Nissan Cars Head Home as Yen Erodes Century of Made-in-Japan

Japan Inc. has a new export market: Japan.

For the first time, companies including Nissan Motor Co. (7201) are building products abroad to ship home as a stronger yen, aging workforce and improved skills overseas erode a century-old mantra that what’s sold in Japan should be made there.

Nissan’s decision to import foreign-made vehicles in 2010 paved the way for some of Japan’s biggest companies, including cosmetics company Shiseido Co. (4911) and electronics maker Toshiba Corp. (6502) Shipments home from Japanese producers’ overseas plants have more than doubled in a decade to a record, including a 31 percent jump in the past two years, compared with a 61 percent gain in total imports over the 10 years, government data show.

“Nissan’s decision was epochal,” said Masato Sase, an auto-industry analyst and partner at Deloitte Tohmatsu Consulting Co. in Tokyo. “Before then there was a tacit assumption that cars sold in Japan would be made in Japan.”

The shift reflects one of the biggest departures from an industrial strategy begun by the Meiji leaders who ousted the last shogun in 1868 and set up western-style factories. A “made by Japan” model, where manufacturers base operations with less regard to nationalism, may boost corporate competitiveness at the cost of jobs in the world’s third-biggest economy, deepening deflation pressures.

“People see the sale of cars made abroad as a sign of the times, as globalization,” said Shiro Kakinuma, a salesman at Taiyo Nissan Auto Sales Co.’s Shibaura Chuo showroom in Tokyo, which offers the Thai-made Nissan March subcompact. “When the new March came out there were some articles questioning the quality of a car made in a developing country. Not anymore.”

‘Epochal’ Move

Shiseido next month will introduce to domestic customers its Za range of makeup made in Taiwan and Vietnam, the first time Japan’s biggest cosmetics maker will import one of its ranges. Kubota Corp. (6326), Japan’s largest tractor manufacturer, started domestic sales of its Chinese-made rice-planting machines and U.S.-built lawnmowers last year.

Toshiba ended domestic fabrication of its Regza television sets last fiscal year after almost half a century of production at home. Panasonic Corp. (6752), Japan’s biggest appliance manufacturer, shifted all its production of mobile phones to factories in Malaysia and China “to improve price competitiveness,” said Yuko Hosaka, a company spokeswoman.

Japan’s manufacturers will make a record 39 percent of their products overseas in the year through March 2015, up from 33 percent two years ago, a Japan Bank for International Cooperation survey showed in December.

First Wave

Earlier forays into overseas production were typically designed to serve markets where the factories were located. In the wake of World War I, Japanese textile companies built plants in China for the Chinese market, according to Tetsuji Okazaki, a Tokyo University professor of economic history who edited “The Contemporary Japanese Economic System and its Historical Origins.” That strategy accelerated in the 1980s amid trade tensions with the U.S. and an appreciating yen.

Now, after a 45 percent gain in the yen in the past five years, business leaders are again moving more production to countries that offer upgraded workforces and lower costs. The yen traded at 78.62 to the dollar at 3.30 p.m. today in Tokyo, within 4.4 percent of the postwar high in October last year.

For companies in the Topix (TPX) stock index, offshore factories typically carry profit margins that are on average 2.5 to 3 times higher than for domestic operations, said Jesper Koll, head of equity research at JPMorgan Chase & Co. in Tokyo. “The deindustrialization of manufacturing means a structural increase in the profitability of Japan Inc.”

Nissan Overseas

Nissan, which makes three out of four vehicles overseas, the highest proportion among Japan’s eight biggest carmakers, was also the most profitable for the first time last fiscal year, with a net income of 341.4 billion yen. In the past two years, Nissan’s stock has gained 14 percent, compared with 7.7 percent for Toyota Motor Corp. (7203), which made 54 percent of its vehicles abroad in the year ended March, according to the company’s website. In the same two-year period, the Topix has fallen 9.2 percent.

The 12-month return potential on Nissan, Japan’s second- biggest automaker, is 38 percent, compared with Toyota’s 25 percent, according to a consensus of analysts surveyed by Bloomberg. A 1 yen gain against the dollar cuts operating profit at Nissan by 2.4 percent and at Toyota by 3.3 percent, Goldman Sachs Group Inc. estimated in an April report.

Job Losses

The lure of shifting abroad will contribute to Japan losing 4 million manufacturing and construction jobs this decade, according to Tokyo-based Works Institute, a research arm of staffing agency Recruit Co. Factory jobs made up 16.5 percent of the workforce in December, the lowest level since comparable data began in 1953.

While industry is retreating in importance, Japan will probably remain one of the world’s largest manufacturers, especially for higher-end products, according to Yuqing Xing, an economist at the Asian Development Bank Institute in Tokyo.

From its base at the foot of Mount Fuji, Fanuc Corp. (6954) makes control systems that run more than half the world’s automated machine tools, helping production lines at Boeing Co., General Motors Co. and Toyota. Japan’s Shin-Etsu Chemical Co. (4063) and Sumco Corp. (3436) control more than 30 percent each of the global market for silicon wafers, used to make computer chips, according to the companies.

“Japan still has stocks of engineers, skilled workers and technologies that are essential for making top-end products,” said Xing, who also teaches at the National Graduate Institute for Policy Studies. “I don’t see any possibility that Japan would be left out of global supply chains.”

‘Monozukuri’ Spirit

Nissan will continue to make 1 million cars a year in Japan “to maintain our monozukuri strength,” Chief Operating Officer Toshiyuki Shiga said in an e-mail. Monozukuri is a Japanese term for “making things.”

Automakers, who face a temporary drop in domestic demand as subsidies from a government stimulus program run out this year, will continue to move production abroad, said Satoru Takada, an analyst at securities research company Toward the Infinite World Inc. in Tokyo.

“Reverse imports, especially for compacts, will increase,” said Takada.

Policy makers will need to take steps to bolster services in Japan as the economy transitions away from manufacturing, and should loosen regulations, said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. Exports have accounted for almost half of Japan’s economic growth in the past decade, and make up about 16 percent of GDP.

While Prime Minister Yoshihiko Noda’s government has set a target of creating 2.8 million jobs in medical, health and nursing care by 2020, qualification hurdles for such positions have inhibited payroll gains, according to Koll at JPMorgan Chase.

“The barriers to entry into nursing and care giving are very, very high,” said Koll. “Barely 50 percent of Japanese applicants pass the test.”

For Japan’s central bank, the increasing share of overseas- made goods in consumer spending may deepen the challenge of quelling deflation, already entrenched in the economy since the 1990s. Core prices, which exclude fresh food, fell 0.2 percent in June from a year earlier.

Deflation Impact

“Reverse imports makes deflation even worse,” said Xing at the Asian Development Bank Institute. “If you move to overseas production, it increases room for cost reductions and that will reduce price levels further.”

Consumers may not mind.

The March at Taiyo Nissan starts at just over 1 million yen, according to the manufacturer, compared with more than 1.6 million for the bigger Japan-made Juke compact for sale at the dealer. Kakinuma says sales of the March have increased since production moved to Thailand, as companies that run fleets of vehicles try to cut costs.

“Consumers are far less concerned about where things are made,” said Robert Feldman, head of Japan economic research at Morgan Stanley in Tokyo and a former economist at the International Monetary Fund. “A Nissan car made in Thailand is still a Nissan car.”

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

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