Adapting to challenges, Toyo Electric Control is now looking to expand in the ASEAN region, along with its quest for sustainable growth in niche markets
Over the last 25-30 years, Japan has seen the rise of regional manufacturing competitors who have replicated Japanese monozukuri processes, but done so at a cheaper labor cost, pushing Japan out of mass industrial markets. However, despite this, we still see that many Japanese firms are leaders when it comes to niche, B2B fields. How have Japanese firms been able to maintain this leadership despite stiff price competition?
I would like to answer this question from the perspective of control panel manufacturing companies as I cannot really talk about all Japanese manufacturing as a whole. First of all, I should answer the question of what exactly a control panel is. Basically, it is a box that contains wiring and machine control features. Proper wiring and installation of the box inside production sites are important. Obviously, depending on the customer outline the features of the control panel may vary. Each control panel is different from one to another, and to be more exact in my wording; there is no standardization. There is no conventional product lineup and every single control panel has its own unique features. At the end of the day, the features simply come down to the specifications required by the final user. Needless to say, all of the control panels our company is producing are tailor-made and customized toward the customer’s final preference.
Your question comes down to why companies give preference to Japanese firms, and to be honest, I think in many ways, Japanese companies are losing as far as cost competitiveness. China and Southeast Asia benefit from much cheaper labor, but at the same time, Japan excels at complex control boxes, whereas foreign companies may struggle to compete with the quality domestic companies can achieve. Competing with high-quality and short lead times has made it hard for those foreign companies to implement the whole structure of a control panel. On the other hand, Japanese companies like ourselves are capable of doing so. I think this is the greatest advantage we can have against foreign companies. I think in many cases, even at the stage of production, customer demands are still changing and adapting to their usage needs. Japanese companies are capable of adjusting and are flexible enough to adapt to customers’ needs even when production has already started.
I would be remiss if I did not mention the Japanese national character, and I think in most cases it can be described as having a full-time commitment to time management. Basically, providing high-quality products on time as the customer demands. In many ways, it shows Japanese people as humble and going out of their way to give great contributions to a project. It also explains a big difference between how things are made in Japan versus how things are made in some foreign countries.
Another aspect to mention is after-sales services. Japanese companies will walk the extra mile to go beyond just providing a product. Extra services like maintenance are almost always provided and I think in many ways this also relates to Japanese manufacturing. Those after-services are important because they give you feedback and talking with customers face-to-face after implementation gives you a chance to hear from the customer how a product can be adjusted. It enables you to take on board that feedback and make a better product the next time. This is something that becomes a foundation of after-service existence.
Last but not least, the biggest advantage over foreign countries is human capital and it is important to talk about on-the-job (OTJ) processes. It is important to contribute to the fostering of human capital so that we can achieve top-notch educational processes and that people do not quit. If people are trained properly, they tend to work for a longer period of time, which allows our company to stay a step ahead of the competition in terms of technical know-how.
You explained that human capital is key. However, something that is posing a threat to that human capital is Japan’s demographic situation. It is the oldest country in the world and to make things even worse, it has a shrinking demographic line. This is creating obvious challenges such as a shrinking domestic market and a human labor crisis. How is your firm facing these challenges?
Yes, we definitely feel this is a big problem, especially with the shrinkage of the market and the hardships in recruiting new engineers for our company. It is a problem that relates to technical inheritance, and it is becoming harder to relay this know-how that our engineers have accumulated. Passing this expertise to the younger generation is hard to do these days. What we have tried to do is role segregation, basically by allowing employees to multi-function rather than focus on one particular area. We are dispersing these roles into different departments so that employees have the opportunity to teach themselves a wide range of skills.
Another aspect is that we have changed our working style, allowing people more flexibility in their working hours, and where applicable, allowing people to work remotely rather than having to come to a production site every day. Retirement age is another key point, and officially in this region the retirement age is 60, but here at Toyo Electric Control, we allow people to work beyond that age if they want to. Many of our workers desire to contribute further to the company beyond their retirement. These policies are things we have adopted to make sure our human capital is happy and in good health. Happy people work hard and excel at doing their job to the maximum of their capabilities.
We do also rely on our production site in Vietnam, which enables us to compensate for some of the shortages we have for production here in Japan. In 2009 we launched our full-capacity production line in Vietnam and currently, we have 170 employees working full-time there. We are able to balance the two production sites in both Japan and Vietnam, and I think it creates a good bond with workers in Vietnam also.
Your company manufactures a range of control panels for different fields. What are some of the advantages your specific panels bring to your clients when compared to your competitors? Are there any particular industries that you are heavily focused on right now?
Machine tools and robotics are the two main focuses for our company right now, and as you can probably guess, factory-automated robotics requires a lot of control panels these days. We focus our production mainly on these two segments. You also asked about new industries, and one new approach the company is taking is to cater to electric-related fields such as electric power supplies. Here we also find a lot of needs for control panel manufacturing. Currently, the needs for advanced automation, labor saving, and unmanned operations are something that is required across the board in so many industries right now. With a deficit in electricity manufacturing, we do find a possibility to go into this field.
Could you tell us about the role that partnerships play in your business model?
Right now, partnerships are not really in our business model. When engaging in partnerships, the beginning of that relationship can be risky. Our company is committed to our own expertise as our first step. Once we get past that first phase and feel we can truly trust local companies then we might consider making these kinds of bonds. First things first, however, and we would like to attempt our own way, and forge a path with our own experience.
A good example is in Vietnam where we do not do a full cycle of process manufacturing for control panels from scratch. Some parts of the painting process are outsourced to some local companies in Vietnam that are Japanese-originated companies. At the moment, we tend to focus on maintaining Japanese quality, but with the promising development rate of local firms, we also hope to have business tie-ups with them in the coming future.
Over the past 20 years, we have seen production shift around the world. China was the factory of the world for almost 20 years, but now we are seeing more companies offset production to ASEAN countries. Why did you choose Vietnam to open your first overseas operation?
This story goes all the way back to the year 2006. At one family dinner with my wife and my father-in-law, we were chatting, and an interesting note is that my father-in-law is in charge of a mold manufacturing company. At that dinner, we talked about Vietnam and the necessity to penetrate new markets. My wife’s father expressed huge concern over Vietnam being the next country to go to for localized production. His company became a good example for our company, and he really opened my mind to Vietnam for expansion. In the end, it turned out great, and I visited Vietnam myself to see how things are there locally. Economically the country is still developing now, and we saw all of the problems happening here domestically, so finally it was decided that Vietnam was a wise move for our company. Expansion overseas became a natural vector to mitigate the issues
The first product we produced with this localized production was a harness for the control panels. Even women, without much strength, can still handle the job (of making a harness), and you know, Vietnam has a surprisingly high literacy rate and its people also have good eyesight. With this product, we kicked off our overseas production and so far, the story has been very good.
Can you run us through a little bit of your history in Vietnam and when you decided to open each of your facilities there?
We started with one spot and we simply decided to expand in order to increase our production capacity. As I mentioned, we started off with harness cable manufacturing in Vietnam around the year 2009. That was stage one of our plan. In 2016, rapid local needs for robotics and industrial machinery came into view, so we thought about making full-scale control panels locally in Vietnam. I would say that was stage two. It enabled us to produce a large number of standard parts of a control panel in Vietnam. (We will then add the optionally customized parts in Japan before delivering it to customers)
Vietnam is rich in excellent human capital, and we have been successful there in recruiting great engineers, especially in comparison to the recruitment woes domestically. It also goes some way to showing how we have been able to increase our production capacity on numerous occasions now.
The COVID-19 pandemic wreaked havoc around the world, affecting supply chains over the past few years. As a result, many companies are trying to shorten their supply chain by localizing production. On top of that, China suffered from its zero-COVID policy as well as a number of other political problems. One of the alternatives is the ASEAN region, but we are also seeing companies bring back their production here domestically in Japan, especially now that the JPY is so low in comparison to the USD. With these big macro changes in mind, do you believe in the potential of Vietnam and do you think growth will continue in the ASEAN region?
The economical appraisal in Vietnam might not actually be as lucrative as you assume. It was good up until recently, but the average salary for human labor is increasing by an indicator of 6% year-on-year. For that sake, maybe in the near future, it will not be so beneficial to sustain production there. It is not all negative, and right now we still see a number of good points economically. Geographically too, Vietnam is in a good position, and it basically is the heart of ASEAN. There is great accessibility to nearby countries such as Thailand, Malaysia, and Singapore. We as a company do utilize this logistical advantage; producing locally in Vietnam and then supplying back to Japan and nearby countries.
Another great advantage of having a Vietnamese expansion is human capital because we see a lot of energetic young people in Vietnam and technologically, they have fantastic know-how. Finally, I would like to bring up how digitally the country is evolving in comparison to Japan. With jobs that can be carried out and completed, transferred through the internet such as panel design, we are continuing to request the Vietnam side for even more.
Definitely, there are pluses and minuses to our expansion to Vietnam. Even with the negative effects of rising logistics fees and labor costs, we still can find cost advantages with the production in Vietnam for the time being, as the Japanese government also have a number of policies to raise wages.
Given the success you have had in Vietnam, are there any other countries or regions around the world that you have identified to replicate your overseas business model?
No, not at the moment. First of all, we like to do things step by step, so we need to set up our foundations here in Japan first and there are many things that can still be done domestically. We have some technical upgrades domestically prescribed by our mid-term strategy, especially in strengthening the foundation of both HR and the production system. Once that stage is passed then maybe we can think about expansion elsewhere, but not at this point in time.
With your control panels, sometimes your customers are taking those products overseas to foreign markets. How are you able to adapt your products to suit the standards of different countries?
Currently, we have 100% of control panels manufactured both in Japan and Vietnam serving the needs of only Japanese companies. These are control panels that are manufactured precisely for Japanese equipment manufacturing or factory automation machine tool companies. When an order comes in, it always comes with the required production features, which are totally adjusted to the standards of the country of usage. We can follow those requests from the customer at the production stage before we release the product.
Looking to the future, will you be interested in exporting or selling your control panels to international firms?
We do have this as a projection to possibly export our control panels to some foreign companies. If we are lucky enough and there are needs coming up then we would be willing to follow those opportunities.
One of your greatest strengths is your integrated production systems; in-house productions of everything from sheet metal processing, painting, and even wiring. Could you give us a breakdown of your production systems and some of the benefits they have brought you over the years?
First, we have the design team, and they use CAD to draw the designs for our customers. Once the designs are finalized and have received approval from the customer, we move on to the next stage which is mold manufacturing from metal sheets.
The data from the design office comes down to the production site, which we call phase one. We take steel sheets and use automated processes to frame the sheets, and this is the core raw material that we utilize. The bending process is the next phase, and the sheets are placed inside a bending machine before we move on to the next phase which involves part manufacturing. Welding of those parts comes next and everything is combined into one structure, which is followed by hand scraping. The next phase is referred to as painting. We actually only have one single production line which stretches from raw materials procurement all the way to the final product coming out. The panels are hung on hangers and circled around the machinery to be painted. Some of the parts that are too big or sophisticated are hand-painted in separate booths rather than going through the automated painting machine.
Next is the final assembly, which is the final stage of production. Wiring is completed and the panels then move onto a testing machine where it is plugged into a power source and engineers check carefully to make sure the panel runs properly. The inspection phase is important to check all the features of the panels are working correctly and accurately. Customers see this phase as vital, and they expect their products to be checked and completed before receiving them. Moreover, the most important thing is that we will have our customers relieved and gain more chance to acquire repeating orders.
Imagine that we come back and have this interview all over again in 4 years’ time: What goals would you have liked to have achieved by then?
In 2017 we celebrated our company’s 50th anniversary and during that time we set up a mid-term strategy for our firm. That mid-term strategy included things such as sales targets, and at that time the company was standing at roughly JPY 4.5 billion in sales turnover annually. We have set targets to reach JPY 6 billion in annual turnover by the year 2027, by which we will celebrate our company’s 60th anniversary.
Interview conducted by Karune Walker & Antoine Azoulay