Global Economy / Time to shift focus from tech to standards

The Yomiuri Shimbun

By Fumihiro Kitayama / Yomiuri Shimbun Senior WriterIt is not necessarily true that goods and services will sell so long as they are of high quality. There are also cases in which the rules surrounding products have a significant influence on business. How do Japanese companies approach the type of rule-making at which Western firms so excel? This has become a major challenge.

Behind shift to electric vehicles

The automotive industry is approaching a significant turning point. The shift in the main type of vehicle drivetrain continues to progress, and in the 2030s, electric cars will become the most common eco-friendly vehicles (see chart 1).

Behind the scenes of the shift to electric vehicles led by the West and China, the hybrids pioneered by Toyota Motor Corp. are under siege.

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  • The Yomiuri Shimbun

  • The Yomiuri Shimbun

  • The Yomiuri Shimbun

Thailand, called the Detroit of Asia, is a market in which Japanese manufacturers have an 80 percent share of sales, and the start of the move to oust hybrids there goes back to around 2011.

The move was devised by the German auto industry. German manufacturers, which were at a disadvantage relative to Japanese hybrids that were treated favorably by the tax code, requested a narrowing of the tax treatment gap with the diesels that are their forte. They sought a change from a tax scheme based on engine displacement, which was beneficial to hybrids, to a tax scheme based on CO₂ emissions. They also presented trial calculations that indicated Thailand’s tax revenue would increase if these changes were enacted.

Ultimately, the tax reforms brought into effect by the Thai government in January 2016 diminished the advantage held by hybrid vehicles.

In the United States, California has excluded hybrids from the category of eco-friendly vehicles starting with 2018 models. Japanese manufacturers that do not meet the standards requiring a certain percentage of their sales to be eco-friendly vehicles are buying emissions allowances from U.S. electric vehicle manufacturer Tesla Inc.

Tesla is also engaged in lobbying in Canada. In 2016, they succeeded in having similar environmental regulations introduced in some provinces.

Why did these changes to the rules occur?

The assessment of relative merit in terms of environmental friendliness varies depending on the criteria used. For example, when one takes into account the sources from which electricity is generated, electric vehicles are not necessarily superior.

“One factor behind the loss of hybrids’ advantage is that Japan’s public and private sectors did not join together to put forward an effective opposition,” Deloitte Tohmatsu Consulting LLC senior official Keisuke Hanyuda said.

West leads the way

By actively participating in making regulations, companies create demand and sometimes even undermine the superior position of a rival company. This technique is nothing new.

The production of hydrofluorocarbons (HFCs), used as coolant in air conditioners and other products, will gradually be cut back from now on. However, this market would not have arisen in the first place without the intervention of corporations.

How to prevent the destruction of the ozone layer? In this debate, which began in the 1970s, the U.S. chemical industry demanded evidence showing that chlorofluorocarbons (CFCs) were harmful. They claimed that instituting a ban when there were no alternatives would create confusion.

U.S. firm DuPont later cooperated with research by the U.S. National Aeronautics and Space Administration (NASA), while at the same time steadily making progress in developing HFCs. Three days after NASA released its conclusion recognizing CFCs as harmful in 1988, DuPont decided to halt the production of CFCs.

By the end of 1989, they had acquired about 20 related patents, and began producing HFCs the following year. This put DuPont ahead of the then timetable for the Montreal Protocol (see below) ban on CFCs, according to DuPont’s corporate history.

When the European Union was drafting its environmental standards, which were enacted in 2013, Daikin Industries Ltd. sought to have standards adopted in the bloc that recognized the energy-conserving effects of inverter technology, which is an advantage Japanese firms have.

They lobbied in Europe, and succeeded in both protecting the environment and securing a market.

However, there are not many cases in which Japanese companies have succeeded in influencing the creation of international rules.

Western companies proactively lobby across borders. The funds they spend on this are far greater than those of Japanese companies (see chart 2). The standards established by the International Organization for Standardization (ISO) (see below) among other organizations are also a means by which to capture markets. The secretariat, which is at the center of the debate over the formulation of such standards, tends to be made up of Westerners, and in recent years, the rising prominence of China and South Korea has been conspicuous (see chart 3).

Deft strategy

Technological skill does not necessarily guarantee a competitive advantage.

The Roomba home vacuum cleaner robot by U.S. firm iRobot Corp. has a market share of roughly 60 percent in Japan, but in fact, a Japanese company had also completed a prototype before the Roomba went on sale in 2003.

It was not that this company had gotten a late start in developing sensors or the like. The delay in bringing it to market was believed due in part to concerns over the risk of accidents — for instance, “What if it runs into the Buddhist altar and starts a fire?”

Had the company acted on such concerns, such as by creating safety standards, they might not have missed the business opportunity.

There are rules that companies should create, and rules they should oppose. Toshihiko Fujii, a consulting fellow at the Research Institute of Economy, Trade and Industry, expressed concern that “lessons from past cases are not being taken advantage of.”

Automated driving

In the new industrial revolution brought about by artificial intelligence and the internet of things, “innovation and rule-making will advance in parallel,” according to Toshifumi Kokubun, managing director of Tama University’s Center for Rule-making Strategies. One part of this can be observed in the moves around automated driving.

The revised traffic laws enacted by the German government in June 2017, with levels of automated driving (see chart 4) based on difficulty, opened up a path to realizing Level 3, in which the system plays a major role. German automaker Audi AG announced new models compliant with Level 3 in step with the legal reforms.

High-speed driving will require further reforms to the system, but one can see Audi’s intention to gather a vast amount of data ahead of time, and seize the initiative at the stage of genuine automation.

In January, U.S. automaker General Motors Co. announced plans to put Level 4 to practical use as early as 2019, and U.S. authorities expressed their inclination to support this effort as well.

Japan does not appear to be leading the way in making rules for growth sectors. The private sector adopts the rules that the public sector creates, and overcomes the barriers with technology. This kind of earnest position by Japanese manufacturers will not always be effective going forward. How can we create a framework for competition? The pressure is on to respond quickly.

■ Montreal Protocol

This international agreement was established to regulate the production and consumption of things like specified chlorofluorocarbons (CFCs), in order to protect the ozone layer, which absorbs ultraviolet rays. Its adoption in 1987 led to the widespread use of hydrofluorocarbons (HFCs). It was later discovered that HFCs are greenhouse gases, resulting in the gradual shutdown of their production.

■ International Organization for Standardization

This is the leading nongovernmental organization for establishing specifications and quality standards for goods and services in order to facilitate international business. Founded in 1947, its headquarters are in Geneva. Its standards have been adopted by about 160 nations, and extend to environmental practices and quality control as well.Speech

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