Japan is not an “outdated manufacturing nation” ... the “invisible strength” of Japanese companies that China and South Korea still cannot match

After the end of the Cold War, Japan's manufacturing sector was shaken by the rise of lower-cost competitors such as South Korea and China. Some companies, however, have shifted strategy, moving away from product assembly and commoditised businesses and advancing the transition to “Japan Inside,” with a focus on upstream areas such as design and materials.

The smile curve shown in the chart indicates that upstream activities, including design, high-performance materials and manufacturing machinery, as well as downstream activities such as distribution and retail, raise profit margins. It explains that concentrating on upstream operations provides capabilities that European and US companies cannot easily match. Apple and UNIQLO have maintained their design capabilities and commitment to upstream materials, while keeping downstream costs down through outsourcing and direct sales.

Former consumer-electronics giants such as Sony and Panasonic are increasingly withdrawing from consumer-facing end products, while more Japanese companies are restructuring around supply systems for upstream products, materials, components and factory automation. This shift can be viewed as a move to specialise in developing and supplying sophisticated materials and equipment, drawing on technological expertise and production infrastructure.

Japanese companies are also moving away from commoditised businesses in the semiconductor sector and concentrating resources in upstream and downstream areas such as materials and packaging. Japanese companies supplying new materials account for a significant share of the market, while the development of supercomputers such as Fugaku and research and development in advanced materials are sources of international competitiveness. This kind of “invisible strength” is also regarded as important from an economic security perspective.