of the complex inputs needed, the Japanese automotive industry has evolved into an integrated supply chain of companies. Each vehicle consists of parts from hundreds of supplier companies. The auto parts supplier network has expanded, spanning different industries like chemicals, textiles, mechanical components, and rubber (Doner, Noble & Ravenhill, 2006). The tier 1 suppliers are very specialized in their products. They are critical for the vehicle manufacturers since they allow them to outsource the development and production of essential parts of cars. Denso is the largest tier 1 supplier for Japan's automotive industry and a global leader. The company spe...