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Introduction
As the Japanese economy stagnated, business conditions in Japan's small business sector, in manufacturing and non-manufacturing industries alike, worsened in fiscal 1997. It is the current state of the small business sector and the responses of small and medium enterprises in these severe conditions that are reported in the Japanese Government's "1998 White Paper on Small and Medium Enterprises in Japan".
This year's white paper, which is subtitled "Small and Medium Enterprises in Need for Change and Display of Entrepreneurship", describes how, in this severe economic climate, small and medium enterprises are being forced to change, and proposes that it is important for small and medium enterprises to display thier entrepreneurship, by developing their existing businesses and establishing new ones.
Since 1998 marks the 50th anniversary of the Small and Medium Enterprise Agency, the white paper also summarizes developments in the small business sector and small business policy in Japan and overseas and identifies various commonly shared features.
This booklet, which summarizes, with the help of diagrams, the contents of the "1998 White Paper on Small and Medium Enterprises in Japan", has been prepared to enable the readers to gain a rapid understanding of the main points covered by the white paper. It is directed not only at business managers, but also at a wide readership including researchers, policy makers and others with an interest in the small business sector.
I hope that this booklet will prove useful to a broad spectrum of readers and that it will provide a measure of inspiration for the small and medium enterprises that constitute the foundation of the Japanese economy.
Shinichi Ono
Director of the Research Division of the Director-General's Secretariat
Small and Medium Enterprise Agency
Part 1. Analysis of business trends in the small business sector
Although strong private demand and growth in output had been fueling a gentle recovery, the unexpectedly sharp decline after the surge in demand prior to the consumption tax hike in April 1997 and the damage dealt to business and consumer confidence over the future of the Japanese economy caused by the string of failures of financial institutions strengthened the perception that the economy was stagnating, and from the latter half of the year there was a growing sense in the small business community that business conditions had worsened. Business confidence within the small business sector varied, however, in different types of industry. In Part 1 of this booklet, we look more closely at recent trends in the small business sector and examine the factors which underlie them.
In Chapter 1, we analyze trends in business, management, capital investment and employment in order to identify the factors underlying the slump in the small business sector. The examination of business trends shows both that the sag in demand following the pre-consumption tax hike buying spree hit small business confidence, and that business confidence varied widely between industries.
Production trends clearly indicate that the decline after the rush in demand before the consumption tax hike had a far greater impact on the production activity of small and medium enterprises (SMEs) than on that of large firms. After considering the contribution of the effects of the strong yen and the delay in adjusting stock levels to the divergence in corporate earnings between large firms and SMEs, price trends, financing conditions and bankruptcy trends are analyzed. On the subject of financing, the increasing difficulty of raising funds faced by SMEs is examined in the context of the growing reluctance to lend sparked by Japan's financial Big Bang and the collapse of financial institutions. In the following section, an overview is given of capital investment in the manufacturing, wholesale/retail and service sectors, which show that the current trend in capital investment in the small business sector is unprecendentedly bearish in tone. The reluctance to invest in plant due to uncertainty over business conditions in the future and the divergence between large firms and SMEs in making stock adjustments after the collapse of the bubble economy are identified as the possible causes behind this trend. Regarding employment trends, it is shown that whereas SMEs suffered from chronic labor shortages as the economy gradually recovered from 1993, the fall in employment by larger firms has made it easier for SMEs to find workers. Working hours are also examined, showing that although working hours in SMEs are consistently longer than in larger firms, hours are falling and the gap between firms of different sizes is decreasing. In the last section of Chapter 1, it is shown how the small business sector makes an important contribution to employment in regional economies.
The divergence between firms within the same industry is a feature of recent developments in the small business sector, and this subject is considered in Chapter 2. Although SMEs in both manufacturing and non-manufacturing industries are generally floundering, in addition to the disparity in business confidence between firms of different sizes and in different industries there has also emerged a disparity between SMEs within the same industry. This appears to be due both to differences in the economic environment in each industry and also to the economic repercussions of changes in the economic and industrial structure itself. Conditions in four kinds of industries-automobile parts, electronic components, textile products and materials-are therefore examined to determine the actual state of the gap between firms in each industry and to identify the causes. Turning then to non-manufacturing industries, the differences between companies in the wholesale/retail and service sectors are examined.
Chapter 1. Business trends in the small business sector
Section 1. The slump in the small business sector
1. Japan's economy in fiscal 1997
With the sharp growth in personal consumption at the start of 1997 due to the boom in demand prior to the consumption tax hike and industrial production also on an upward trend, the Japanese economy enjoyed a recovery fueled by private sector demand since 1996. However, the collapse in demand after the introduction of the consumption tax increase was greater than had been expected, and although the effects of the tax hike gradually eased, the string of failures of financial institutions from the beginning of autumn damaged consumer and business confidence, reinforcing the perception that the economy was stagnating.
2. Business trends in the small business sector
(1) Changes in business confidence in the small business sector
Business confidence in the small business sector declined for six consecutive quarters from July to September 1996 through October to December 1997. With sales and recurring profits also declining for four consecutive quarters from 1997, the economy was in a state of stagnation (Fig. 1-1).
An examination of business confidence in the small business sector by industry shows that confidence fell in all industries following the consumption tax hike (Fig. 1-2). The decline was particularly noticeable in the retail, wholesale and construction sectors due to the slump in personal consumption and housing construction. Despite plummeting confidence in the lumber and wood products and textiles industries due respectively to the slump in construction and personal consumption, the relatively small decline in the general machinery and electrical machinery industries meant that the decline in confidence in manufacturing industry as a whole was smaller than in other industries (Fig. 1-3).
(2) Production trends in the small business sector
An examination of year-on-year changes in production in the small business sector in each quarter of 1997 shows that production rose for three quarters in a row from July to September 1996 due to factors such as the rush in demand before the consumption tax hike in the January to March quarter.
Production then declined for three quarters from the April to June quarter due to the slump in production of metal products resulting from the fall in public works and housing construction, and the slump in output of general machinery resulting from weak domestic demand caused by the fall in demand following the consumption tax hike. On the other hand, the output of large firms rose for four straight quarters until April to June 1997 thanks to the rush in demand prior to the consumption tax hike and buoyant demand overseas. Subsequently, output of transportation and electrical machinery went into decline due to weak domestic sales, and so output fell until the October to December quarter (Fig. 1-4). As the output of SMEs was on a consistent downward trend since the consumption tax hike, while the output of large firms only dipped down towards the end of the year, it can seen that the consumption tax hike had a far greater impact on the production activity of SMEs than on that of large firms.
An examination of the year-on-year percentage changes in the contributions by individual industries to the production index shows that there was significant growth in processing industries (in which large firms are heavily represented), and a slump in the materials and other industries (in which SMEs are heavily represented) (Figs. 1-5, 1-6). Two particular areas of growth in output by large firms were electrical machinery and transportation machinery: output of electrical machinery was buoyed up by demand for integrated circuits and computers, whilst output of transport machinery for passenger cars benefited from overseas demand. In the small business sector, output of textiles and metal products (which comprise a large share of SME output) declined due to the effects of the slump in domestic demand and the decline in public works and housing construction respectively, thus increasing the gap between large firms and SMEs.
Section 2. Trends in small business management
1. Changes in business earnings
One feature of the recent trend in the earnings of SMEs is the emergence of a difference in profitability between SMEs and large firms (Fig. 1-7). This appears to have arisen due to a fall in the ratio of costs to sales at large enterprises because of the yen's appreciation, and growing pressure on SMEs to lower prices. The fact that SMEs were slow off the mark in adjusting their stock levels seems also to have been a contributing factor.
2. Impact of price trends
The unit sales DI worsened markedly in 1997, reflecting the decline in demand. The unit purchase price DI showed signs of improving, possibly due to the favorable impact of the weaker yen, but the unit sales price DI worsened, and with the slump in sales, there has been growing pressure on unit prices (Fig. 1-8).
3. Financing of SMEs and growing reluctance to lend
The proportion of SMEs finding it increasingly difficult to raise funds has remained exceedingly high ever since the collapse of the bubble economy (Fig. 1-9). This is due not only to business conditions in the small business sector, but also to the growing reluctance of financial institutions to lend as they have sought to improve their own capital ratios as the Big Bang gets underway.
4. Bankruptcies of SMEs
There were 16,293 bankruptcies of SMEs in 1997 (99.0% of total bankruptcies), a year-on-year increase of 10.6%. Total liabilities were also up 15.7% year-on-year to é¥5.7496 trillion (Fig. 1-10).
Section 3. Weak capital investment trend
1. Capital investment in the small business sector
Planned capital investment by small and medium manufacturers (SMMs) was up for the third year in a row in fiscal 1997, but the rate of growth remained low (Fig. 1-11). The recovery has been unprecendentedly weak, reflecting the feeble level of capital investment.
Plans for capital investment by small and medium wholesalers and retailers for 1997 showed a decline for the seventh consecutive year, and capital investment by wholesalers has gone into decline for the first time in three years. With planned capital investment in the retail sector set to decline for the seventh consecutive year, caution on the part of retailers is particularly noticeable (Fig. 1-12). Planned capital investment by small and medium service companies showed a decline for the first time in four years (Fig. 1-13).
2. Factors underlying the slump in capital investment
Recent trends in capital investment by SMEs have shown no sign of the traditional dynamism of the small business sector. This is due not only to the reluctance of firms to expand production facilities at a time of uncertainty concerning future business prospects, but also to the divergence in corporate profits and SMEs' lag in adjusting stock levels.
Sales and profits do suggest that a recovery is underway, but with business as a whole looking bearish, there will be no widespread new willingness to invest in plant. An examination of the changes in the value of capital investment per project and in the proportion of companies investing in plant shows that whilst the value of capital investment per project is on the increase, the proportion of companies investing in plant has slumped, and the total value of capital investments continues to be underpinned by major investments made by a comparatively small number of firms (Fig. 1-14).
Section 4. Regional economies and employment trends in the small business sector
1. Employment trends by firm size and industry
An examination of employment trends by company size reveals that whereas employment in large enterprises peaked in 1994 and declined in 1995 and 1996, employment in SMEs rose constantly over the same period. This suggests that SMEs found it easier to obtain labor and skilled personnel thanks to the decline in employment in larger firms (Fig. 1-15).
An examination of employment trends by industry in terms of the contribution to changes in the total number of employees shows that employment in manufacturing industries increased until 1992 before going into decline from 1993. The construction, wholesale/retail, restaurant and service industries, on the other hand, have consistently made a positive contribution to employment, and the contribution of the service industry is particularly large (Fig. 1-16).
2. Perception of Employment Level
The employment DI became positive for all firms between 1992 and the beginning of 1993, and since then firms have continued to feel that there is an excess of labor, although the employment DI has however slowly fallen since 1995. In the small business sector, there was perceived to be a shortage of labor for two consecutive quarters from November 1996 till March 1997 until the slump in business conditions set in and the supply of labor was again perceived to be excessive (Fig. 1-17).
Regarding corporate attitudes to the supply of labor by age, there was a strong perception in firms of all sizes that there was a shortage of workers up to the 30~39 year old age-group, and a surplus of workers aged 40 or over. It is obvious, therefore that perceptions of the labor supply are determined more by the age of employees than the size of the firm (Fig. 1-18).
3. Reduction in working hours
An examination of changes in average weekly working hours per company shows that while working hours are longer at smaller firms, working hours are falling at firms of all sizes and the differential between firms of different sizes is shrinking (Fig. 1-19). In these circumstances, it is important that the 40-hour week should be fully implemented at all firms, including those that had been delaying its introduction from April 1, 1997.
4. Regional employment and the small business sector
Regional vitalization is essential to Japan's healthy socio-economic development, and developing employment opportunities and the necessary human resources has thus become an important issue. SMEs play an important part in regional economies, and the role they play in providing employment is particularly important. A comparison of the proportion of employees in SMEs and large firms in regional economies and the three main metropolitan areas shows that SMEs provide a larger share of employment in regional economies. Ups and downs in the small business sector can consequently have a significant impact on regional economies (Fig. 1-20).
Questioned on the contribution of SMEs to regional economies, the largest number of companies said that small firms "create employment opportunities". The next commonest response was that they " vitalize the regional economy", followed by "encourage the growth of regional wholesale, retail and service sectors", "form local communities", "tackle environmental problems", "raise the level of technology in a region", "preserve and develop traditional techniques", and "support regional culture" (Fig. 1-21). From these results, it can be seen that the contribution of the small business sector to the creation of greater employment opportunities is particularly important to the vitalization of regional economies.
Chapter 2. Features of recent business trends
Section 1. Divergence in business trends between SMMs
Recent business trends in the small manufacturing sector have begun to show signs not only of a divergence between firms of different sizes and in different industries, but also between firms in the same industry. A comparison of the sales of firms in the automobile parts, electronic components, textile products and materials industries with the figures three years ago shows that while the proportion of firms whose sales declined has increased slightly in all four industries, a generally comparable proportion of firms registered no decrease (i.e. an increase or no change) as recorded a decrease in sales. What the sales trends show, therefore, is that a process of polarization is taking place in all industries (Fig. 1-22).
The commonest reason given by firms in all industries for an increase or decrease in sales was a change in domestic demand (Figs. 1-23, 1-24). The other main causes of a decline in sales were considered to be external factors such as a "fall in transaction unit prices", "fall in orders due to worsening business conditions faced by customers", and "change in consumer behavior", reflecting a worsening in the business environment faced by SMEs. While a considerable number of firms suffered an inevitable decline in sales, others also saw sales rise. Many of these firms responded that the rise was due to positive action on their own part, such as an "increase in quality competitiveness", " increase in demand for own products and technology", and "development of new products", indicating that they had improved their competitiveness in terms of quality to counter negative quantitative factors.
Section 2. Divergence between firms in the small non-manufacturing sector
1. Divergence between firms in the distribution industry
A comparison of sales in the small retail sector now and five years ago shows that a gap has emerged not only between new-style retailers such as drug stores and discount stores and conventional retailers such as department stores and general stores (i.e. between firms with different types of management), but also between firms with the same type of management (Fig. 1-25). Consumer demand has recently become more advanced and diversified, and coping with this change is becoming increasingly difficult for small and medium retailers. As consumer behavior has changed with increasing motorization, price cutting and the use of computerization to improve efficiency by some firms have led to a growing disparity between firms in the small retail sector.
In the small wholesale sector too, not all firms are languishing. Instead, a process of " diversification" is taking place (Fig. 1-26). The gap between those small and medium wholesalers that have developed an aggressive style of management to develop new markets and procure goods in response to consumers' needs, and those which have failed to develop their business strengths is reflected in the difference in sales.
2. Divergence between firms in the service sector
The business services sector is growing strongly across the board, and the personal services sector is also continuing to enjoy steady growth. Even in the service sector, however, the changes in sales over the past three years indicate that a gap has emerged between a significant proportion of firms whose sales increased, and also a significant proportion whose sales decreased (Fig. 1-27).
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