Supply Chains in Japan:How do they affect resilience and

innovation of the economy?

Yasuyuki TodoFaculty of Political Science and Economics

Waseda Universityyastodo@waseda.jp

Yale SOM Japan 2016March 16, 2016

About MeResearch Fields• Development economics, international economics,

Japanese economy• Applied econometric analysisResearch Topics• Effects of firm internationalization

– Firm-level data for Japan, Chain, and Indonesia• Effects of networks on economic growth

– Firm-level data for Japan, Indonesia, Vietnam, and the whole world

• Quantitative evaluation of Japanese aid in Indonesia, Ethiopia, and Burkina Faso

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3

http://www.voxeu.org/person/yasuyuki-todo

http://www.weforum.org/agenda/2016/01/how-will-the-tpp-affect-japans-economy

Today’s Talk

Supply Chains in Japan • What is keiretsu? How does it work? • Resilience of Japanese supply chains• Role of diversity of supply chains

in innovation• Current changes and prospects• Internationalization of supply chains

4

Keiretsu

5

Final-good producers

1st tier suppliers

Share of Toyota in Aisin’s sales: 60%

50%

2nd tier

3rd tier

Togo Seisakusho

Toyota

Aisin

Denso

Toyo

Honda

MusashiKeihin

Characteristics of Keiretsu

Close ties between firms through supply chains• A large share (e.g., 60% for Aisin)

of a particular keiretsu partner in total sales• Long-term relation• Technical assistance from buyers to suppliers

– E.g., Toyota teaches “kaizen” to suppliers.

• Joint R&D for new parts• Sometimes associated with capital ownership

6

Kyohokai’s web sitehttp://www.kyohokai.gr.jp/

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Mutual Benefits through Keiretsu

Buyer Supplier

Technical assistance (production & development),

higher prices than in the market

High-quality parts of a wide variety, “just in time” delivery

Aoki, M. (1988), Information, Incentives, and Bargaining in the Japanese Economy, Cambridge University Press.

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Keiretsu long-term relations b/w suppliers & assemblers

Long-term employment

Seniority wage

Employment

Team productionFirm-specific tacit knowledge

matters

Complementarity• Share tacit knowledge b/w

suppliers and assemblers• Long-term relation provides

incentives to invest in relation-specific assets

Inter-firm relations

Necessary for long-term

employment

Provides incentive to

invest in firm-specific knowledge

Complementarity between Keiretsu and the Employment System in Japan

Aoki (1988), ibid

9

Supply Chains in Japan

Based on 100,000 ties randomly selected from 4 million in firm-level data collected by Tokyo Shoko Research in 2010

Recent challenges:Are keiretsu-type supply chains in Japan resilient to disasters?

Effects of Supply Chain Disruptions

10

Disruption of supplies

due to disasters

Flow of material

and parts

Propagation of neg. effects

through supply chains

11

Tohoku: Areas Affected by the Great East Japan Earthquake in March 11, 2011

●：Plants in the auto industry

Epicenter

Cluster of the auto industry

Disruption of Supply Chains by GEJ Earthquake

12METI (2011), http://www.meti.go.jp/press/2011/04/20110426005/20110426005.html

0

10

20

30

40

50

調達済み 5月～7月 8月～10月

％assemblers

April 2011 May-July August-

suppliers

Survey in April, 2011 to firms (not directly affected):Expectation about when they can procure sufficient amounts of material, parts, and components

Were impacts of the earthquake propagated through supply chains?

Observations Many plants not directly hit by the earthquake

(including GM in US) were temporarily shut down b/c of lack of parts and materials.

Simulation using an IO-based model(Tokui J., et al., 2012, RIETI Policy Discussion Paper, No. 12-P-004.)

Loss of 1.35% of GDP by the earthquake90% of the loss disruption of supply chainsBut, supply chains are not always harmful

to recovery from disasters.13

Supply chains’ positive effects on recovery from disastersSupport from suppliers and clients• Renesas Electronics

– Microprocessors for automobiles– One of the largest bottleneck for recovery

of the auto industry– 80,000 man-days of labor from clients

14http://japan.renesas.com/media/ir/library/pdf/csr/2011_csr_03.pdf

Supply chains’ positive effects

Support from firms in impacted areasOgatsu Musen (3rd tier w/ 14 workers)Horio Seisakusho (2nd tier of auto makers)

15

Nikkei Newspaper, Sep. 8, 2011, http://www.nikkei.com/article/DGXZZO42592900U2A610C1000000/

Ogatsu, whose plant was washed away by the tsunami, rented a space from Horio to continue production (left), until it built a new office in 2012 (below).

Nikkei BP, Mar. 10, 2015, http://techon.nikkeibp.co.jp/article/MAG/20150225/405903/?rt=nocnt

Supply chains’ positive effects

Support from firms in impacted areasToyo Seikan (can maker)Kirin (beer brewery)

16http://www.jsda.or.jp/katsudou/kaigi/chousa/haxtusin_kon/no05/files/vol5-2.pdf

Sendai PortKirin

Toyo Seikan

Google Map

0 10 20 30 40 50

Others

Financial institutions

Public institutions

Volunteers

Relatives/friends

Competing firms

Suppliers/clients

17

Share in all firms

Share in firms damaged completely/half

Todo, Y. et al., 2015, How Do Supply Chain Networks Affect the Resilience of Firms to Natural Disasters? Evidence from the Great East Japan Earthquake, Journal of Regional Science.

% of firms that received support from:

Positive Effects of Supply Chains

18

Disruption of suppliesFlow of

material and

parts+ effectthrough

support from partners

Another Positive Effect

Substitute new partners for damaged partners using supply chains Iwaki Die-cast, which had to stop production

for a while, provided dies to competing firms.• Felt responsible for

continuing to supply parts to buyers

• Gained more trust and thus more purchase from buyers after the earthquake

19http://www.rieti.go.jp/jp/events/13032201/pdf/09_yokoyama.pdf

20

Searching for New Suppliers (April, 2011)

METI (2011)

0

20

40

60

80

代 代

％material producers

assemblers

Have found new partners for most disrupted supplies

No yet

Positive Effects of Supply Chains

21

Disruption of supplies

Flow of material

and parts

+ effectthrough

substitution of damaged partners

Effects of Supply Chains on Recovery

22

+Support from

partners

+Substitution of

damaged partners

‒Propagation of negative effects

through supply chains

What is the actual net effect?

Recovery from the GEJ Earthquake

Projection by METI in April, 2011:Full recovery of supply chains: Fall in 2011Actual full recovery: July in 2011

• Renesas Electronics: Re-started production on June 1

23http://japan.renesas.com/media/ir/library/pdf/csr/2011_csr_03.pdf

Recovery from the GEJ Earthquake

24Wakasugi R., Tanaka, A., 2013, Recovery from the Mega-quake in Japan: Evidence from Manufacturing Firms, KIER Discussion Paper, No. 867, Kyoto University.

Tohoku

Japan

Index of industrial production in the transportation equipment industry (2005=100)

Earthquake

Recovery from the GEJ Earthquake

25Cabinet Office of Japan, http://www.esri.cao.go.jp/jp/sna/menu.html

Earthquake

Real GDP of Japan

Billion yen

Todo, Y. et al., 2015a, How Do Supply Chain Networks Affect the Resilience of Firms to Natural Disasters? Evidence from the Great East Japan Earthquake, Journal of Regional Science.• 2 firm-level datasets

– Data collected in the impacted areas after the earthquake (2000 firms)

– Data for supply chains before the earthquake collected by Tokyo Shoko Research (800,000 firms & 4 million ties)

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Evidence of positive effect of supply chains on recovery from GEJ Earthquake

010

2030

Perc

ent

0 20 40 60 80 100

Recovery time27

No disruption of operation: 30%No operation for 1-5 days: 23%Median: 5 days

Effect on the recovery time short-term effect

(# of days before resuming operation)

010

020

030

040

0Re

cove

ry ti

me

0 5 10 15 20 25# of suppliers outside impacted areas

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Many suppliers outside impacted areas quicker recovery

Graphical Evidence

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Dep. var.Time for resuming operation

Sales growth in ½ yrs

Suppliers in impacted areas 0.108 3.62*

Suppliers outside impacted areas -0.351*** 2.61

Suppliers of direct suppliers 0.081** -1.04

N 902 883Pseudo R2 0.149 0.129

Regression Results

* p<0.1; ** p<0.05; *** p< 0.01

support, substitution

> propagation

support, substitution

< propagation

Agglomeration effect

Summary of Todo et al. (2015a)

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Supply chains are helpful to recovery from disasters. Disruption of supply chains negatively affects

production of firms not directly affected by the earthquake. But, the effect does not last long.Geographically diversified supply chains

promote resilience through substitution and inter-firm support. Clustering within regions promote medium

term recovery. Todo, Y. et al., 2015, Journal of Regional Science.

Knowledge Diffusion through Supply Chains

Diffusion from buyersExplicit technical assistance to suppliers

(See slide 6) Disembodied knowledge diffusing

through face-to-face communicationDiffusion from suppliersHigh-quality intermediates

for high-quality final goods Diffusion of embodied knowledge

31Dyer, J., and Nobeoka, K., 2002, Creating and managing a high performance knowledge-sharing network: the Toyota case. Strategic Management Journal 21.

Knowledge diffusion through buyer-supplier relations

Learning by exporting/importing(Kimura et al. 2006, Blalock et al. 2004, Amiti et al. 2007)

Vertical spillovers from downstream FDI(Javorcik 2004)

Implying larger diffusion from overseas partners than from domestic ones

Importance of geographically diversified networks

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Results from Social Network Studies

Importance of diversityStructural hole (ties between different groups)

(Burt 1992)

Strength of weak ties (Granovetter 1973)

Density of ego networkredundant knowledge(Burt 2004)

33Figure from Burt (2004)

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Measure of diversity of an employee’s ties

less diversemore diverse

Mea

sure

s of P

erfo

rman

ce

Burt (2004)

Estimating Effects of Supply Chains on Productivity and Innovative Capacity through Knowledge Diffusion

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Todo, Y., et al., 2015b, “The Strength of Long Ties and the Weakness of Strong Ties: Knowledge Diffusion through Supply Chain Networks,” RIETI Discussion Paper, No. 15-E-034.

• TSR data for the manufacturing sector in Japan

Effects of Supply Chains on Sales/Worker and # of Patents

36

ln(# of suppliers/clients in same pref. )ln(# of suppliers/clients out of pref. )

Network densityln(sales per worker)

ln(sales) controls including industry

it it it it

it

it

−= + + +

+ + =

=

Y α βY δX ε

Y

X

1

11

and pref. dummies

Estimate the system of dynamic equationsby Seemingly Unrelated Regressions

Key Network Variable: Density of each firm’s ego network

• # of actual ties among each firm’s supply chain partners /# of all possible ties among them

• Mean: 0.26• Considerations

– Redundant knowledge in dense networks

– Dense networks trust knowledge diffusion

• Hypothesis:Density may or may not promote diffusion.

37

Me

My ego-network density = 1/3

-4-2

02

4

1 2 3 4 55-year Period

-4-2

02

4

1 2 3 4 55-year Period

-4-2

02

4

1 2 3 4 55-year Period

％

Sales

Sales per worker

(1) When the number of

neighboring suppliers

increases by 1

(3) When transactions between partners (density) increase

Todo, Y., et al., 2015, “The Strength of Long Ties and the Weakness of Strong Ties: Knowledge Diffusion through Supply Chain Networks,” RIETI Discussion Paper, No. 15-E-034.38

(2) When the number of

distant suppliers increases by 1

Effects on # of Patents (IV Tobit of Newey, 1987)

Independent var.(logged) Dependent var. (logged): # of registered patents

# of neighboring suppliers 0.00286 0.0413

# of distant suppliers 0.133+ -0.0474

# of neighboring clients -0.0786 -0.0638

# of distant clients 0.240** 0.117

Density -0.283 -1.154* -0.294 -0.987*

# of distant suppliers * density 0.887*

# of distant clients * density 0.583

N 36,839 36,839 36,839 36,839

+: p < 0.1, *: p < 0.05, **: p < 0.01 39

Technological advantages vary across prefectures.

40Todo et al. (2015)Technology class

Dark color indicates technological advantage. Pr

efec

ture

s

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Knowledge Similarity between Supply Chain Partners

CDF of a measure of knowledge similarity

(constructed from patent data) for firm pairs with supply chain ties

without supply chain ties

Similar knowledge in dense networks

Summary of Todo et al. (2015b)

Effect on productivity

Effect on innovative capability

# of neighboring suppliers No No

# of distant suppliers + +

# of neighboring clients + No

# of distant clients No +

Density − − (weak)42

F2F tech. assistance

needed

Disembodied knowledge diffusion

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Diversified networks contribute to innovation.

Clustered networks within the community Knowledge diffusion from multiple sources

(Centola, 2010)

Ties with outsiders (bridging ties, structural holes) Diffusion of new knowledge

(Watts & Strogatz, 1998; Burt 1992; Granovetter 1973

[strength of weak ties])

Recent Changes in Supply Chains in Japan

Dissolution of keiretsuToward more resilient supply chains

• No reliance on particular suppliersModularization of parts

• Promoted by US and European auto makers,stimulated by the electronic machinery industry

44Nikkei Newspaper, Feb. 4, 2013.

45

Average Characteristics of Top 5 Japanese Automobile Manufacturers

Data source: Tokyo Shoko Research

46

Illustration of Changes in Supply Chains

2nd tier

A

Final assembler

1st tier suppliers

B C D

E

Before

After

When C is hit, it may be replaced with D.

When A is hit, C can still survive because of demand from E.

Supply chains have become more resilient.

Inevitable Weakness

Tradeoff b/w efficiency and resilience• To achieve a high

quality, special parts available only from a particular supplier should remain.

Toyota seems to be ready for this problem this time.

47

Nikkei Asian Review, Feb. 15, 2016http://asia.nikkei.com/Business/Companies/Toyota-resumes-production-at-assembly-plants-after-weeklong-stoppage

Internationalization of Supply Chains

48

Characteristics of Suppliers of Top 3 Auto Makers in Each Region

In Japan, final producers are internationalized, but suppliers are not.

FactSet Revere

49

Production networks in East Asia has been developed.

Fujita and Hamaguchi (2014), Supply Chain Internationalization in East Asia: Inclusiveness and risks, RIETI Discussion Paper No. 14-E-066.

Trade in intermediates in 2000

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Trade in intermediates in 2012

Fujita and Hamaguchi (2014), ibid.

Regional Share in Trade in Parts and Components

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

IntraRegionalto the ROW

IntraRegional

to the ROW

IntraRegional

to the ROW

NAFTA

EU

EastAsia

Fujita and Hamaguchi (2014), ibid. ROW: Rest of the World

Internationalization of Japanese Firms

Japanese final assemblers: YesTheir suppliers (mostly SMEs): Not much

52

Lack of internationalization of SMEs is one of the biggest problem

of the Japanese economy.

53

050

010

0015

0020

00企業数

0 1 2 3

全要素生産性（平均=1）

国内向け企業

050

010

0015

0020

00企業数

0 1 2 3

全要素生産性（平均=1）

国際化企業

“Lying dragon” firms

Internationalized firms

Num

ber o

f firm

s

TFP (average = 1) Wakasugi et al. (2008)

TFP distribution for non-internationalized firms in Japan

Many productive firms are not internationalized.

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Why?

Protection of SMEs

Economic stagnation

E.g., a law required banks to give forbearance to distressed SMEs.

Zombie firms

Political pressures

SMEs do not need to be internationalized to survive.

55

Japan could be more internationalized.

Average of 2010-13: World Bank, World Development Indicators

56

But, Japanese firms may not survive any more without going out.

Share in World GDP (%)

G7

Middle incomes countries

Japan

World Bank, World Development Indicators

Summary

Supply Chains in Japan• Resilient to some extent

even when hit by the GEJ earthquake• More resilient after the earthquake

through diversification of partners• Diversification, in turn, leads to productivity

improvement and innovation. • Lack of internationalization of SME suppliers

may be a big problem. 57