Putting “Reshoring” into Perspective

With the yen at its weakest level in years, some major Japanese manufacturers with overseas facilities are moving to shift production back to Japan. But insiders caution that the “reshoring” trend is a limited phenomenon and signals no real change in the basic strategy of Japanese export companies in the age of globalization.

Homecoming for Panasonic, Canon, Honda

For years Japanese electronics giants and automakers have been moving production offshore to save on costs. But since the beginning of 2015, the media has been highlighting signs of a backwash, as major manufacturers begin shifting some of those operations back to Japan. This spring Panasonic will begin transitioning to domestic production for air conditioners, washing machines, and other major appliances destined for the Japanese market. Last December Sharp launched trial operations at its Yao Factory in Osaka Prefecture with a view to shifting production of some of its home air purifiers and refrigerators back to Japan from its Chinese affiliate. And Canon has announced plans to expand its domestic production ratio from roughly 40% to 60% of its total output over the next three years.

Even the auto industry shows some indication of moving in the same direction. Honda, whose Vietnamese plants produce mini-bikes for the Japanese market, will shift some of that production back to Japan by the end of this year.

“Reshoring” Initiatives by Major Japanese Manufacturers (as of March 2015)

A Limited Rebalancing

Two major factors contributing to this reshoring phenomenon are the weak yen and the rise in overseas production costs. The yen’s value has fallen substantially since the advent of Abenomics, settling at about ¥120 to the dollar in recent months. Indeed, the yen has fallen by about 30% against the Chinese yuan in the past two years. A weak yen makes Japanese-made export goods more cost competitive on foreign markets. At the same time, rapid growth and development in China and other emerging economies are pushing up local wages. The soaring number of Chinese tourists in Japan and their legendary shopping sprees are a product of these trends, which have made Japanese goods considerably more affordable for Chinese consumers.

The relatively weak yen, compounded by rising labor costs overseas, is also pushing up the price of imported goods in Japan—including those produced by the overseas affiliates of Japanese manufacturers for sale in Japan. In some cases, these factors have negated the cost advantages of producing goods overseas and reimporting them into Japan. Under the circumstances, it is not surprising that Japanese manufacturers would start thinking about repatriating production on a limited basis.

That said, globalization is still the overarching trend in manufacturing, and Japanese companies are by no means giving up on overseas production. What we are seeing is no more than a modest reduction in the overseas production ratio with regard to specific products. “It’s a rebalancing of capacity utilization in the direction of Japanese plants,” says one expert. “Most of these companies are simply putting their underutilized or idle domestic facilities to work. Don’t expect it to reach the point where they’re shutting down overseas facilities and building new ones in Japan.” Both Canon CEO Mitarai Fujio and Panasonic President Tsuga Kazuhiro have echoed this viewpoint, stressing that while the wind may be shifting slightly toward Japan, overseas production is here to stay.

Abandon China?

China may offer a somewhat less attractive investment environment than it did a few years ago, what with labor costs on the rise and economic growth expected to slow to 7% in fiscal 2015. But the lure of China’s 1.3 billion consumers is as powerful as ever—especially for Japanese automakers. After all, what other market in the world can absorb upwards of 20 million new cars annually? At this point, Western vehicles still control the largest share of China’s foreign car market, but Japanese manufacturers are pulling out all the stops to catch up.

Since auto manufacturing involves a vast network of parts suppliers and other business partners, relocating a production base can have huge ramifications for the manufacturer and the local economy. Under the circumstances, the risks of social unrest or an economic downturn are scarcely sufficient to induce Japanese automakers to turn their backs on China’s colossal market. Toyota President Toyoda Akio explained his company’s position in no uncertain terms: “Basically, we have no plans to alter our global production and sales strategy.”

In fact, the same logic applies to most manufacturers with established overseas affiliates. According to sources in the know, Canon and Panasonic began thinking about moving some of their production back home more than a year ago, suggesting that considerations other than the weak yen may have played a role in their decisions. Moreover, even with wages rising overseas, labor costs still account for only about 25% of total production costs. In other words, few companies can expect to save big on labor just by shifting production back to Japan. Indeed, while Canon’s Mitarai seems bent on producing the company’s new products domestically, he has also made it clear that the Japanese production facilities will be fully automated.

Overseas Production at All-time High

So, how can we characterize the big picture of Japanese manufacturers’ overseas operations?

According to the Basic Survey on Overseas Business Activities conducted by the Ministry of Economy, Trade, and Industry in July 2014, overseas affiliates accounted for 22.9% of Japanese manufacturers’ total output and 29.4% of their total capital investment in fiscal 2013. Both of these figures represent all-time highs. Japanese manufacturers’ capital investment in overseas facilities has risen for four straight years, and in fiscal 2013 it was up 21.8% over the previous year. Capital investment grew at a particularly high rate in the areas of transportation equipment including automobiles (34.6%) and chemicals (29.1%). By region, the fastest growth was in North America (33.0%) and Asia (9.6%).

According to the same survey, Japanese companies dissolved or relocated a total of 554 overseas affiliates in fiscal 2013, up 44 over the previous year. Of these, 214 were in manufacturing industries (down 2) and 340 in nonmanufacturing industries (up 46). Among Japanese companies expanding overseas, a larger percentage invested in China and Southeast Asia in fiscal 2013 than in fiscal 2012. The ratio of those expanding into North America and Europe dropped, while the percentage of those investing in the three newly industrialized economies of East Asia (Hong Kong, South Korea, and Taiwan) held steady.

The results of the METI survey indicate that while strategic considerations are drawing individual Japanese companies—and in some cases industries—into and out of foreign markets, the overall trend is one of ongoing expansion overseas. As economic globalization accelerates, more and more companies are embracing the concept of “local production, local consumption,” a model that insulates manufacturers from the impact of exchange-rate fluctuations, helps them tailor their product development, production, and marketing to local conditions, and allows them to contribute to the local economy through job creation.

The shift away from reimportation of goods intended for the Japanese market could well continue, especially if the yen remains weak over the long term. But while big manufacturers may follow the lead of companies like Panasonic in putting their idle or underutilized Japanese plants to work, large-scale investment in new domestic facilities seems unlikely. Japanese manufacturers will continue to follow the basic strategy of seeking the optimal point of production based on cost and proximity to the market.

Japan is facing a host of structural economic challenges, including population decline and stagnant consumer demand, as well as the “hollowing” of the nation’s industrial base. Under the circumstances, a major wave of reshoring by Japan’s big manufacturers is as unrealistic as it is appealing. To revitalize the economy and spur a regional renaissance, Japan will need creative ideas for tapping into latent consumer demand and developing new industries.

(Originally written in Japanese by Harada Kazuyoshi of the Nippon.com editorial department and published on April 10, 2015. Banner photo: Japanese workers assemble air-conditioning units at Daikin’s Shiga Plant in Kusatsu, Shiga Prefecture, October 2014. @ Jiji.)