Industry 4.0: Can (and Will) Japan Compete?

Japan was once counted among the top three countries in competitiveness, technological development, and innovative production management—a beacon of capitalism for the world.

Then, in what has been called the two lost decades after the collapse of its economic bubble, the light went out. Governmental policies and corporate efforts aim to free the country of economic stagnation, but it’s perfectly fair to ask if Japan will really be able to lead—even compete—in the coming era.

The Fourth Industrial Revolution and its emerging technologies—IoT, AI, robotics, and 3D printing, to name a few—are stimulating the development of new production systems and business models that will transform national economies. As such, most countries are implementing plans to support the development of Industry 4.0, regardless of their economic state. The profound scale and speed of this technological transformation, combined with new developments in the sciences (bio, neuro, green, nano, etc.), market volatility, and future uncertainty complicate strategies to promote productivity and growth.

In the spring of 2000, Harvard Business School’s Professor of Business Administration Michael Porter and his Japanese colleagues published Can Japan Compete? to examine Japanese successes and failures. The answer to the title question was a resounding yes, but another question followed: Will Japan choose to compete?

The authors of Can Japan Compete? concluded that, while the country did boast a number of strong industries, it had even more failures. Further, competition was limited by government protection of the local market and reinforcement of the keiretsu—a system in which companies serve each other in an artificial internal market, far from any shareholder pressures. While the idea behind this was to prevent company bankruptcy and preserve jobs, the ultimate result was detrimental to industrial and overall economic progress. In short, minor reforms and stimulus packages simply weren’t going to cut it.

The top six companies of the current Industry 4.0 era are all of a digital and AI-first mindset: Apple, Amazon, Alphabet (Google), Microsoft, Facebook, and Alibaba. For those keeping score, that’s five from the USA and one from China. The first Japanese company in the ranking is way down at number 32: Toyota Motors. Seeing this, it’s natural to ask the question again: Can Japan compete?

For the answer, let’s look at two studies: Readiness for the Future of Production, published recently by the World Economic Forum (WEF); and a study Gakushin University emeritus professor Michiya Morita and I are currently conducting about the implementation of Industry 4.0.

Readiness for the future of production

The WEF benchmark of 100 countries is based on two main components: the structure and drivers of production (Complexity and Scale), plus six key drivers that position a country to transform its production systems (Technology & Innovation, Human Capital, Global Trade & Investment, Institutional Framework, Sustainable Resources, and Demand Environment). The WEF’s findings rank Japan first in terms of structure of production, with a score of 9.0/10. However, the drivers of production component score drops to 6.8/10. This does not prevent Japan from ranking among leading countries, as we can see in the following graph.

So what are Japan’s strengths? Here are the highlights:
・Complexity: 1st (10/10)
・Demand Environment: 3rd (7.8/10)
・Production Scalability: 5th (7.5/10)
・Institutional Framework: 17th (7.8/10)

On the other end of the spectrum, we see clear room for improvement:
・Global Trade & Investment: 27th (6.2/10)
・Human Capital: 28th (6.0/10)
・Sustainable Resources: 39th (6.6/10)

If we dive deeper into Japan’s weakest areas, we find that the country is 93rd in GDP global trade, 84th in passing on critical thinking to the new generation (a crucial aspect of education that GLOBIS University is committed to improving), and 82nd in viable alternatives to nuclear energy.

All these numbers lead to two key questions:
1) How can Japanese companies make use of their powerful resources?
2) Does the government’s excessive protectionism numb healthy competition?

Implementing Industry 4.0

In 2016, my colleague Professor Morita and I began to research how Japanese companies envision and implement Industry 4.0. Since then, we have concluded that the level of implementation in Japan is low. Findings show that successful implementation takes place in companies with a high-performance corporate culture, a strong commitment from managers, and top-down leadership committed to promoting changes. In general, however, companies are reactive to external risks and avoid internet- or IoT-related developments, regardless of competitive advantage potential. Most even fail to accept that Industry 4.0 will become standard. Those pioneering Japanese companies prepared to face the challenges of Industry 4.0 hardly represent the whole.

The government’s Japan Smart Society 5.0 plan aims for reforms in individuals, companies, and social issues. However, it does not offer clear answers to chronic doubt and leaves wide, ambiguous fields for reform. When we compare this with the precise, detailed plans of other countries, most of which reflect an understanding that there can be no social welfare without fostering growth or productivity, the question arises again: Can Japan compete?

A white paper published in 2016 by the Ministry of Education, Culture, Sports, Science and Technology (MEXT) does not provide much reassurance. While it shows an accurate inventory of the current situation, it suffers a lack of analyses and diagnoses—and is as broad and ambitious as the mouthful of a title the ministry holds itself. Essentially, it offers a good general direction, but is still focused on ICT research without providing clear plans to foster change.

There also appears to be some confusion when it comes to fostering technological innovation: the paper proposes more scientists and data engineer entrepreneurs. Entrepreneurs, however, do not necessarily have to be experts—quite the contrary. Many founders of new leading companies did not complete a degree, meaning almost none were experts in the area of their first business.

There’s no doubt that Japan will compete in the global economy of the Fourth Industrial Revolution. The country has the key capabilities and competences—as well as understanding of its setbacks—to rank among the top three once again. However, it will be necessary to inject some life back into those competences that have atrophied. Japan will need a more aggressive approach to compete on the global stage, which leads us back to this: Will Japan choose to compete?