Falling Exports in Japan Hit Small Companies Hardest

By HIROKO TABUCHI
Published: March 25, 2009
SAITAMA, Japan — Most people who own an iPhone, a Prius or a Nintendo Wii have never heard of Porite, but this small company outside Tokyo makes a crucial part of their toys’ vital organs.
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Ayumi Nakanishi for The New York Times
Koki Kikuchi, left, and Masanori Kikuchi have little to keep them busy at a factory in Saitama, Japan.
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Ayumi Nakanishi for The New York Times
Masanori Kikuchi, left, with workers in a plant that makes and exports tiny parts for electronics. Demand has fallen sharply.
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Ayumi Nakanishi for The New York Times
Orders have all but dried up for Porite, a small company based outside of Tokyo, despite the ubiquity of the tiny copper bearings it produces.

The New York Times

Despite the ubiquity of the tiny copper bearings Porite churns out by the millions each day, orders all but dried up in September. Now shipments are down about 40 percent from last year, as consumers in the United States and elsewhere rein in spending on sophisticated electronics.
With little to do, the company’s 400 employees spend their days sweeping and cleaning, and about a dozen contract workers have been let go.
The finance ministry announced Wednesday that exports from Japan, the world’s second-largest economy, fell by a record 49 percent in February compared with a year earlier. It was the fifth consecutive month that exports have fallen. Shipments to the United States fell 58 percent. Japan’s trade surplus was down 91 percent, to 82.4 billion yen, or about $840 million.
Although the Japanese brands known worldwide have received more attention in the news, the bulk of the problems affecting Japan’s exporters are not at Toyota or Sony, both of which predict deep losses this year, but at small and midsize companies like Porite.
In a shift often overlooked even inside Japan, these virtual unknowns now account for about 75 percent of Japan’s manufacturing output and employ almost 90 percent of the sector’s workers.
In part because of the export slump, the nation’s economy was 12.1 percent smaller in the last three months of 2008 than in the period a year earlier, putting Japan on course for its deepest, longest decline since World War II.
“Japan has taken a disproportionate hit in the economic downturn,” says Yasuo Yamamoto, senior economist at the consulting firm Mizuho Research Institute. “Japan’s exports are concentrated in the very sectors that have been hit the most in the economic crisis, like cars and electronics.”
Porite is an example of an increasingly important group of Japanese exporters that have found a niche in making the advanced inputs — like tiny bearings and micron-thin films and wafers — that make other companies’ products tick.
Streamlined and focused, they bear little resemblance to the conglomerates that have long dominated Japanese industry.
“Because these companies aren’t household names, their emergence has been easy to overlook,” says Ulrike Schaede, a professor at the University of California, San Diego.
In fact, division of labor is developing on a large scale in Asia. Take the laptop, for example: Japan exports advanced materials and machinery tools to Taiwan and South Korea, which make microchips and other intermediate products to export to China, which puts together laptops to ship to the United States.
Similarly, almost 75 percent of the parts that make up semiconductors are made in Japan, though the semiconductors themselves may be manufactured elsewhere, according to estimates by Japan’s trade ministry.
But that has made Japan’s export industries especially vulnerable to the global downturn. On top of a fall in direct exports to the United States, Japan is exporting less to other Asian manufacturing centers like China, Taiwan and South Korea, as companies there scale back production.
Moreover, exports have been growing in importance for Japan. Overseas shipments have surged in recent years, fueled by a huge appetite for Japanese cars and gadgets among consumers in the United States and elsewhere, while the domestic economy has stagnated.
Last year, exports made up 15.9 percent of Japan’s gross domestic product, up from 9.8 percent a decade ago.
Even small companies like Porite rode the wave of globalization, opening factories in Taiwan, Singapore, Malaysia and Thailand — and, in 2002, Jefferson City, Mo. Now, more than 70 percent of Porite’s sales come from outside Japan.
Economists predict Japanese manufacturing will remain sluggish for some time. Sentiment in Japan’s small and midsize industries is at its worst in almost 20 years. Trouble at many of Japan’s regional banks, the lifeline for many smaller companies, has raised concerns of an impending credit crisis.
Over all, industrial production fell 10.2 percent in January from a month earlier, the biggest fall on record, and is expected to have declined sharply in February.
“Companies are cutting back production at an incredible pace to reduce inventories, and that’s being reflected in the export figures,” said Hiroshi Shiraishi, a Tokyo-based economist for the bank BNP Paribas. “We may see exports come back a little once inventories are brought down,” he said, “but a full recovery is further down the road.”
Still, small manufacturers that do survive the current downturn will bounce back more quickly than many larger exporters, said Ms. Schaede of the University of California, because they are such dominant players in their fields. “They are extremely focused, and they will be in a very strong position once we see economic recovery,” she said.
But many fear a “hollowing out” of Japanese technological expertise by then as companies fail.
“The small- and medium-sized enterprise sector is an immense resource. It’s Japan’s beating industrial heart,” said Damian Thong, Tokyo-based analyst for the brokerage firm Macquarie Securities. “When you start getting more moving overseas, or go out of business, the concern is that you can’t get it back. Once that happens, Japan’s industrial base breaks down.”
Tatsunosuke Kikuchi, father of Porite’s president, Masanori Kikuchi, founded Porite in 1952. His first break came when he landed orders from Hitachi to make bearings for Japan’s first domestically produced electric fan. Since then, it has been a race to develop the smallest, sturdiest bearings for ever-smaller gadgets.
Porite takes copper powder and molds parts to exact specifications, allowing electronics and auto companies to develop smaller, more complex motors. The company estimates it holds about a 70 percent global share in bearings for consumer electronics like the iPhone, as well as a 20 percent share in bearings used in auto motors.
“Every time we get an order for smaller, more complex specifications, I think it’s impossible at first,” Masanori Kikuchi said. “Now, we’re talking two-thousandths of a millimeter. And we’re going to go even smaller.”
Japan is desperate to save companies like Porite. The government has put aside 20 trillion yen, about $200 billion, to back bank loans to small and midsize companies to bolster lending and avert a credit crisis. It has also introduced measures to subsidize smaller companies to keep idled workers on their payrolls.
“Small and medium companies have been the most vulnerable in the bad economy,” says Fumio Sato, a trade ministry official in charge of an emergency help line for struggling small and midsize companies. He says calls to the line have surged since January.
“In Japan, even the fate of small companies reflects the world economy,” he said.