Meiji 3

Silk production was a traditional industry in Japan dating back to ancient times (4th or 5th century?). During the Edo period, many hans produced high quality silk cloth and kimono. But when Japan opened its ports and resumed foreign trade in the mid 19th century, Japanese silk suddenly found an enormous overseas demand (especially in the US). This silk boom had a few important effects.

First, naturally, silk production (mulberry cultivation, silkworm raising, silk spinning) was greatly stimulated and expanded all over Japan, especially in the eastern regions. Virtually all farmers and villages which could produce silk tried to do so. This raised rural income significantly. Today, you can hardly see mulberry trees or silk production in Japan. But back in those days, they were everywhere.

In many developing countries today, rapid industrialization and liberalization often impoverishes farmers and widens the income gap. In the case of Meiji Japan, however, international integration did not increase the gap between urban and rural income thanks to the silk boom. The tea export boom and rice inflation also contributed to this trend. In fact, as rural communities gained economically they often became politically active. But at the same time, rural prosperity now depended critically on the price trends of agricultural commodities such as silk and rice. When these prices were high, enriched farmers and landlords enjoyed higher consumption, low tax rates (since the land tax was nominally fixed) and staged a political movement demanding a constitution and criticizing the government. When agricultural prices plummeted, however, political movement lost momentum and many indebted farmers became landless. We can call this the risk of international integration due to domestic and global market fluctuation which must be monitored and managed carefully by the producers and the government--it can happen to any country even today.

Second, the new class of merchants emerged. As foreigners were confined to the designated foreign settlement and its surrounding area (the most important foreign settlement was Yokohama), they could not build their own distribution network in Japan (violating national treatment of the GATT Agreement, but there was no WTO at that time...) Thus they had to rely on Japanese merchants to procure silk and tea for export and sell British clothes to local markets. Japanese merchants who played this role were often new people, unconnected with big merchant families in the Edo period. They communicated price information, provided short-term trade credit, established marketing channels, and even assisted in installing new machines and learning new technology. Those who did business directly with foreigners were called Yokohama merchants, but there were other types of new merchants as well. Renowned silk-producing localities included Nagano, Yamanashi, Gunma and Tohoku Region (all Eastern Japan) and merchants played critical roles in restructuring these producers. If successful, Meiji merchants made huge profits. Quick and spontaneous emergence of a merchant class with productive functions (instead of simply exploiting producers) was a unique Japanese feature not always visible in other countries.

But Meiji merchants were far from perfect. Foreigners often bitterly complained about the dishonesty and corruption of some Japanese merchants. Silk was sold by the weight, so water was often added before weighing. Foreigners had to check if the merchandise was dry inside. At one time, the quality of Japanese silk became so low that its demand and price fell, and the government had to impose quality standards.

Third, continued silk exports was accompanied by the transformation of production method and organization. Manual labor was gradually replaced by machine spinning (I -> M*; see lecture 4 for notation). At first, silk production used to be farmers' side job, but later it was undertaken by factories (M* -> M). More precisely, silkworm raising still remained family-based and decentralized across the country, but silk spinning became automated in big factories.

Silk remained the top export item for nearly a century. Silk exports were a stable source of foreign exchange for Japan, contributing to industrialization.

Traditional cotton industry

Roughly speaking, the production process of cotton proceeds as follows: cotton harvest -> ginning and cleaning -> spinning (yarn) -> weaving (cloth) -> sewing & cutting (garment). Other processes such as dyeing may be added.

As Prof. Odaka says (lecture 4), indigenous and modern sectors often existed in parallel. The cotton industry was no exception. Therefore we will discuss the cotton industry in two parts: traditional and modern. This section looks at the traditional.

Like silk, the cotton industry existed for a long time. But the traditional method, using wooden looms and household labor, was less productive than Western technology. This type of production was often organized as the putting-out system where a merchant contracted each farm household individually to produce. The merchant provided all materials (and sometimes tools), received finished products and paid the commission. Production took place in the farmer's household using family labor (usually the wife). The question is: how could this mode of production survive against British imports and introduction of modern technology? Why were they not wiped out?

We can cite a few reasons. First, domestic demand for cotton products rose so fast that, while imports increased, domestic production could also expand. Domestic demand was rising because (i) farmers were enriched as noted earlier, and they switched from homemade or second-hand clothes to purchased ones; (ii) new merchants established a nationwide sales network; (iii) the price of clothes relative to the general price level declined, further stimulating demand.

Another important reason was that Japanese and British cotton products were differentiated and not easily substitutable. Japanese cotton was thicker and used lower count fibers, while British cotton was thinner and used higher count fibers (higher the count, thinner the fiber). The two products were used for different purposes, so they did not compete directly. This is a point much stressed by Professor Heita Kawakatsu (International Research Center for Japanese Studies and Waseda University).

However, even though the traditional cotton industry survived, the impact of international integration surely reorganized its production. Vertically integrated producers (raw cotton -> yarn -> fabric) declined, while specialized producers (using imported yarn for weaving) prospered. Demand for plain white cloth fell, while higher-value, more differentiated products (creased, patterned or colored cotton) found a larger customer base. Some cotton villages disappeared while new ones popped up. Whether the traditional cotton regions survived the integration shock or not depended very much on the existence of helpful merchants who introduced imported materials and developed new domestic markets for the producers. Again, the merchant's role was essential in adjusting to a new environment.

Toward the end of the Meiji period, machines began to be introduced even in the traditional sector. This was prompted by the need to improve efficiency due to (i) rising wages; (ii) worsening of the terms of trade (i.e. the falling price of output (fabric) relative to input (yarn)); and (iii) recessions. But while machines were introduced, they were not exactly the same as the Western original. They were used in smaller scale production and some modifications were made (such as using wooden parts instead of steel). This can be considered modifications of indigenous method (I -> I*).

Modern cotton industry

Now we turn to the modern cotton industry. This industry had to be introduced as an entirely new technology (M -> M).

In early Meiji, Japan imported large amounts of cotton yarn as an input to domestic cotton cloth production. The government considered yunyu boatsu (import substitution) of cotton yarn to be an important national goal. Model factories in cotton spinning were established in the 1870s, but these SOEs did not succeed commercially.

The turning point came when Osaka Spinning Factory (OSF, or Osaka Boseki Kaisha) was established in 1883 as a private company by the strong initiative of Mr. Eiichi Shibusawa, the super businessman (lecture 3). Worried about rising cotton yarn imports, Shibusawa decided to create a new company that overcame the defects of SOEs. In particular, OSF had the following advantages.

OSF was an instant success. Although 1883 was a recession year (Matsukata deflation--see lecture 4), the company was profitable from the beginning. The lesson is that competitiveness depended critically on the choice of appropriate technology (which includes size, location and mode of operation). In addition, strong managerial leadership (Shibusawa) and deep practical knowledge (Yamanobe) were instrumental. Without these, purchasing expensive machines alone would not achieve efficiency.

The success of OSF had a powerful demonstration effect. Soon, several spinning factories were established following OSF's method. Largest among them were spinning companies of Hirano, Amagasaki, Settsu and Kanegafuchi (Kanegafuchi is now called Kanebo). Large-scale cotton spinning factories were concentrated in Kansai area (Western Japan, near Osaka). Young female workers were recruited by these factories with often inferior working conditions. But competent engineers were constantly in short supply. Initially, the product of these companies (yarn) was sold to domestic traditional weavers (namely, for import substitution). Later, their products were also exported as well as used internally to weave cloth within factories.

While the modern cotton industry became the pillar of Japanese manufacturing, they faced two problems. The first was the recession around 1900 which forced even big factories to restructure, merge or even close. The number of modern spinning factories declined from 78 in 1899 to 49 in 1904. After the shakeout, the three largest spinners were Osaka, Toyobo and Dainihon.

Another problem was the conflict of interest between ownership and management. Shareholders (rich merchants and former daimyos) were not interested in the textile business per se and only wanted quick and high return on their investment. By contrast, top managers and high-level engineers were well informed about technology and market and had a long-term perspective. Thus, the former demanded large dividends while the latter preferred retained profits for expansion. This tension sometimes escalated to the level where shareholders demanded the resignation of the management.

Overview on the machinery industry

As noted above, Meiji industrialization was basically light industry industrialization (especially textiles), and the machinery industry was still weak and internationally uncompetitive. Japanese machines were imitations of western models. In Meiji, "MADE IN JAPAN" meant low price and low quality. The industry still heavily depended on foreign technology and imports. During Meiji, there were only imports and virtually no exports of machinery. But as technology was being absorbed, preparations for the next period (Taisho and Showa periods) were made.

Initially, military SOEs dominated the machinery industry. Backed by the government, they were large in size and had newest machines imported from Europe or America. By contrast, private companies were smaller and less modern, and they normally used second-hand or Japanese machines.

But private-sector manufacturing was also growing, albeit gradually. Largest among private companies were shipyards and railroad car factories. Medium-sized ones included electrical companies such as Toshiba, NEC, Oki and Hitachi. Small companies produced various parts and devices. The input-output linkage between large firms and smaller firms was still weak. Large factories imported most machines and produced the remaining machines and inputs internally. Domestic procurement from other companies was insignificant at first. In other words, "supporting industries" did not really exist during Meiji.

Inter-firm migration of engineers facilitated technology transfer and absorption. Graduates from Technical University and technical high schools (lecture 4) first worked at SOEs or at relatively large private companies. After acquiring skills and knowledge, many of them moved to smaller private companies or established their own factories. In this way, Western technology was diffused widely within the machinery industry.

In Tokyo and Osaka, SMEs began to be concentrated in certain areas of the city and formed industrial districts. They tended to gather near large factories as a core. In Shiba area (near Tokyo Tower and Hamamatsu-cho Station today), large factories including Shibaura Manufacturing Company (private, "Shibaura" means Shiba Beach), Naval Weapon Factory (SOE) and Mita Manufacturing (SOE) were located. Around them, private companies gathered to produce machines and parts. Another industrial district in Tokyo was formed in Honjo-Fukagawa area (left bank of the Sumida River), specializing in metal products like nuts, bolts, and so on. In these industrial districts, SMEs not only competed against each other but also cooperated. If your factory did not have the right machine, you could ask your neighbor to do the work for you, and vice versa. Some of them became subcontractors of larger firms. However, their financial accounting was imprecise and pre-modern.

Japanese managers and engineers were generalists rather than specialists, and job hopping was very common. Workers were also characterized by the lack of discipline and low saving. The Japanese labor force at that time was more "neoclassical" and quite different from the labor force in the post WW2 era. To further promote industrialization, Japan had to transform these light-footed engineers and workers to stay in one factory in order to absorb and develop firm-specific skills. Japan later succeeded in doing this during the war time (1937-45, see lecture 9)

Railroad carriage and locomotive

Railroad cars (carriages) and railroad engines (locomotives) are quite different in required technology. The latter are far more difficult to manufacture than the former.

As to carriages, about 25% were imported and about 75% were domestically produced throughout Meiji. Among domestic producers, Shimbashi Factory (SOE) and Kobe Factory (SOE) were the biggest, together occupying the share of 64% of domestically produced carriages.

As to locomotives, all had to be imported at first. The government wanted to promote domestic production (i.e., import substitution). In 1900, the first locomotive was test-produced by the cooperation of an SOE and the private sector. Shimbashi Factory (SOE) provided the blueprint to Japan Railroad (private) and Kansai Railroad (private) and engineers were mutually exchanged. In 1912, the Railroad Agency nominated four private companies to copy-produce locomotives. But since these companies were still technically weak, the government provided them with technology, materials, production management, training (including opportunities to study abroad), and the promise of official procurement. Hence the market was secured.

During the Meiji period, both public and private railroads were built. But in 1906 the government nationalized virtually all railroad companies. Nationalization was carried out partly for military reasons and partly because many of the private railroad companies were unprofitable. One big problem with railroads was that local politicians built too many railroads to please rural electorate and win votes.

Shipbuilding

Among domestic shipyards, Mitsubishi Shipbuilding (private, in Nagasaki) and Kawasaki Shipbuilding (private, in Kobe) dominated. Both were former SOEs sold to influential businessmen. In the early days, ship repairing was more profitable than building new ships.

About half of the newly built ships were purchased by domestic private customers. The rest were produced for the navy or exported to China, Thailand, and other countries. The government supported the shipbuilding industry by offering subsidies for building large-sized ships above 700 tons (later, above 1,000 tons). Construction of naval ships was not very profitable but the government supplied materials for them. Due to the lack of supporting industries, shipbuilders produced most parts internally.

Electrical machinery

Shibaura Manufacturing (later Toshiba) was founded by Mr. Hisashige Tanaka, the inventor. Initially it was a relatively small operation with 502 workers, producing military goods. When naval factories stopped procurement from Shibaura (they now could produce internally), Mr. Tanaka's factory shifted to the production of private-sector electrical machines such as generators and transformers. When Shibaura Manufacturing faced a financial crisis, Mitsui Zaibatsu came to the rescue. Shibaura also established business cooperation with General Electric (USA). Similarly, Mitsubishi Electric Company cooperated with Westin House (USA) and Furukawa Electric Company cooperated with Siemens (Germany).

Even with these efforts at domestic production, imports still dominated the Japanese market of generators and transformers (about foreign products occupied 75% in 1911, which mainly came from the US). Toshiba's share was 16% and concentrated in lower capacity generators compared with US products.

There was a debate in the government as to whether the national telephone network should be built privately or publicly. The government finally decided to build it by itself. Oki Electric was approached by Western Electric to produce telephones but Oki refused. So, Nippon Electric Company (NEC) was set up for this purpose as a joint venture partner for Western Electric (54% share) in 1898. Oki and NEC competed for the official procurement of telephone equipment.

NEC was initially only a sales agent for Western Electric products, but soon began to produce its own products and became more independent from WE. NEC's success was due to (i) foreign technology and capital (from WE); (ii) secured markets through government procurement of telephone equipment; and (iii) the company's high technical absorptive capacity.

Mr. Shibusawa and Mr. Yamanobe

In 1877, Mr. Takeo Yamanobe was a 26-year old student majoring in economics and insurance theory in London. One day he received a letter from an unknown gentleman in Japan. The sender's name was Eiichi Shibusawa. The letter said something like this.

"Dear Yamanobe, your name was mentioned by a friend of mine. Japan imports too much cotton yarn today. We need to establish a domestic spinning industry. We need people who know both management and technology. Will you please study the cotton industry? I will create a company."


Mr. Shibusawa (1840-1931), the super businessman	Mr. Yamanobe (1851-1920), the super factory manager-engineer

Perhaps Yamanobe was annoyed. Who is this to tell me to change my subject? But after thinking a bit, he decided to follow Shibusawa's advice. He went to Kings College where he studied textile industry theory. But theory alone was not enough. He moved to Manchester, the capital of global textile industry. He posted ads in newspapers: PLEASE HIRE ME AS A COTTON INDUSTRY TRAINEE, I WILL PAY but no company responded. Finally, he met Mr. Bragg who allowed him to work and absorb practical knowledge in his factory for eight months--including technology, marketing and shipping. He learned very hard. Shibusawa sent him 1,500 yen (a huge sum at that time).

When the study ended, Yamanobe placed an order to purchase textile machines and steam engines, and went back to Japan.

In 1882 Shibusawa and Yamanobe discussed the factory site. For establishing the company, 250,000 yen was collected from rich merchants and friends of Shibusawa. Shibusawa's bank, First National, would lend the working capital. Osaka Spinning Factory was successfully launched in 1883. Yamanobe became the factory manager-engineer.


Osaka Spinning Factory, inside and outside.

Around 1900, there was a severe textile recession. Shareholders demanded higher and quicker returns. But Yamanobe insisted on long-term development of the company. Even the General Director criticized him. Being desperate and wanting to quit, Yamanobe visited Shibusawa's residence. Shibusawa said he would support him 100% so please continue to work for the company, so Yamanobe stayed. After a while, the recession ended and Yamanobe was promoted to the President of OSF.

So what do we learn from this story? Meiji industrialization was achieved by these powerful individuals full of energy, vision and leadership. Meiji was full of such people, and Japan relied on them for industrialization. New laws, deregulation and a level playing field are perhaps not enough. If Shibusawa did not write the first letter to Yamanobe, Japan's textile industry may not have started. (The next question is: how to generate these people in any given society?)

Visit Shibusawa Museum

Mr. Fuji of Kanebo

Mr. Masazumi Fuji was a super factory manager of Kanegafuchi Spinning Company (Kanebo). He graduated from Keio University and worked in the sales department of Suminodo Factory of Kanebo. This factory had obsolete machines, lack of work discipline and low capacity utilization. He worked 18 hours a day to replace or repair old machines and recruited 500 new workers. He restored the factory to full operation in three months.

After that, he was promoted to the managing director of Kanebo's Tokyo Factory. This factory was another disaster. He repaired, invested, and improved quality. He reduced the work force from 4,000 to 1,620. After three years, the factory became very profitable.

If Mr. Fuji were still alive, I would like to send him to your country as a JICA expert.

Iwanami Shoten, Sangyoka no Jidai 1, Nihon Keizaishi 4 (The Age of Industrialization 1, Japanese Economic History vol. 4), S. Nishikawa and T. Abe, eds, 1990.

Miyamoto, Matao, Nihon no Kindai 11: Kigyokatachi no Chosen (A History of Modern Japan vol.11: Challenges of Entrepreneurs), Chuo Koron Shinsha, 1999.

Nakamura, Takafusa, Nihon no Keizai Hatten to Zairai Sangyo (Japanese Economic Development and Indigenous Industries), Yamakawa Shuppansha, 1997.

Okazaki, Tetsuji, Kogyoka no Kiseki: Keizai Taikoku Zenshi (The Path of Industrialization: History before Becoming an Economic Giant), Yomiuri Shimbunsha Press (1997).

5. Meiji (3): major industries: silk, cotton and machinery

Three industries to be featured

Silk industry