Navigating post-COVID profits, demographic challenges, and sustainable solutions - insights from the president of Japan Pallet Rental.
After a series of serious supply chain disruptions caused by COVID-19, coupled with some increased demand for goods worldwide, the shipping and logistics industry has reached some record profits between 2020 and 2022, which has finally come back to normal by Q1 2023. What have these changes done to your company and your industry in general? From a macro perspective, what is your outlook for the next year within this industry?
We mainly operate our business within Japan. The reduction in consumers' opportunities to go out due to the COVID-19 pandemic outbreak has had a serious impact on the restaurant industry. On the other hand, consumption of hygiene-related products such as disinfectants and hand soaps, and food products for household use also increased. In this way, the decrease and increase in pallet demand were offset to some extent. This can be said to be a reflection of the characteristics of our business, which serves a wide variety of industries as customers.
Rising prices of raw materials for products and energy such as fuel and electricity are having a strong impact on our customers. For us, this is an issue related to the procurement price of pallets for rental and the cost of operating pallets.
Looking at data on Japan's total domestic logistics volume, it has not yet recovered to pre-pandemic levels. It has been pointed out that one of the reasons is that real wages have not increased amidst inflation.
At the same time, Japan is facing a serious labor shortage due to its rapidly declining birthrate and aging population. The rental pallet service we provide has an aspect of the value for logistics automation. This is a factor that increases the demand for pallets in the Japanese industry.
We predict that demand for pallets will continue to rise, as the labor shortage is becoming increasingly difficult to deal with, and the impact will outweigh the downward pressure caused by slumping consumption.
Many companies are moving their manufacturing away from China and taking their production back to Japan. Simultaneously, the Japanese yen is very weak against the US dollar, making the export of Japanese products very competitive. It seems that this is not such a bad year for the Japanese economy, especially compared to the US or Europe. Do you agree with this argument? How do you think these two major trends will impact your business in the years forward?
I suppose that the trend to move manufacturing out of China appears to be accelerating because companies are considering factors other than exchange rates and wage levels. The trend of a weaker yen is probably a positive factor for manufacturing in Japan. I think that going forward, strategies for production bases will be established not only in Japan but also globally. Japan's strength lies in producing high-quality products and services through continuous improvement. While it is good at partial optimization, total optimization has not progressed, and it has been pointed out for many years that labor productivity is low. This also applies to logistics.
We see this as an opportunity to significantly advance our business, which aims to optimize the entire supply chain through pallets.
The shrinking of the Japanese domestic market isn't only caused by the present financial situation but also by the nation's demography. In the next 15 years, it is said that a third of the Japanese population will be over 60 years old, which will impact to some extent how Japanese corporations will handle their legacy and know-how and provide enough workforce to manufacture their products. What are some of the challenges that this demographic change will cause, and how are you reacting to them?
Japan's demographic shift and aging population are having a detrimental impact on the logistics sector, which relies heavily on physical labor and a substantial workforce. Pallets are a commodity used in the logistics field. However, it is somewhat embarrassing to acknowledge that pallets are not as extensively utilized in Japan as they are in the US, Europe and certain parts of Asia. Instead, there is a greater dependence on manual labor for these tasks. Given the long hours of work and lower-than-average pay, the younger generations are not really drawn to work for logistics companies. It is worth mentioning that improving the financial incentives within this sector could potentially attract a larger workforce.
Japan's labor shortage is negatively affecting the country's logistics economy as a whole due to the unavailability of human resources. It is anticipated that in 2024, the Japanese government will introduce legislation aimed at reducing working hours and prohibiting overtime work. While this move is intended to improve work-life balance, it may also limit access to the necessary labor force, particularly impacting our ability to extend warehouse employee working hours. The ongoing demographic issue of an aging population presents a persistent socio-economic problem that will continue to pose significant hurdles for us.
The Japanese government wants to increase the number of truck drivers by reducing overtime and improving working conditions. The overtime limit for Japan's smallest workforce is currently limited to 360 hours, but the Japanese government has delayed applying this to truck drivers.
There are predictions that the new regulations on overtime work for truck drivers will cause a decline in income and lead to an even more serious labor shortage. However, it is time to overcome the effects and make reforms. This is because supply chain disruption due to labor shortages is recognized as a real risk.
Modern Japanese companies' logistics systems are highly managed. On the other hand, it is also true that inefficiencies remain at the intersections between companies. The key to improving the low labor productivity in the logistics industry is the total optimization of the supply chain.
A solution we came up with is palletization, a method that can streamline our operations and reduce the lead time for truck deliveries. By implementing palletization, we believe that we can save about one-fourth of the original loading time, ultimately enabling us to ensure timely product deliveries. However, it is a long process, which requires revolutionizing the entire logistics system. To pursue this solution, we will need to engage in substantial discussions with the government.
Palletization requires time, so it can't be done before the government finalizes its legislation on overtime work. In Europe, it is standardized, following uniform shapes and dimensions, which is the only aspect that can simplify the work. To facilitate palletization, logistics bases in the manufacturing and wholesale industries may require capital investment to change conveyors, etc. However, palletization is not as widespread in Japan as it is in Europe, and standardization is the critical element.
For palletization to gain broader adoption in Japan, it is imperative that pallets adhere to standardized dimensions and sizes. This approach aims to simplify the process and reduce our burden on manual labor for loading and unloading trucks. In achieving this, government support plays a vital role in advancing our business plans.
The adoption of standardized palletizing systems could yield significant benefits for our company. We have had a standardized palletizing system in place since its introduction by JIS in 1970. In fact, we were pioneers in introducing this standardized palletizing system in Japan. As a result, we are well-prepared to offer pallet rental services. This could serve as a practical solution for companies that standardized palletizing systems in their facilities. We are eagerly anticipating developments in the coming months, particularly in light of the government's plans for 2024.
In view of this prevailing labor shortage and these opportunities, digital transformation is significant in optimizing the logistics industry. As we move forward, we increasingly see the utilization of autonomous vehicles in handling goods in ports, the application of AI in managing shipping traffic and the incorporation of many other technologies. You have developed many systems such as the X-Rental Open Platform or TranOpt to optimize the routes being used for greener logistics. How do you believe DX will impact the global logistics and shipping industry? How do your digital initiatives lead to safer and more efficient operations?
Our developed system is designed to streamline operations and enhance transparency in the logistics industry.. This chain extends to warehouses, dispatch centers, wholesalers, and ultimately, retail companies. Numerous companies are part of this distribution network, all of which need digitalization. However, it is difficult for individual companies to develop solutions that can be applied to the entire standardized supply chain. We digitize our pallets to help companies share and utilize logistics data.
At our company, our primary focus is simplifying operations and fostering a B2B approach with our clients. We aim to work closely with our customers, offering logistics solutions and digitalization services. Our programs, including the X-Rental Open Platform and TranOpt, are primarily designed to streamline operations and enhance transparency and traceability. Digitalization remains the key factor in achieving these goals.
It has the potential to contribute not only to logistics solutions but also sharing data around logistics. Data sharing streamlines various operations, for example, inspection work. At the logistics centers in Japan, there is still a lot of manual work such as re-entering data, and there are many tasks that should be improved. This approach eliminates the need for truck drivers to wait during inspections, further enhancing efficiency.
Going the extra mile, we have taken the initiative to RFID-tag every pallet we introduce in the logistics industry. This technology enables our customers to access detailed information about a specific pallet and product. As a result, they can link digitized pallet services with their own logistics systems, simplifying their operations and conserving valuable time and resources. While not all the customers in our portfolio have adopted these systems yet, we are committed to providing this benefit to anyone who wishes to leverage it. Our dedicated efforts are centered on the best interests of our customers, and we collaborate closely with both our existing and potential partners.
Environmental friendliness is a key theme in the logistics sector; hence, we see many of the larger district companies like Nippon Express trying to develop such a system. As we wait for new types of fuel to be developed for ships and trucks, we look at ways we can optimize the current transportation potential we have. Building on that, what other types of sustainable initiatives is your company releasing not only to enable your firm to be eco-friendly but also to support your clients to increase their eco-friendliness?
As a provider of pallet rental services, JPR is committed to environmental sustainability. Our approach allows clients to eliminate the need for disposable pallets with plastic packaging. Through rigorous performance evaluations conducted by an independent environmental assessment agency, we have demonstrated that our pallet rental services have resulted in a remarkable 76% reduction in CO2 emissions for our customers in Japan. Our objective is to further increase this figure in the near future, ensuring that anyone using our rental services actively contributes to a greener environment.
Rental pallets operate within a closed circuit, with most of the plastic pallets having a life cycle of 20 years, significantly contributing to a more eco-friendly ecosystem. Previously, we used virgin plastics in pallet manufacturing, but we have transitioned to incorporating 30% recyclable plastics into our pallets while maintaining their strength, durability, and longevity. Our ongoing research and development efforts are now pushing the boundaries to reach a milestone of using 50% recyclable plastics in our pallets. These initiatives have garnered positive reviews from the media, and we have witnessed increasing interest from foreign companies in utilizing our services.
You recently started a relationship with UPR Co., Ltd. in April in order to run together your X-Rental Open Platform. Can you tell us more about this partnership and about its goals? Are you looking for new partners, and what would be a partner of choice in your opinion?
While UPR is considered our rival company, we are working on fostering cooperation with them. The X-Rental Open Platform is a solution we have devised to simplify the processes involved in rental services. In the Japanese market, numerous rental services are in operation. Picture a logistics center conducting its daily business, utilizing a variety of pallets and solutions. Operators often find themselves manually inputting information from different companies into multiple databases, a time-consuming and unnecessary task. The X-Rental Open Platform serves as a system that consolidates various logistics solutions and pallet rental services for end-users. The primary goal of this system is to enhance efficiency for our users. This approach is closely aligned with our emphasis on standardization, and we are keen on fostering more partnerships of this nature.
It's important to note that this system thrives because of the active participation of companies that provide services and input data into this unified system. This collaborative development effort between UPR and JPR benefits a large number of companies. We are currently putting it through its paces, with plans to launch the full operation of the system in Japan this coming November.
Would you be looking for this kind of partnership in the future? What should be the profile of your ideal partner?
Pallet rental isn't extensively used in Japan as we would like it to be. The Japanese government is exploring the increased adoption of rental pallets over disposable ones as a viable solution. Our objective is to establish partnerships with companies that use their own pallets. In Japan, it is said that about 500 million pallets are distributed all over the country. The standardization of the user interface is expected to promote pallet transportation between companies, which is currently difficult with in-house pallets. Our aim is to encourage more companies to take advantage of our rental services, platforms, and solutions which are designed to simplify their operations. Despite the presence of several rival companies, we seek opportunities to collaborate with them to make processes more efficient, ultimately conserving valuable resources.
With your first operation in South Korea in 1985 and after going to different countries for your international operations such as Thailand and China, and being the first Japanese company to receive a certification for EPAL Euro Pallet Sales in 2022, how do you plan to further develop your overseas business? Would it be through M&A, or are there any specific markets that you would like to target as part of your international expansion?
We have already set up a company for international rental pallet business in Thailand and have built a network of partnerships in China, Korea, Taiwan, etc. Our goal is to enhance our business presence in these locations. The Asia Pallet System Federation(APSF) is responsible for standardizing pallet usage across the ten Asian countries. While each country has its unique logistics routes and transportation methods, we strictly follow the standards set by APSF. As a result, we anticipate substantial growth as we introduce our rental pallets and services to more companies, particularly in Asia, where we already have a strong foothold.
Despite being more cost-effective and eco-friendly, saving time and allowing your clients to reduce their overall logistics costs, why are palletization and the rental model for pallets not widely used in Japan and Asia?
The simple answer is the cost. In most Asian countries, labor costs are relatively lower, making it more economically viable to rely on inexpensive human labor rather than investing in the purchase or rental of pallets, which can be quite expensive. This cost consideration has been a key factor inhibiting the widespread adoption of pallets. However, we have noticed a shift in some Asian countries like Thailand and Malaysia, where activities similar to our operations in Japan are gaining momentum. These regions are increasingly incorporating pallets into their logistics solutions through rental services.
Similarly, in Japan, it is generally more cost-effective to hire a driver for manual loading and unloading of goods rather than utilizing pallets. This practicality has posed a challenge to the broader adoption of pallets in these areas. Moreover, many manufacturing companies in these regions may not prioritize pallet dimensions, as standardizing pallets would require adjustments to their products and packaging.
Many companies have not used pallets for transportation, but changes in the business environment, such as the declining birthrate and advances in digital technology, will encourage companies to consider using pallets.
It looks like an opportunity is coming for JPR's business. How much do you think JPR can scale business while providing solutions to the challenges facing the logistics industry?
Our goal is to encourage a more extensive utilization of our pallets by our customers. Currently, we have 10 million pallets in circulation annually, and we aspire to significantly increase that number. Given the vast number of manufacturing companies, logistics facilities, retail warehouses, and Japan's population, we envision the possibility of having up to 100 million pallets in circulation in Japan.
Our aim is to ensure that at least 50 million of these pallets are actively in circulation every year within Japan through our company's efforts.
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