The service industry (the tertiary industry) of Japan already accounts for 70% of GDP and employment. Growth in demand is particularly strong in the medical, nursing, and education sectors, and there is said to be a chronic labor shortage.
The labor shortage is an opportunity for transforming productivity
In recent years, there has been a shortage of labor all over Japan due to the low birth rate, aging population, and economic recovery. This has further intensified the pressure on the service industry, which was already facing a labor shortage. However, when looked at from a different point of view, a labor shortage can be an opportunity for structural reform and help increase added-value.
The labor productivity of the service industry is much lower than the manufacturing industry and also lower than the same industry in the United States. The labor productivity of job types such as wholesale, retail, restaurants, and hotels is less than half that of the United States, and the productivity of business services is less than 40% that of the United States.
There are three methods for raising productivity: (1) Making improvements in existing businesses or at individual companies; (2) Making it easier for companies to enter and leave the market to improve corporate constitution; and (3) Relaxing regulations to make it easier to create new business models.
(2) and (3) are ways to drastically increase the productivity of the entire industry, but (1) can also have the same effect.
Japan (and Japanese people) are not good at making major changes, but they are good at gradual reforms. This strength can be leveraged to make major improvements.
The actual problem is that although the overall service industry has low productivity, there are many individual companies with excellent productivity. All the companies that achieved high scores for their "scientific and engineering approach" and "service process improvements" in the Japan 300 High-Service Awards by the Service Productivity & Innovation for Growth (SPRING) have high productivity, regardless of their size. Even just learning from these companies and implementing their best practices could greatly improve the productivity of the Japanese service industry.
Aggressive IT investment that directly contributes to business is the key
In recent days, occupations being replaced by AI (Artificial Intelligence) in the future has become a popular topic. Joint research by Nomura Research Institute (NRI) and Oxford University estimated that 49% of the labor population will be replaceable by AI and robots in 10 to 20 years. This research analyzed the structure of the 601 occupations in Japan, estimated the possibility that each job could be replaced by AI, and calculated whether all tasks of workers would be highly likely (66% or higher) to be replaced by computers. This was a technical analysis that did not consider the impact on society or costs, but the fact that about half of jobs may be replaceable by computers surely means that there is a huge opportunity for improving productivity.
Uber is causing a storm in the taxi industry over the world, but has had little impact in Japan. The defining features of the Uber business model are: (1) Using non-professional drivers and (2) Increasing the appeal and operation rate of taxis via systemization—more specifically, increasing convenience using smartphones, GPS, and credit cards and increasing boarding rates. When thinking about adopting this system in Japan, (1) would be difficult because it would pose a problem to the taxi industry, but (2) could be effectively utilized to increase boarding rates.
The popularization of RFID (Radio Frequency IDentifier), an automatic identification technology, is imminent in the distribution industry. Although these tags have become cheaper than before, their applicability will be limited as they still cost about 10 yen each, but leading companies in the apparel industry have already attached RFID tags to all their products to conduct ordering and stock management of their products. Since RFID tags can be read wirelessly, productivity can be dramatically increased because product inspections can be performed immediately.
Aggressive IT investment (for increased sales and work reforms) is required for the systemization needed to achieve these things. However, Japanese companies currently perform passive IT investment (for cost reduction) and do not pursue aggressive IT investment. Human resources and budget are taken up by the maintenance of existing systems, and investment does not progress because of bottlenecks such as a lack of human resources that understand both business and IT, and the inability of systems to receive management assistance because they are based on trial and error. If we take a look at the United States, which has a large number of business assistance services, we can see that companies outsource passive investment and focus on aggressive investment.
There are three things that are important for the future service industry: (1) Outsourcing non-core work; (2) Learning from best practices; and (3) Focusing on aggressive IT investment. I believe that the key to solving the problems of labor shortage and mismatch will be solved by human resource cultivation that encourages people to take risks and not be afraid of failing.
NRI Research Paper Knowledge Creation and Integration August, 2017
Nomura Research Institute, Ltd.
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