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Japanese Economy Update

Industrial implications of the reactions to covid-19

  Senior Research Fellow


Protectionism has led to re-globalization and de-globalization of the manufacturing industry

Protectionist measures that have become increasing popular in the recent years have affected the manufacturing sector by bringing to light the risk of depending on the global value chains. Since it became costly to import certain essential intermediate and final goods from countries which have become subject to higher import tariffs, sources of these goods have been shifted to other countries. In this sense, it is the reform of the existing global values chain, or “re-globalization”, that is taking place. However, in other cases, the domestic production of theses goods has been promoted. In this case, it is a movement towards delinking of the existing global value chain, or “de-globalization”, that is taking place. These changes should have major influences on the geographical location of the manufacturing industry.

What will be the industrial implications of the reactions to covid-19?

In the past couple of months, we are also witnessing a rapid spreading of a new disease of corona-virus origin (covid-19). In order to contain further spread of the disease, various emergency measures have been taken: shutdown of factories, restrictions on travel, calling off of events, closure of schools, and confinements to homes. They are affecting our daily lives. At the same time, they have brough to light some traditional features of industries that could be transformed. If it will be transformed, they may have long-lasting impacts on the industries, not only the manufacturing but also the services industries.

In the manufacturing industry; freedom from physical collaboration of workers

One of the first measures that was taken when covid-19 became a concern was to shutdown or extend the closure period of the factories (as was the case in China). It was to stop people gathering and to stop creation of infected clusters that could spread the diseases to a wider population. As a result, both the blue-collar and the white-collar workers were prevented from going to work, production in these factories stopped.

However, if you come to think of it, factories do not require workers to gather. Of course, collaboration and division of labor is important in modern industries, as Adam Smith emphasized. However, it does not mean that blue-collar workers have to gather physically. Thanks to automation and robotization, production can be doe by machines, and workers need only to monitor and intervene when accidents happen, but that can be done through remote operations vis internet. In the case of white-collared workers, it is much easier to shift to telework as many companies in Japan are now actually asking workers to do.

Factory-based manufacturing may stay but the recent incident may accelerate the recent trend of shifting workers from physical to digital collaboration.

In the services industry; freedom from inseparability of production and consumption

In the services industry, face to face transactions has been considered to be natural because of the inseparability or simultaneity of service production and consumption (i.e. service cannot be stored). However, the widespread of internet has made services to be free from physical contact: Services such as call-centers have developed in global scale, online retail service has become indispensable, and asking questions by chatting is now common. The world has become increasingly flat. Those services which has been considered to be difficult to shift online, such as medical and long-term care, could become more popular if we can make use of robots and remote surgery devices such as da Vinci, probably reinforced by haptic technology.

What has been mentioned so far with regards services are recent development which removes the constraint of inseparability or simultaneity in terms of distance. Another constraint, inseparability or simultaneity in terms of time, can also be removed if we can make use of artificial intelligence (AI). If AI can learn how to treat customers and patients from inputs by the shopkeepers, doctors, and nurses, it can provide services without the real-time involvement of these service providers.

Undoubtedly, it is too haste to expect everything to shift to this direction immediately. But the measures that has been taken to prevent widespread of covid-19 has brought to light some of the traditional direct human involvement in industries that is now not necessarily essential. It would most probably accelerate the move towards less involvement of that kind. It could reshape industries and the way humans work in a significant way.

Risks in the industrial transformation

If this is the direction that our economy is going to take, we need to take note of the risks that my involve.

First, the shift towards the direction mentioned above, if it comes true, will mean that we will be relying more on internet and electricity. As far as they perform satisfactorily, there would not be much of a problem. However, there are risks of cyber-attacks, system failures, and power blackouts. We need to prepare for these risks. The preparation should partly overlap with the efforts toward creating business continuity plans in case of earthquakes, tsunamis, and other natural disasters.

Second, the industrial shift to less personal contact means that the strength of the Japanese way of business will lose its significance. One of strength of Japanese business in the manufacturing industry has been in the transfer of tacit knowledge through close personal contact among workers. In the services industries, it was the hospitality, or “omotenashi” expressed through close personal contacts between the workers and the customers. These traditional business style will become increasingly difficult to show their virtues.

How to adapt to these expected changes and to create comparative advantage in the new industrial landscape will be an important task that Japanese economy is going to face in the near future.