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The Honolulu Advertiser
Posted on: Saturday, June 2, 2001

Japan's small businesses struggling

Bloomberg News Service

TSUBAME, Japan — Kohei Akimoto still shouts over the din of machinery at his factory in northwest Japan, even though most of the 33 machines are switched off.

"We only have enough work for four operators," he says. That's a third the number needed just five years ago.

In the 1980s, Akimoto's Aoyoshi Co. made 1 million pieces of silverware a month, outsourcing production to 100 local companies. Now, he has only 30 suppliers and imports 40 percent of his products from Asian neighbors like China and Taiwan.

Such cutbacks are common at the thousands of small factories that dot this part of Niigata prefecture, a two-hour bullet train ride from Tokyo. While Honda Motor Co. and Sony Corp. have prospered by giving global consumers the latest cars and video equipment, the inability of small companies to stay competitive has kept Japan in and out of recession for a decade.

"There's no way a guy banging metal out in Niigata can compete with his counterpart in China," said David Scott, who manages a $2 billion small-company fund at JF Asset Management. "The major manufacturers are moving offshore, and these (small) guys are out."

Small businesses employ one in four Japanese workers and account for nine in 10 of the nation's companies. Yet many haven't changed their product lineup in decades, even as high labor costs make it 10 times more expensive to make a spoon in Japan than in China.

In Sanjo City, just down the road from Akimoto's factory, Sakagen Co. has spent a century making the same pair of shears for trimming miniature bonsai trees. The all-metal clippers, roomy enough to accommodate all four fingers of a gloved hand, don't wear out, but at 4,000 yen a pair, or $33, they are finding fewer buyers as Japan's economy slows.

Sakagen Co. halved its work force to 10 people and says a new cut-price clipper with a red plastic handle has been slow to catch on.

"This isn't a business where designs change quickly," said Sakagen President Genichi Sakai.

As orders for Nigata's products fall, few small companies have the capital to retool and make value-added products.

Japan's banks, burdened with as much as $1.2 trillion of bad and risky loans, according to some estimates, are reluctant to lend small firms the money they need to modernize their factories.

Some companies are trying to adapt. Morii Shiki Co., the region's biggest producer of cardboard, has made adjustments to its production system and targeted makers of mobile phones and personal computer parts.

The changes helped bolster profit 33 percent last year even as sales to local businesses dropped by a fifth.

"We try to ally ourselves with the market winners," said president Tomio Morii.

Morii Shiki is the exception in a region where most small companies lack the technology and the machinery to change products or target new customers. Even Morii Shiki is making do with a cardboard-corrugating machine it bought 20 years ago and can't afford to replace.

At Sanjo's government-backed industry promotion center, which farms out jobs to local companies, orders for computer casings and other high-tech goods are unfilled because they don't have the expertise, officials said.

Sanjo and Aoyoshi's homebase of Tsubame got their start as industrial towns 350 years ago, when the government in Edo, now modern-day Tokyo, dispatched a group of metal workers to reinvigorate the region in what can claim to be Japan's first economic stimulus plan.

The earthquakes and fires that regularly devastated urban areas in the centuries that followed kept metal workers busy making nails and spikes to help rebuild ruined cities.

Over the years, Tsubame made a name for itself as a center for metal flatware, pots and kettles, and Sanjo as a top producer of butcher knives and bonsai clippers.

Today, with many young people more interested in Sony's Playstation2 video-game console and e-mailing their friends by cell phone, bonsai is a waning tradition. The 4,000-yen clippers are an unwanted luxury for frugal Japanese, who increasingly prefer to shop at discount outlets like 100-yen stores where everything sells for less than $1.

As demand for the region's goods dries up, so do jobs.

This past winter, so many jobseekers jammed the parking lot at the employment office in Sanjo that neighbors regularly called the police to clear the lane of double-parked cars.

Still, no amount of parking will generate work for Sanjo's 3,420 jobless — in April, just 1,840 job advertisements were posted. It's not much better elsewhere. That works out to 54 jobs for every 100 jobseekers, below the national average of 62.

"I don't see much point adding more people," said Aoyoshi's Akimoto. "Our task now is to make sure we have enough work for those we have now."