'Made in Japan' Brand at Crossroads

46% of large manufacturers surveyed by the Japanese government in August said they would move production bases abroad if the yen stays around 76 yen against the dollar for half a year.

As more firms face a tough choice over whether or not to move production overseas to escape the impact of the relentless rise of the yen, the "Made in Japan" brand is at a crossroads, say analysts.

According to the Ministry of Economy, Trade and Industry, some 46% of large manufacturers it surveyed in August said they would move production bases abroad if the yen stays around 76 yen against the dollar for half a year.

Currently near 77 yen to the greenback, the unit's strength risks causing the "collapse" of the Japanese auto industry, Toyota executive vice president Satoshi Ozawa said last week.

Toyota's first half net profit dived 72% partially due to the impact of the strong currency. For the maker of the Prius hybrid, every one yen rise against the dollar can wipe tens of billions of yen from annual operating profit. In the year ended March, Toyota made around half of its cars in Japan, more than rival Nissan.

The nation's biggest automaker, along with other Japanese giants such as Sony, Mazda, Honda and Canon all reported recent quarterly earnings that saw profits eroded by the impact of the strong yen and the March disasters.

A strong Japanese currency hurts the nation's key export sector by making goods made in Japan less competitive abroad and cutting into repatriated overseas earnings.

Prime Minister Yoshihiko Noda has spoken of his fear of industrial "hollowing out" as companies threaten to take jobs overseas. Japan's efforts to intervene in markets to weaken the yen have had little lasting impact. "Industrial hollowing is now more serious than in the past as Japanese firms are forced to move to secure profit," said Takunori Kobayashi, an economist at Daiwa Institute of Research.

For semiconductor foundry and data storage firm Elpida Memory, the shift of 40 % of the firm's production from its home in Japan to Taiwan is an imperative move as a high Japanese unit erodes profits.

"Under this currency situation, we have to carry out (the plan) no matter what," president Yukio Sakamoto said recently when the chip maker announced a net loss of 56.7 billion yen ($735 million) in the first half ending September.

Recent supply shocks caused by the March earthquake and tsunami have only helped accelerate the process, say analysts. Wacom, holding more than 80% of the global market for pen-input tablet devices, is setting up a parallel component production base in China after the March earthquake and tsunami triggered power shortages and crippled component supplies at home.

"We have to minimize risks of supply," said Wacom President Masahiko Yamada. "I'm aware of concerns about industrial hollowing, but national borders have already been disappearing," he said. "Staying here does not always benefit Japan. Should we put everything within the fence or should we go out and contribute to the country from outside? I will choose the latter."

Panasonic, which last month forecast its biggest annual loss in a decade because of a stronger yen, is moving its procurement operation to Singapore from Osaka.

Yet other firms are reluctant to shift from an industrial system famed for its ability to produce high quality precision instruments and components crucial to everything from cars to screens for smartphones.

"In 10 years, our rivals will change from Japanese to Chinese," said Kazuma Sekiya, president of Disco, a Tokyo-based firm controlling 80% of the global market for machines that grind and cut microchips.

"Building factories in China means we will give our know-how and personnel resources to our future rivals," Sekiya said.

"I don't think Japan will completely lose the status of a major manufacturing nation," said Takahiro Sekido, chief economist at Credit Agricole Securities Asia in Tokyo. "But to survive, Japanese makers need to further concentrate on what no one but Japan can do."

An example lies in microprocessor firm Renesas, which has a roughly 40% share in the global market for automobile engine and brake system microcontrollers.

Production was decimated by the March disasters and a shortage of its processors sent shockwaves through the global auto industry. For many it illustrates that Japan remains a "manufacturing kingdom".

Sekiya believes Japan will survive as a manufacturing nation whose craftsmanship can be traced back centuries when master smitheries created swords famed for the sharpness of their blades.

"In Japan, we have excellent suppliers and diligent workers," he said. "Even if we built factories overseas, we would have to bring almost all the parts from Japan."

Copyright Agence France-Presse, 2011

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