Question

Fukui Prefecture is situated on the northwest coast of Japan, over 400 kilometers west of
Tokyo. In 2014, over 95 percent of Japanese-produced eye-glass frames were made in Fukui
Prefecture, principally in the cities of Fukui and Sabae. In the early 20th century, the Fukui
economy was dominated by agriculture. Taking advantage of the seasonal lull in
employment during the winter months, Mr Masunaga Gozaemon and his brother Kohachi
started a business in the village of Shono to manufacture celluloid eye-glass frames.
Initially, the quality of Fukui-made eyeglasses was low. To raise standards, Mr
Gozaemon established a guild like system in which full-fledged craftsmen could set up their
own businesses. Production took off during World War I, and by 1937, the Fukui industry
comprised 70 factories employing 800 workers, and producing 1.5 million pairs of eyeglasses
a year.
In the 1980s, Fukui manufacturers perfected the production of titanium frames. These
are light and sturdy, and cause fewer allergies than conventional metals, but require
considerable skill to make. The strong tradition of craftsmanship in Fukui enabled the
production of titanium frames.
Mr Shoji Gozaemon, great grandson of the pioneer, Masunaga Gozaemon,
emphasized, “One of the characteristics of Japanese craftsmanship is a kind of redundancy of
detail. There is a tendency to pay careful attention to the minutest details. The spirit of
Japanese craftsmanship often involves spending more time and effort over producing
something than is strictly necessary” (Nippon.com 2012).
Besides manufacturers of eye-glass frames, the Fukui industry also includes
manufacturers and suppliers of lenses, sunglasses, reading glasses, parts, materials such as
titanium wire and preformin, and machines and tools.
With the entry of low-cost Chinese manufacturers into the market, the manufacturing
of eye-glasses in Fukui prefecture peaked in 1992. Within twenty years, by 2012, 40 percent
of Fukui eye-glass manufacturers had gone out of business, and employment and production
dropped by one-third. Another challenge is demographic. Japan is a rapidly ageing society.
In just eight years between 2011-17, the working population of Sabae fell by 11 percent to
30,000.
One possible response is automation. Fund manager, Howard Smith, asserts that
“with chronic depopulation challenges in rural areas, most companies must adapt or die. That
involves planning for succession and investing heavily in automation” (Financial Times,
2018).
(c) 2018. I.P.L. Png. This case is based in part on “Sabae, Fukui: A Town with an Eye for Design”,
Nippon.com, 24 April 2012, “Luxottica Group Invests in ‘made in Japan’”, Press Release, Luxottica
Group, 6 March 2018, and “Made in Japan: can handcrafted glasses survive an automated world?”
Financial Times, 4 April 2018.
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Mr Ryozo Takeuchi is chairman of Takeuchi Optical, founded in 1932 and presently
employing 80 persons. Mr Takeuchi is also president of the Fukui Optical Association. He
describes automation as a buzz-word, and maintains that metal frames must be finished by
hand. In his factory, titanium frames pass through the hands of ten different workers and are
then polished for 72 hours in a bath of pulverized walnut shells.
Another response has been to shift away from the previous OEM (original equipment
manufacturing) model, in which Fukui produced eye-glasses and parts for international
brands such as Prada and Dior. In 1996, Fukui manufacturer Boston Club launched its own
brand, Japonism, and followed up in 2002, by opening a retail store in the fashionable
Minami-Aoyama district of Tokyo.
Chief designer of Boston Club, Kasashima Hironobu, remarked, “Traveling to
international fairs overseas … brought home to me that constantly emphasizing the technical
know-how we have built up over the years is not enough to make us internationally
competitive. ... We need to promote the worldview expressed by our brand and appeal to the
consumer by emphasizing the values that lie behind it” (Nippon.com 2012).
Boston Club’s previous strategy had been to design products that could only be made
with Japanese technology. Turning design convention on its head, Boston Club decided to
emphasize durability – to produce eyeglasses which could be used for life. It developed the
new Rudder Hinge which can be detached and replaced when necessary. With replaceable
parts, the frames can be used almost indefinitely.
In 2003, over 20 Sabae manufacturers joined to develop an industry brand, “291.” In
2008, they opened Glass Gallery 291, a retail outlet in the Aoyama district of Tokyo and then
another outlet in the Megane Museum at Sabae. In 2017, Masunaga Optical, the company
founded by pioneer Masunaga Gozaemon, employed 173 workers at its factory, and operated
retail stores in Tokyo, Osaka, Nagoya, and Nara.
However, not all Fukui eye-glass manufacturers have been able to adapt. Some lack
the managerial expertise or capital. Looking out from his factory, Mr Takeuchi pointed to
three businesses that had recently gone bankrupt.
Some owners are selling. Founded in 1966, Fukui Megane presently employs 170
workers and specializes in making titanium and solid gold frames. It pioneered multi-colored
gold frames and is still the only the producer in the world. In March 2018, Fukui Megane
sold a 67 percent stake to multinational eyeware manufacturer, Luxottica, which owns brands
including Ray Ban and Oakley, and manufactures for brands such as Chanel, Prada, and
Giorgio Armani.
Luxottica Group Executive Chairman, Mr Leonardo Del Vecchio, explained that “The
acquisition of Fukui Megane represents a first step for the entry of our Group in the world of
Japanese production. We intend to continue investing to recreate a productive pole of
excellence in Sabae, in line with the Luxottica model. For the first time in the history of
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eyewear, we will have under the same roof two great artisan schools such as the Italian and
the Japanese ones” (Luxoticca 2018).
The aging ownership of other Fukui eye-glass manufacturers without successorship
plans presents an opportunity for mergers and acquisitions. Specialists, Nihon M&A Center,
M&A Capital Partners, and Strike, can help find buyers and consolidate and automate the
industry.
In 2007, former investment banker, Mr Kenzo Matsumura, bought five companies
that were spun off from the merger of Japanese toy manufacturers Tomy and Takara. Among
them was a trading house that sold reading glasses through a television shopping channel. Mr
Matsumura expected that, in a fast ageing society, the demand for reading glasses would
boom. However, the reading glasses were bad and hardly profitable. The cost of production
was 3,300 Yen, the trading house charged a wholesale price of 3700 Yen, while the television
channel priced the glasses at 10,000 Yen.
The condition of the factory in Sabae was parlous. In Mr Matsumura’s words, “The
machinery was battered and looked 40 years old. There were women doing lens coatings by
hand. Everything was manual. The defect rate was 30 percent” (Financial Times, 2018).
Major lens manufacturers like Hoya and Nikon outsourced production to China and
Thailand. Mr Matsumura criticized their strategy, “If you fully automate a factory, you can
be in Japan running that factory more productively and at lower cost than in China”
(Financial Times, 2018).
He set up an automated factory in Chiba prefecture, east of Tokyo, which produces
Hazuki reading glasses at a rate of 20,000 a day. Shrouded in secrecy, with further
automation, the factory is expected to triple the rate of production.
Hazuki has also repositioned the product as a sophisticated fashion item, while
maintaining the retail price at 10,000 Yen. In February 2018, during the Winter Olympics,
Hazuki spent US$5 million on television advertising, which led to a spectacular boost in sales.

Questions:

1. With reference to the Japanese eye-glass manufacturing industry, discuss why productivity differs within an industry.
2. What does a buyer get from acquiring a Fukui manufacturer of eye-glass frames?
Compare the benefits to Luxoticca vis-à-vis a private equity firm.
3. Do you agree with Mr Takeuchi that automation is a buzz-word?
4. If you were Mr Matsumura, where would you locate your factory? Discuss the advantages and disadvantages of locating in a cluster.

Answer 1

1. Productivity differs within industry itself due to internal the economies of scale which the firms are enjoying. These are lower per unit costs of production—some large and established firms can produce good quality or even premium quality eye-glass frames at low or market rates due to the involvement of large labour force which is actively specialising in the production of eye-glass frames.The firms could be bound by the demand for eye glasses and frames from different market segments, for examples some might just   not consider quality but might want the frames to be trendy ,, some buyers may insist on certain specialised frames  and so on. Depending on such preferences too the market for glasses might be demanded and similarly on the supply side , they might be supplied at a higher price. Since its labor intensive , employing more labor, the skill differences between the labourers can also result in differences in productivity. Also a prominent cause can be that given a fixed amount of machines and adding more and more labourers to it will lead to issues like mismanagement as a result of overcrowding of the variable input onto a fixed input sometimes leading to cases like disguised unemployment where the marginal productivity of the variable factor is almost zero. Some Fukui manufacturers also lack managerial skills and capital which will definitely reflect upon the productivity of that particular firm.
2. A buyer acquiring a Fukui manufacturing eye glass frames gets to buy good quality frames – world class quality and also benefits  from the brand loyalty created by FuKui since in 2014 95% of eye glass frames were produced by Fukui Perfecture (alone) in Japan.They are able to buy sturdy titanium frames , where even the minutest components and details are carefully manufactured and detail is given importance. Accuracy is the watch word and automation and advent of technology has enhanced the quality of the Japanese frames. Fukui Megane, is the only producer of muulti colored gold frames in the world and hence the buyer of Fukai frames will be the exclusive owner of such a product which is likely  to add to the 'status ' of the buyer or the person who wears it.

Luxottica, a multinational eye ware manufacturer , who owns brands of premium quality and high end prices, offers frames which are often purchased for their so called ‘look’ and high end precision to detail and workmanship and presenting utmost satisfaction to its users.Two great artisans schools of Japanese and Italian will add more quality and bring about more brand loyalty since Luxottica, is already an established multinational company while Fukui is famed for its frames across the world.

This however would not have been the case had Fukui Megane had an agreement with a private equity firm, where capital, expertise and world wide access to international markets could be lacking. This could pose a problem to the already aging Japaneses population.

3. Yes. Automation will lead to improved supply at lower costs, this will lead to specialisation and improvement in labour productivity. Use of ‘battered’ and back ward techniques of production especially plant and machines will lead to higher depreciation costs. Hence automation is required as it will enable the frames industry to compete with its competitors both national and at international level.

4. Mr.Matsumura’s decision to set up the factory in Chiba Prefecture away from the cluster is a rational decision made on the basis that being among a cluster of industries could remove the ‘exclusivity’ factor to the firm and may be highly influenced by its competitors policies.

The factory is expected to triple its production levels . Mr. Matsumura ‘s , being an entrepreneur has chosen to risk setting up his factory away from the cluster of firms of the eye wear industry,

The advantages of such a situation is that the workers are more and mostly concentrated in the work of their factory alone—not exactly influenced by the activities of similar workers in other frames factories. It could lead to better productivity and higher levels of output as well as lower labour turnover.The firm might emerge a market leader and might attract workers especially experienced laborers towards it which might add to its growth.The firm may also be able to create a brand loyalty in the consumers in its vicinity and this may further enhance its image rather than being merely a pert of a cluster of firms.

The disadvantages are that the lone firm away from the cluster loses out on the benefits of being part of the industry –in the physical sense – like the external economies of scale or the benefits that arise to a firm due to external factors like availability of cheap labour, raw materials and transport and communication , especially industry related information which the other firms in the cluster might enjoy. The easy mobility of labor and other factor inputs from one firm to another which might reduce the costs of production might not occur to the single firm that were to stay away from the cluster. In the melee the single might  also lose out on employing the best experts in the industry.