HIGASHIOSAKA, Japan, Aug 22 (Reuters) – Small factories in the western Japanese town of Higashiosaka have fueled the meteoric rise of the country’s biggest brands for decades – but a weak yen and rising costs have accelerated a slow decline and are reshaping the industrial core.

Home to around 6,000 businesses, 87% of which have fewer than 20 employees, the city is emblematic of how these forces are pushing small Japanese manufacturers to a tipping point.

The Higashiosaka workshops create metal components for everything from train seats to ballpoint pens, and have long relied on giants such as Sharp, Panasonic and Sanyo for orders.

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Now Sanyo is gone, acquired by Panasonic. Work in general has dried up in recent years in the face of competition with South Korea and China; When Taiwan’s Foxconn acquired Sharp in 2016, it moved much of the company’s manufacturing out of Japan.

The amalgam of problems facing Higashiosaka – an aging population, outsourcing and a declining currency – reflect the problems that have eaten away at the foundations of the world’s third-largest economy and its global exports, which have reached 83.1 trillion yen ( $610.54 billion) last year.

One factory in the city, aircraft component maker Aoki, is turning to the food industry after being hit hard by the pandemic. Another, pneumatic drill parts maker Katsui Kogyo, has raised prices for the first time since its start in 1967. Lampshade company Seiko SCM has cut production and is seeking to revive Higashiosaka’s manufacturing industry. by converting part of its head office into a shared workspace.

“It’s like being the frog that is slowly boiled alive,” said Hiroko Kusaba, CEO of Seiko SCM. “We all thought big brands would always protect us, but that’s not the case anymore.”

HUMAN CONNECTION

Over the past six months, the value of the Japanese yen has fallen from around 115 yen to the dollar in early March to over 130 yen in August. And the pain of COVID lingers: 67% of small businesses in Higashiosaka say they are still suffering from the pandemic, according to a survey conducted in April by the local chamber of commerce.

For these companies, weathering the economic storm is not just about surviving, but about preserving the industrial ecosystem.

Small and medium enterprises represent 99.7% of businesses and 68.8% of employment in Japan. But those same companies only account for 52.9% of the economy, according to a 2016 government survey, the latest data available.

The area around Higashiosaka has a history as a manufacturing center dating back hundreds of years. The city still has industrial enclaves where tiny factories are wedged between houses, hammering, sawing and shaping metal from early morning until dusk.

This hodgepodge of production has resulted in human connections and a sense of community, said Hirotomi Kojima, general manager of Katsui Kogyo, the aerial drilling company. This provides a crucial support network, but also makes it difficult to pass on higher costs.

Kojima raised its prices in October. Material costs have skyrocketed since then, but he is reluctant to raise prices again, fearing he will lose longtime customers.

They asked Kojima for favors, such as cost sharing or “ease” on price increases.

“The closer I am to the customer, the harder it is to start that conversation,” Kojima said.

Torn between protecting those ties or harming his business, Kojima is seeking new clients for the first time in 10 years as CEO.

He often visits Hironobu Yabumoto, a close friend who manages another pneumatic drill manufacturer. Although they are in direct competition, they place orders and share customers.

“We want the manufacturing industry and this culture to stay,” and that’s a bigger priority than being the last one standing, Yabumoto said.

SLOW DECLINE

Over the past decade, Kusaba and Kojima have seen at least one factory quietly close every year as aging owners die, fall ill or close their businesses without a legacy.

The surviving companies are welded. Kusaba, who is out of town, said the locals – like the baker and the rice seller – ground him in the community.

“And they come and tell me how bad business is, how they had so many customers before when manufacturing was booming, and how times have changed so much,” said Kusaba, CEO of Seiko SCM for 12 years.

That’s why she’s turning her own business on its head to protect her bottom line and help Higashiosaka’s makers.

In June, she reduced her company’s die-casting department to three people from six and reduced the number of machines. In its place, it creates a collaborative workspace and opens a “shared factory”, where users can pay to access machines and resources that will reduce fixed costs and increase production.

“Big brands, big manufacturers — they’ve let us down,” Kusaba said. “Now we have to communicate directly with the consumer. We can only rely on ourselves.”

Her decision means there will be more die-cast work for her competitors, but Kusaba said she’d rather do that than see the entire industry fall into disrepair.

“Competition is not the way to survive. Rather, we must join forces,” she said.

NOT ESSENTIAL

Aoki, who has been labeled “non-essential” during the pandemic, is trying to avoid being dragged down by an airline industry wrecked by COVID-19. CEO Osamu Aoki has pinned his hopes on a different area: food manufacturing.

He designs and builds a machine that processes meat. For now, it sits in the Aoki factory while workers fine-tune the device.

Although he predicts the food industry will bring more stability, Aoki expects his electricity bills to double in August – an increase of 8 million yen that will require a 4% increase in income to cover. .

Japan’s manufacturing sector has traditionally relied on selling value-added products, where a weak yen boosts profits. But that no longer seems true, Aoki said.

“I think it’s a calculation,” said of the currency slump. “Now is the time to reevaluate.”

MANUFACTURING TRADITION

Changes and experiences in Higashiosaka do not guarantee its survival, nor that of Japanese small business culture.

“We won’t see total annihilation if factories can bear the extra costs…but the longer the prices (high prices) go on, the harder it will be for them,” says Naohito Umezaki of the Chamber of Commerce of Higashiosaka.

He added that the city’s social fabric was already fraying as family businesses closed for good; a top priority is finding people to take over and preserve the manufacturing tradition.

At Aoki, 22-year-old Yuto Miyoshi asked the CEO for advice on whether he should succeed his father in running the family welding business in a nearby town.

“My father often warns me about the difficulties of running a business,” Miyoshi told Aoki.

But he added that on a rare occasion, his father got a little too drunk, and blurted out what an estate plan would mean for him.

“He said, ‘I’d be so happy if you took over,'” Miyoshi said.

($1 = 136.1100 yen)

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Reporting by Sakura Murakami. Editing by Gerry Doyle

Our standards: The Thomson Reuters Trust Principles.

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