What Will Become of the Manufacturing Culture?

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The Japan News

December 20, 2017

Is Japanese manufacturing secure? A string of recent events is a cause for concern, as Kobe Steel, Ltd. and Mitsubishi Material Corp. subsidiaries falsified product data, and Nissan Motor Co. and Subaru Co. allowed employees without proper qualifications to conduct final inspections on vehicles. Why are scandals like these occurring? How can Japan restore its brand strength and trustworthiness? We interviewed three experts on the matter.

Guessing wishes of management causes malfeasance

Kenshu Kikuzawa

Keio University Professor

The repeated improprieties uncovered in Japanese manufacturing industries have characteristics particular to Japan. In these cases, it’s not clear who the ringleaders are.

The wrongdoings involving emissions from Volkswagen AG’s diesel vehicles were reportedly ordered by its management. In the case of Kobe Steel, Nissan and other Japanese companies, however, the situation is more opaque. The background here is Japan’s corporate culture of highly complex and tightly woven personal relationships.

Assume, for example, that overly demanding targets for delivery deadlines and quality were issued by management. In European and U.S. companies, the response would probably be, “That’s impossible.” In Japan, however, such a response is liable to be an imposition on a manager and cause rifts in one’s relationship with that person. In economics, this kind of burden and waste from personal relationships are called transaction costs.

If one can use creativity and ingenuity to clear such targets, all is well. But what happens when one can’t? If the transaction costs with one’s boss are deemed excessively high, then wrongdoing becomes a rational option. Although it is seen as unethical behavior from an external vantage point, wrongdoing can transform into a rational choice inside the organization.

In Japanese companies, employees who “intuit 10 things from just being told one” are praised, because they reduce the burden stemming from personal relationships. They find ways of working out difficult conundrums, but if they repeatedly overreach, fractures start to show.

During the economic slump after the strong yen and the collapse of the bubble after the 1980s, Japanese manufacturers worked hard to cut costs. This led to an increase in extreme demands and workers having to more often surmise the wishes of management so as not to cause trouble for them. I think this naturally made misconduct more entrenched.

It is difficult to prevent “misconduct with no ringleader” just through corporate governance reforms, such as increasing the number of outside directors. More time and effort should be devoted to changing the organizational culture.

First, greater transparency and tolerance are required. It’s better to have an organization where employees can freely voice their opinions and top management lends an ear. Smoother communication will suppress impropriety and make it more easily discovered.

Furthermore, it is important that management is not overly bound by profit and loss figures. In Japanese companies, employees with an excellent talent for calculating profits and losses are promoted to president. No doubt profits and losses are important, but they are not things that a president should demonstrate his or her ability for.

A president needs to judge value and take responsibility after having employees do a task. These kinds of leaders are needed, but they are rarely fostered, which is one of Japan’s weaknesses. If leaders who can judge value are not fostered, innovation will also not arise.

Japan’s brand of manufacturing is in crisis, but it can be recovered with reforms. In particular, the role of managers is critical. As the country fights deflation, Japanese companies have come to solely pursue profit and efficiency. Instead, managers should hone their sense of value, and put greater emphasis on strategies for making business grow through innovation.

Kikuzawa, 60, assumed his current post in 2006 after serving as a professor at the National Defense Academy, Chuo University and elsewhere. He specializes in organizational economics and comparative management theory. His books include “Soshiki no Fujori” (The absurdity of organizations).

(This interview was conducted by Yomiuri Shimbun Senior Writer Tatsuya Sasaki.)

Only thinking in defensive ways is utter nonsense

Toyohiko Aoki

Chairman of Aoki, Inc.

For small factories like us, Kobe Steel is a leading company in a very special position. It is unbelievable that they falsified data. I feel like: “What are you thinking? Are you considering those involved in the manufacturing industry?”

Japanese manufacturing is about “over-specification,” which requires performance specifications set higher than necessary. The approach that has been taken to date is that if you make something good, it should sell.

The companies, not only Kobe Steel, that have committed the recent improprieties were businesses that pulled Japan out of the ashes in the wake of World War II. They have amazing technical expertise, which they must not forget. They must have been off their guard. As companies grow larger, they can’t keep an eye on themselves at all levels, I think.

And if a certain sham continued for more than 10 years, I think it must have become standard practice.

It’s not the case that awareness has waned, but it seems more like workers believing that they are doing the right thing. If they had had oversight functions that carried out checks once a year, or once every three years, the problems probably would not have worsened to this point.

It seems that in recent years, Japanese manufacturing has been unduly influenced from abroad.

For example, Japan has its own reliable standards called Japanese Industrial Standards (JIS). This is something that we can be proud of in the world. However, Europe’s International Organization for Standardization (ISO) has developed its own standards that Japan has to meet.

Companies are told by overseas investors to generate profits on a quarterly basis. This is bizarre. If we try to do that, we cannot do research and development.

A similar phenomenon is seen in sports like judo. If Europe and the United States cannot win, they change the rules, meaning that Japan cannot win. Why is Japan unable to stand tall and argue for its strengths in front of the rest of the world?

Japan is one of the few countries that can manufacture products from scratch. The important thing is to restore our pride. This is especially true for business managers. Without vision, business is impossible.

It’s foolish to only think in defensive ways. Rather than bowing and apologizing, I hope managers will quickly admit what was wrong and explain what kind of measures they’ll take.

I hope that managers, if their companies are stripped of JIS certification, will declare that they will get it back by any means. Otherwise, morale among their employees will deteriorate. That is the scariest thing.

The recent events are a chance for companies to strengthen themselves. There may be someone who gets upset and says, “You’ve produced defective products.”

What I would like to hear is, “Certainly it was wrong to falsify data, but watch what we Kobe Steel will do.” I hope companies will revive Japan’s manufacturing with this spirit.

Aoki is 72. His company manufactures products including aircraft and other components. It became a certified factory for Boeing Co. of the United States in 1997. In cooperation with the Japan Aerospace Exploration Agency, it launched Maido No. 1, a small factory-built satellite, in 2009.

(This interview was conducted by Yomiuri Shimbun Senior Writer Keiko Chino.)

Outdated standards need to be reviewed

Junichi Sato

President of the Japan Federation of Engineering Societies

Even from a global perspective, Kobe Steel is a powerful manufacturer. Its steel, copper, aluminum and other products are used across many fields, from rockets to bullet trains to beverage cans. IHI Corp., where I used to work, also uses its products for aircraft engines and other items.

However, Kobe Steel falsified data on material strength and other things for many years and shipped products below the specifications agreed upon in contracts with its customers. Similar improprieties were also uncovered at Mitsubishi Material’s subsidiaries. Japanese companies, in particular, excel in the manufacturing of materials. This brand has been fostered over many years. The recent scandals seriously tarnished the brand and damaged national interests.

Even though the products fell below required specifications, there have not been any reports so far of malfunctions in such things as bullet trains made with Kobe Steel’s materials. There are many cases in which the companies to which these materials were shipped confirmed their safety. This tells us that the standards are set too high. To me, this is a grave problem.

The standards and rules for the strength of materials and others should be constantly reviewed. It does not mean skimping on work. As science and technology progress and generational changes occur, material features and applications change as well. Reassessing standards can help reduce costs and spur innovation. That is to say, it directly links to international competitiveness.

However, it seems that managers and workers did not think that way, but instead unthinkingly maintained the status quo. It is just like they are driving a car according to traffic rules for horses and buggies, even though we are already in the automobile era.

The strength of Japan’s manufacturing sector lies in kaizen (improvement), where workers exercise their brains even without being instructed to do so by management. However, this process failed to function in the latest case. Perhaps the strength of workers has decreased. The same is true for those who purchased materials from Kobe Steel.

Nissan, Subaru and others continued the practice in question for final inspections on vehicles for years. I think these cases also have the same problem.

Standards cannot be reassessed by one company alone, as scientific and technological proofs are needed. Nationwide efforts should be made to address the problem with companies cooperating with university engineering departments and state-run research institutions. However, this would be difficult to achieve in Japan today.

After the collapse of the economic bubble in the 1990s, companies have had little extra leeway. At universities and research institutions, there has been less research in fields that help establish standards. It is hard for researchers to write articles and to obtain funding.

The United States has moved in the opposite direction. In the early 1980s, the United States felt a sense of crisis over Japan’s dramatic progress in manufacturing. The National Science Foundation established engineering research centers across the country and promoted basic research at universities and industries.

Japan has remained at the levels it reached in the 1980s. In order for Japan to regain its manufacturing dominance, it needs to establish an industry-government-academia framework that is able to revise standards suited to the times. This will likely take about 10 years. However, we have no choice but to do it.

Sato, 69, is a senior fellow at the Japan Science and Technology Agency. He served as managing officer and research and development department chief at IHI, president of IHI Inspection & Instrumentation Co., and adviser to IHI. He has also been a visiting professor at Tsinghua University of China and elsewhere. He specializes in combustion engineering.

(This interview was conducted by Yomiuri Shimbun Senior Writer Keiko Chino.)

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