Toyota City is on edge like no time since the 2008 “Lehman shock.” Yet machinations at the headquarters of Japan’s most iconic company suggest the fallout from today’s coronavirus outbreak will be deeper and far more lasting.
On March 19, Toyota scaled back production after a worker in his 20s tested positive for Covid-19. Those thought to have had contact – 11 initially – were sent home from the Takaoka factory, which produces the RAV4 vehicle, Corolla sedan and Harrier crossover.
Next, assembly lines quieted down.
In fact, the coronavirus ripple effects emanating from President Akio Toyoda’s office are spanning the globe. In recent days, the auto giant suspended production at European plants, as well as at its UK facilities in Derbyshire and Deeside. It is also shutting down North American production, which, as spokesman Rick Hesterberg explains it, means all automobile and components plants in the US, Canada and Mexico.
Toyota’s coronavirus-driven downshift isn’t unique. It’s emblematic of how Japan Inc is battening down the hatches for a 2020 that is turning out to be far worse than even the doomiest naysayer could possibly have feared.
Japan ended 2019 on a decidedly weak note. Gross domestic product plunged an annualized 7.1% in the October-December period. That slowdown was partly about the US-China trade war, partly an ill-timed sales tax hike. The bottom line: a 9.6% decline in 2019 profits for major Japanese companies.
Those losses, importantly, preceded the coronavirus outbreak. The respiratory illness didn’t really start showing up in Asia’s No 2 economy until mid-January. Since then, the losses to the Nikkei 225 Stock Average have been virtually unprecedented. The benchmark index is down 20% so far this year.
The rapidly shifting new normal has CEOs redrawing business plans. On March 10, a Cabinet Office survey found that sentiment among executives at Japan’s top companies was the gloomiest since the 2011 Fukushima nuclear crisis. Households, too. From January 1 to March 10, consumer confidence plunged 8.7%, according to advisory Morning Consult.
The problem, notes Morning Consult economist John Leer, is that Japan was “in a precarious position before the coronavirus outbreak” thanks to government missteps, including boosting the consumption tax to 10% from 8% on October 1. “The tax and the coronavirus are both likely to weigh on total consumer spending in 2020,” Leer said.
That augers poorly for profit prospects.
Olympic bonanza delayed
Nor is the roughly US$140 billion stimulus package Prime Minister Shinzo Abe’s government is cobbling together sufficient to alter this trajectory. At most, that jolt may help Tokyo sustain the loss of the Summer Olympics that was scheduled to start in July. The postponement of the event until some as yet unknown time in 2021 will cost an estimated $6 billion in economic losses.
Japan Inc had been gearing up for a banner year of tourism – a record 40 million visitors by year end.
With the Games bonanza put off, companies from All Nippon Air to bullet-train operator East Japan Railway to mobile operator NTT Docomo to convenience store giant Seven & I to hoteliers to restauranteurs all face unprecedented turmoil.
Then there are branding-related windfalls that Olympic-sponsoring blue-chips won’t be reaping this year. The list includes Toyota, Asahi Breweries, Canon, Fujitsu, Mitsubishi Electric, Mizuho Financial, NEC, Nomura Holdings, Panasonic and myriad others.
Japan Airlines has been on a flight-canceling rampage.
Domestic demand “has been hit hard by the outbreak, and we have had to take the decision to shut down a portion of our operations for a while,” said JAL spokesman Mark Morimoto. JAL will “watch what happens, see the trends that emerge.”
Novel coronavirus fallout is the human equivalent of a credit crunch. At the very least, large companies are putting new investments and expansion plans on hold.
Earlier this week, Toyota made news again. It is halting seven production lines at five domestic plans from April 3. Mazda is suspending operations in Japan, Mexico and Thailand. Sony Pictures is delaying film releases. Panasonic is suspending operations at its electric battery facility in the US, a blow to Tesla Motors, whose supply chain relies heavily on the Japan Inc icon.
Amusement parks operated by Seibu Railway Co and its peers are shuttered for now.
Still, for all the pain Japan Inc faces, there are a couple of silver linings to consider.
One is that Japan’s coronavirus case count is notably low by global standards – 1,193. This means that so far, “Japan has been able to avoid the draconian quarantine measures suffered by most other major economies, and this is likely to be reflected in a much smaller blow to economic growth,” says analyst Nicholas Smith of CLSA Japan.
At the same time, Smith notes, companies listed in the broader Topix stock index “are so cash rich.” And the loan/deposit ratio for large banks is only 52%. Banks, Smith says, are “desperate to lend,” offering Japan Inc a competitive advantage over peers.
Another silver lining: how Japan is finally giving flexible work arrangements a try.
New ways to work
Japan Inc is obsessed with employees being physically in the office. Teleworking was never really a thing in Tokyo circles. The coronavirus crisis changed that, virtually overnight. Beginning in mid-February, a who’s-who of icons allowed portions of their staff to work remotely.
On February 28, Mitsubishi Corp started asking all its roughly 3,800 Japan-based employees to work from home. Cosmetics giant Shiseido asked 8,000 employees to do the same. It, like Mitsubishi and other household names, asked those who must be in the office to avoid rush-hour commutes.
Personal care and laundry giant Kao Corp allowed about 15,000 workers to telecommute. The same with public relations behemoth Dentsu, Honda Motor, MUFG Bank, mobile operator KDDI, pharmaceutical conglomerate Daiicchi Sankyo and many others.
Granted, most salarymen and women are still schlepping it to work. Yet the 13% share of company employees teleworking, according to a poll by Persol Research and Consulting, is nothing short of revolutionary for such a rigid and tradition-bound business culture.
“One welcome by-product of the crisis is that work-style reform is getting a much-needed boost because more companies are encouraging their employees to telework,” argued the Japan Times in a recent editorial. “This presents a great opportunity to change the nation’s archaic corporate culture, which demands high loyalty and long working hours from workers. If telecommuting becomes the norm, employees will be able to spend much more time with their families and, most importantly, fathers will be able to spend more time participating in childcare.”
Take SoftBank Group employees, who have had a particularly disorienting few days. Not just because CEO Masayoshi Son suddenly ordered a $41 billion sale of assets to shore up his company’s cratering market value, but because many staffers are manning their battle stations from remote locations.
Son announced the sell-off roughly a month after coronavirus forced SoftBank, too, to pivot toward far more flexible work schedules.
But these bright sides are dim compared to the descending darkness.
Japan Inc is facing a year no one could’ve predicted two months ago. Unfortunately, 2020 has another nine months to run – a year that can’t end fast enough for befuddled CEOs.