Oct. 22 (Bloomberg) -- When Shigeo Aiba is worried about the survival of his company, it’s time to pay attention.
Aiba is president of Togo Seisakusyo Corp., a Japanese maker of industrial springs that traces its roots back more than 150 years to when Jyouuemon Aiba began repairing farm equipment among the rice fields of Chita peninsula 270 kilometers (170 miles) southwest of Tokyo.
The business, which survived the effects of the Great Kanto Earthquake, defeat in World War II, destruction by a typhoon and the collapse of the asset bubble in the 1980s, is now struggling to survive Abenomics.
“The cost of wages will go up while Abenomics, which is seeking to boost inflation, will raise the price of everything, adding to our costs,” said Aiba in an interview at Togo’s factory in Aichi. “We will be buried without a new source of revenue.”
Togo represents the cost of Prime Minister Shinzo Abe’s effort to end 15 years of deflation by increasing fiscal and monetary stimulus and promoting wage growth and spending. While Japan’s big exporters such as Toyota Motor Corp., Aiba’s biggest customer, are benefiting from a weaker yen, many domestic producers like Togo Seisakusyo with fewer than a thousand staff are struggling. Companies about the same size or smaller than Togo employ two thirds of Japan’s workforce.
Abenomics has sent stocks to the highest level in five years and lifted profits of Toyota as a weaker yen boosted the value of overseas earnings. Aiba says the government needs to pay more attention to smaller companies like his that face higher wage and materials costs with little immediate benefit from the currency’s decline.
Japanese companies with capital of at least 1 billion yen ($10 million) earned a record 10.5 trillion yen in the April-to-June quarter, more than double that of businesses in the 10 million yen to 1 billion yen range for the first time, according to figures compiled by Bloomberg from the Ministry of Finance dating back to 2000.
Toyota’s domestic production has fallen to 3.5 million vehicles a year, from a peak of 4.2 million in 2007. Togo’s sales have dropped 10 percent from a peak of 39 billion yen in 2007 and it has cut its workforce by about 20 percent since 2008, said Aiba.
Togo has been a supplier to Toyota almost since the carmaker started 76 years ago. The supplier’s car parks for executives are lined with rows of black Toyota Crown sedans. The 15 minute drive from Akaike station to Togo’s headquarters passes block after block of factories, most of which supply the world’s biggest automaker.
The fortunes of supplier and customer are reflected in official data. Large manufacturers’ confidence rose in September to the highest level since 2007, an Oct. 1 central bank report showed. Consumer confidence fell for three of the past four months through September, while rising energy prices pushed up consumer prices excluding fresh food in August at the fastest pace since November 2008.
“Small companies in this area will remain cautious for a while,” said Nobuhiko Hayashi, executive director of the local branch of the Japan Academy of Small Business Studies. “It’s in their DNA after going through economic hardships. We don’t yet know if Abenomics will succeed.”
Demand for loans by small manufacturers fell to 1 from 2 in October compared with three months ago, while the level of borrowing at large producers rose to 5 from 2, according to a Bank of Japan index that gauges responses from a survey of senior loan offices at the nation’s top 50 lenders.
Togo’s plants are part of an industrial sprawl around the city of Nagoya that stretches 40 kilometers north along the Kiso river and another 50 kilometers south down the Chita peninsula, where Jyouuemon Aiba traveled from village to village repairing hoes and rakes a century and a half ago. Occasionally, between the lines of factories, glimpses of a few patches of remaining rice fields can be seen.
The region was almost all farmland when Jyouuemon Aiba began his tool-repair business. That was only a decade after U.S. Commodore Matthew Perry arrived in Japan with his Black Ships in 1853 and forced the Tokugawa Shogunate to open the country to trade after two centuries of isolation.
The itinerant blacksmith eventually settled in the village of Haruki where he incorporated a company in 1881 to make farm equipment, including a patented threshing machine. As the business grew, examples of Togo’s tools found their way as far afield as China and Korea. Japan’s Showa Financial Depression in 1927 triggered by bad debts from the vast number of bills issued after the Great Kanto Earthquake caused sales to collapse and with the onset of the Great Depression in the U.S. in 1929, Togo was driven to the edge of bankruptcy.
The company’s revival came in 1943 at the height of the Second World War, when Togo’s third-generation president, Yoshiichi Aiba, decided to start making springs for trucks, eventually becoming a supplier to Toyota.
Hyperinflation followed by tightening measures in the aftermath of Japan’s defeat again pushed the company to the brink of ruin and it couldn’t afford to pay its workers. It was revived this time by the Korean War, with Japan’s automakers unable to keep up with demand for vehicles.
The company borrowed 3 million yen (about $8,300 at the time) from the U.S. government and acquired land for a new factory on the site where its headquarters are today.
As Japan entered the hyper-growth era in the 1950s, Togo boomed along with the economy. Skilled labor became scarce and like many Japanese companies at the time, Togo provided buses to pick up employees from home and built a child-care center, cafeteria and dormitories to retain workers.
Just as business was booming, its offices and factories were ripped apart by a typhoon in 1959. With a 10 million yen loan, the company rebuilt and prospered along with the fortunes of Toyota, surviving the revaluation of the yen and the oil shock in the 1970s as domestic vehicle production soared.
In 1998 the current president took the helm with Japan deep into the aftermath of its asset bubble implosion. One of his first tasks was to fire staff. The global slump in 2008 was even worse and Aiba let the contracts of his 100 part-time workers expire, the company’s biggest labor reduction.
“We are still struggling to emerge from that downturn,” Aiba said, adding he doesn’t see a prospect for sales to surpass the record reached six years ago.
Manufacturing jobs in Japan have fallen by one third since the peak in 1992, according to the statistics bureau. Manufacturers filed the most number of bankruptcies after construction businesses from 1998 through 2012, according to Tokyo Shoko Research Ltd. In recent years, much of that decline was blamed on a strong currency with the yen reaching a postwar record of 75.35 to the dollar in October 2011.
“I want manufacturing back and the auto industry is in the center of it,” Prime Minister Abe said in a speech to auto industry associations on Jan. 7. “It’s wrong that hard work and wisdom don’t help you compete because of a super-strong yen.”
Partly due to Abenomics the yen has lost almost one fifth of its value in the past year, to around 98 per dollar, helping Toyota forecast the highest profits in six years in the 12 months through March.
“Japan’s economy is recovering and business investment is picking up,” said Hiromasa Yonekura, chairman of Sumitomo Chemical Co. and head of Keidanren, a lobby group for Japan’s biggest companies, at a press conference on Oct. 11. “The recovery probably hasn’t so far been felt at some companies but many will be able to realize it going forward.”
In the meantime, Togo has set up two departments devoted to finding alternative sources of revenue. One is developing products from its springs business to tap new markets. The other is trying to enter new markets, such as a light that helps plants grow indoors. Tokuo Hayakawa, a director of the general administration department, said neither is successful yet.
Meanwhile, like thousands of other suppliers around Toyota City, east of Nagoya, Togo’s future remains tied to the auto industry, an historical bond that transcends economics.
When Aiba’s father Touichi died in 2006, it was his friend and golfing buddy Shoichiro Toyoda, former head of Toyota and a son of the founder, who spoke for 20 minutes at the funeral, remembering the times he was scolded by the elder Aiba for transgressing the family’s strict etiquette on the course.
“Toyota is the key reason we have grown,” said Hayakawa. “Meeting with Toyota’s standards is tough. They are always asking us to lower costs while making our product better.”
Aiba said Abe’s efforts to lower the yen and help industry are only a step in the right direction and the government needs to help the bulk of businesses in the country.
“We won’t make any progress without taking some action,” said Aiba, 58. “But I want them to pay more attention to small companies. Japan’s manufacturing would die without them.”
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