U-turns for profit: Japanese electronics manufacturers prove you can go home again.

"We can still compete with low wage countries when we innovate in manufacturing," said Fujio Mitarai, president of Canon, as he guided journalists around the construction site of the company's new factory in Oita City, Oita Prefecture, on the southwestern island of Kyushu.

Meanwhile, Sharp, the world's number one LCD TV maker, will expand its production capacity in Japan for high-end large screens, rather than shift production to China, where it has a joint venture with a local manufacturer that makes small- and medium-size LCDs.

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Are these signs that high-tech manufacturers are making a U-turn to Japan?

Over the past 25 years, Japanese industry has experienced waves of sangyo kudoka--the hollowing out of its domestic manufacturing base. This largely resulted from manufacturers shifting their production offshore to exploit lower wages in countries such as China, Vietnam and Mexico.

Even Japanese high-tech electronics manufacturers had to invest in overseas production facilities to stay competitive. In China in 1989, Canon set up the first of their seven plants that churn out everything from printers and copiers to digital cameras. In 2004, about 40 percent of Canon's manufacturing base was overseas, with two-thirds in China. That ratio, however, is due to change. Canon will invest $6.5 billion in production facilities in the period 2004-06, and 80 percent of that will be in Japan.

Why have Japanese high-tech electronics manufacturers changed to a strategy of increased investment at home? One reason is that price alone is no longer sufficient in gaining a competitive edge. Even though labor costs are much higher in Japan than elsewhere in Asia, high-tech products can be sold at good profit. Japanese makers' strategy is to sell the latest products featuring the newest technologies at a premium until their overseas competitors catch up with similar models. This requires a degree of collaboration between R & D and manufacturing departments only achievable if they work in the same location.

Another reason is related to intellectual property. To stay ahead of their competitors, Japanese high-tech manufacturers need to protect their cutting-edge technologies-something that can be better achieved in Japan, where companies have a more loyal work force, contrary to China, where workers frequently job-hop for better pay. Further adding to the cost of manufacturing in China are rising wages and the appreciation of the Chinese currency.

Canon is manufacturing color printers in Japan using its latest production technologies. In its Oita plant, the production processes for printer cartridges are fully automated, resulting in a cost reduction of 10-15 percent in comparison with cartridge production in China.

Companies in some industries are staying put offshore. Japanese automakers, for example, continue to invest in China. In contrast to Volkswagen and GM, the Japanese automakers were late expanding their manufacturing base to China. Currently, their Chinese production lines are running at full capacity. In fact, they anticipate growing demand from the American market, requiring further expansion of their China-based manufacturing capacity. All together Japanese companies are expected to invest 25-30 percent more in China this year than last.

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Cell Production

While Japanese electronics makers who have made the U-turn no longer use price competitiveness as the crux of their marketing strategy, they are not indifferent to cost reduction, and they are reducing costs by scrapping their conveyor-belt lines and adopting a production system that also gives them greater innovativeness. This new system is cell production.

Canon and Fuji Film use cell production in their camera factories. To stay ahead of the competition from low-wage countries, new camera models with advanced features are introduced every three months. These cameras can be priced at a premium until the overseas competitors introduce similar lower-priced models. In old-style manufacturing, the lead-time from product design to mass production was too long-trial production and education of line workers was time consuming. Japanese electronics manufacturers were forced to innovate in their production practice. What they did was shift from conveyor belts to cell production.

Just what is cell production? When you visit a Canon or Fuji Film manufacturing plant in Japan, you will see hundreds of workstations where small teams build one entire product from the basic components to the finished retail box, ready for shipping. Each workstation constitutes a cell. Each worker is capable of doing a variety of jobs within the cell. For cameras, most of the cell work consists of component assembly, but more specialized skills include soldering and testing. Canon even has extremely skillful cell workers that produce complete cameras by themselves.

Cell production sometimes boosts productivity by 50 percent, mainly because of higher worker satisfaction. The cell production method also allows for higher flexibility. Products can be introduced much faster as switching to a new model requires only a few days of initial intensive training. It also allows for demand-driven manufacturing. If demand for a certain camera model suddenly increases, cells can easily switch to manufacture that popular model. Other advantages of cell production are lower labor costs and a smaller necessary floor space. Because all production is on demand and parts are stored near the cells, inventory and warehouse space is reduced as well. Also quality is higher as any problems have to be solved within the cell by the workers themselves. Issues can therefore not be passed anymore to the next stage in the assembly process.

Japanese electronics manufactures are returning to Japan to keep intellectual property at home and to offer the world state-of-the-art gadgets at premium prices. With a strategy of low-wage mass production overseas and flexible high-tech manufacturing at home, they should remain globally competitive.

Arjen van Blokland writes the magazine's "Wireless Watch" newsletter. Contact: [e-mail]