Japan's H-IIA rocket leaves the launching pad at Tanegashima Space Center in Tanegashima island,... [+]
If there is one word for what is possibly the most remarkable, different, and problematic feature of Japan—and also one that distinguishes Japan and places it at a huge disadvantage against such coming rivals as China—it is COST.
It is not just what things cost—i.e., prices, which in many cases are lower now (in yen terms) that, say, ten years ago. Rather, more fundamentally, it is the (cultural?) attitude toward costs.
Daily life in Japan is punctuated by mind-boggling encounters with gross inattention to or tolerance of clearly excessive, unnecessary, easily reducible costs that are, in any case, being incurred and must at some point be paid for.
Examples abound and would require too much space to elaborate even briefly, but we’ll allow one: the methods, equipment, designs, engineering, materials, staffing, security measures, traffic control, barriers, safety measures, scheduling, and every other observable aspect of any urban or rural new construction, renovation, or maintenance project (including—perhaps above all—home renovations, called “reform” in Japan). I am not an expert in this field, but I have seen enough over 30 years to know that the same project would be executed by a Chinese contractor using Chinese methods and labor with comparable (or acceptable) result at 20-30% of the cost being paid in Japan, while taking 1/3 the time.
I say this in sorrow rather than anger, and even more in bewilderment. Japan’s is ostensibly a market economy and, therefore, prices are supposed to matter. But they do not, or at least not enough. The only cost that seems really cheap—and may be a big part of the problem—is the cost of money.
But if the market in Japan is insensitive to prices the international market is not. And this presents Japan and Japanese companies with a huge problem—as well as opportunity.
We are seeing it again as Japan strives to capture a piece of the global commercial satellite launch business. So far, so encouraging. On May 18 Japan’s mainstay H2A rocket lifted off the Tanegashima Space Center (Kagoshima prefecture) launch pad successfully carrying four satellites into orbit, including one for a Korean customer.
For Japan’s aerospace industry—and particularly the maker of the H2A rocket, Mitsubishi Heavy Industries (OTC:MHVYF)—this was hopefully the beginning of a new business—commercial satellite launching.
MHI has the technology and, now, the track record to enter this business. This was the H2A rocket’s 15th consecutive successful launch (out of a total 21), yielding a 95.2% performance level that is competitive with the other market players—Europe’s Ariane 5 (34 launches, 97.1% success); Russia’s Pronton (60/91.7%); the U.S.’s Atlas 5 (29/96.6%) and the start-up U.S. Falcon (7/57.1%) (data from the Nihon Keizai Shimbun May 19, 2012).
The H2A is somewhat disadvantaged by its relatively small payload capacity of 4 tons—compared with 8 tons for Ariane 5, 6.4 tons for the Pronton, 8.2 tons for the Atlas 5, and 4.7 tons for the Falcon.
But the biggest problem is cost. MHI is entering the business with an estimated launch cost base of JPY 8.5-10 billion. This looks competitive with the Ariane 5 cost of JPY 7.7-10.8 billion, but it is much higher than the Russian rocket’s JPY 5.4-6.6 billion, or the two U.S. competitors—Atlas 5 at JPY 5.8-7.2 billion, and Falcon at JPY 4.4 billion. (Also, according to Japanese government sources, Ariane’s sales are supported by EU subsidies that give customers substantial discounts, so Japan loses to them too.)
This is now. How about the future, particularly as new competitors like China and India enter the market?
Clearly, if MHI is going to make a business of this (as well as of its short haul MRJ commercial jet) it is going to have to find a way to cut its costs and reduce prices to customers. The company understands the problem. Its management has set the goal of halving costs by 2020.
Can this be done? It must be done. But it will require changing deeply imbedded attitudes and customs and the tolerance of high cost seemingly built into the Japanese system.
For doubters, I can point to one very relevant success story. In fact, Nissan (PINK:NSANY) owes its survival and current competitive to the ability of Carlos Ghosn (duded, without love, at the time, “the cost killer”) to break down the attitudes and practices behind Japan’s high costs in massive restructurings beginning in 2000.
This why I say that Japan’s high costs—a big problem now-- are also an opportunity. As Nissan showed, there is plenty of room for cost cutting. MHI needs a “cost killer’ like Carlos Ghosn.
