MMRCDISCUSSION PAPER SERIES
No. 533

A Research Note on Global Supply Chains in the After-COVID-19 Era1
Takahiro Fujimoto
The University of Tokyo
August 2020東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

A Research Note on Global Supply Chains in the After-COVID-19 Era1

Takahiro Fujimoto
The University of Tokyo
August 2020

1This discussion paper is a translation by Mihail Marinov of a revised version of Fujimoto (2020),
an MMRC Discussion Paper (No. 530) that was published in May 2020. I would like to thank Mr.
Marinov and Prof. Daniel A. Heller of Chuo University for helping the author publish this English
version.
1

Abstract: This exploratory article aims to preliminarily describe and analyze the spread of newcoronavirus (COVID-19) infections and its impact on global and local supply chains in Japanesemanufacturing industries and firms. Based on existing literature on industries, firms, and disasters,
we characterize the 2019-2020 new coronavirus pandemics as “the first global and invisible
disaster in the era of global competition,” in which risks of factory shut-downs caused directly or
indirectly by infections can happen at any part of the global supply chains. This is also an invisible
disaster that affects human productive resources, as opposed to visible disasters that destroy nonhuman physical productive resources. In the latter case, the organizational capabilities for quick
recovery of damaged sites and ramp-up of substitutive production are key factors, while theprotective capability for defending the factory and keeping it uninfected is critical in the lattercase. We argue that the spread of the new coronavirus infections is a global disaster that broke out
in the middle of intense global competition, so dynamic balance between supply chain
competitiveness and robustness/resilience, including quick switching between a competitionfocused mode and a disaster-focused mode, is crucial. In this situation, certain factories withhigher levels of deep-level competitiveness and anti-disaster robustness, strengthened historicallyby intense competition and major disasters in the past, may take central roles in enhancing thecompetitiveness and robustness of a firm’s global supply chain as a whole. We also discuss the
future possibilities for rebalancing the supply chains of Japanese firms in Asia with the help of atriangular model consisting of Japan, China, and ASEAN countries.

Keywords: new coronavirus (COVID-19) infection, global disaster, invisible disaster, recovery
capability, substitutive production capability, protective capability, balancing supply chain
competitiveness and robustness, capability-transferring role of Japanese factories, rebalancing
Asian supply chains.

21. Scenarios for the after- COVID-19 era : A cycle of stability and crises
As of the first half of 2020 the actual status of the COVID-19 pandemic is not entirely certain,
so at the time of the writing of this paper nothing definite can be said about what the after-COVID19 world will look like. Therefore, currently no accurate projections can be made and only acertain number of scenarios can be contemplated.
1. A “better” scenario: This is by no means the best scenario because it still involves a large
number of people losing their lives but it is probably a better scenario. Based on the results of thepandemic countermeasures taken by different countries, an effective vaccine or medication is
eventually be developed and through vaccination or herd immunity the pandemic will come to an
end in a year or two. Even so, if we consider past experience with global pandemics, in the ageof globalization it will most likely be inevitable that every decade or so there will be a global
pandemic.
2. Influenza scenario: If, like the flu virus, the COVID-19 virus mutates rapidly and frequently, a
new vaccine will have to be developed every year but there still may be a pandemic every few
years due to incomplete vaccination. If a medication like Oseltamivir (also known as Tamiflu,
used to treat and prevent Influenza A and B) is developed, the mortality rate may fall but the virus
may still continue to spread.
3. Common cold scenario: The worst scenario is probably one that is similar to the spread of thecommon cold but in this case also accompanied by high mortality rates. As is well known, thecold affects the upper respiratory tract but the trouble is that there are a multitude of virus strainsthat cause the common cold which makes it harder for the immune system to respond effectively,
which in turn makes the development of a vaccine highly improbable. Current medication only
alleviates symptoms and does not cure the common cold. If COVID-19 follows this pattern, there
will be a pandemic for several months every year and it is entirely possible that travel restrictions
and lock-downs will become part of every-day life.
In other words, the after-COVID-19 world may face different degrees of travel restrictions,
ranging from once every decade or so to every year, and currently it is not possible to say how
often there will be restrictions. In any case, it seems likely that firms will need to change the way
they manage their production locations and global supply chains depending on which scenario
plays out. Therefore, now is the time to start making contingency plans to deal with all
possibilities.

32. Capability building and disaster response in the era of global competition: A historicalperspective
2.1. Supply chain competitiveness and robustness
Japan is a country where a large number of earthquakes, floods, and other disasters often
occur. One of the benefits of the long experience of having to deal with natural disasters is that,compared to other countries, Japanese industry enjoys improved supply chain recovery capability
and supply chain robustness/resilience2 to natural disasters. Even in large-scale national disasters
such as the 1995 Kobe earthquake and the 2011 earthquake and tsunami, the best Japanese
domestic manufacturing facilities were able to manifest their rapid recovery capability. In local
disasters, such as the fire at a manufacturing facility of Aishin in 1996, suppliers were also quick
to respond with flexible substitutive production which significantly helped recovery.3 It is also afact that Toyota is among the top manufacturers in the world in terms of supply chain
competitiveness and supply chain robustness/resilience.4
However, until now the capability to recover from physical damage to facilities due to visible
domestic disasters has attracted more attention, and the response to invisible global disasters suchas global pandemics has remained under-researched.
It is entirely possible that the best Japanese firms and manufacturing facilities will be able
to utilize their crisis response capability, which they have been building up in their effort torespond to visible domestic disasters, to respond to invisible global disasters this time, and again
display strong supply chain robustness, even internationally. Moreover, they may be able to do
this without impairing their supply chain competitiveness.
What must not be forgotten is that at least in the last thirty years earthquakes and epidemics
have been happening in the era of global competition among firms. The general human mentality
is to focus on emergency response when overwhelmed by the ferocity of a disaster and thus lose
sight of the big picture; however, even in the case of disasters we must remember that global
competition will continue to occur on a daily basis. So, what is important is to be able to strikethe right balance between supply chain competitiveness and robustness.
Thus, for example, calls for redesigning supply chains so that they will conform to
exclusively domestic sourcing in the middle of a pandemic tend to underestimate the importanceof the balance between robustness and competitiveness, and raise serious questions as to whether
this can be a sustainable long-term strategy.
2

In this paper the terms supply chain robustness and supply chain resilience are considered to bebasically synonyms. The term robustness is probably more adequate when discussing “visible” disasters
such as the 2011 earthquake and tsunami, whereas the term resilience is probably more adequate when
discussing “invisible” disasters such as wide-spread infections. In any case, in this study they have thesame meaning.
3
See Nishiguchi & Beaudet (1998)
4
See Fujimoto & Heller (2018), Chap. 8.
4

2.2. Thirty years of mega-competition and mega-disasters
The discussion of the need for balance between supply chain competitiveness and supply
chain robustness has to be made from the long-term perspective of history and should not be
guided by short-term goals. To do so, we need to look at what has happened in the last thirty years,
or the so-called post-Cold War era. The key point here is the almost simultaneous emergence inthe 1990s of two phenomena, namely, global competition and digitalization.
In the 1990s after the Cold War ended, China—a country with a large population and wages
as low as one twentieth of those in Japan—joined the global market, causing a large number ofcompanies to lose their price competitiveness and leaving them struggling to survive in theincreasing global competition. At the same time, assisted by the revolution in digital information,
many Japanese manufacturers of household electric appliances who had already begun to rapidly
introduce modularity into their product architectures, as well as old industries such as the textile
industry, saw their international competitiveness decline, with a large number of domestic
manufacturing facilities being closed down and transferred to China or other overseas territories.
By contrast, manufacturers of products with complex integral architecture such as highperformance automobiles were able to keep their competitive edge in product design and preserve
their important position in Japanese exports. To put it another way, the fate of the international
trade of Japan was decided by comparative advantages or disadvantages in product design.
However, in contrast to the USA with its rather unilateral and almost complete transfer ofmanufacturing facilities to China, even those Japanese industries that had seemingly lost theirinternational competitiveness continued to hold onto their domestic production locations
tenaciously. With the help of innovations in production along the lines seen at Toyota, companies
in these industries were able to significantly increase their productivity (sometimes as much as
several times) and turn their remaining domestic manufacturing facilities into competitive motherfactories (i.e., domestic plants that are able to compete with overseas plants).
With the exception of still competitive products like automobiles and fine chemicals,
domestic production facilities that were unable to keep up with digitalization and having lost large
chunks of their business to low-wage countries, were having a very difficult time in the past thirty
years, which by the way coincided with the Heisei era (1989-2019) in Japanese history. However,even at the end of the Heisei era manufacturing accounted for more than 20%, or more than 100
trillion yen of the approximately 500 trillion yen Japanese GDP, with nearly ten million people
employed. Moreover, this continued high demand for products manufactured in Japan occurred
even as birthrates declined and the population aged, which caused a serious manufacturing labor
shortage in Japan. Incidentally, among the G7 countries only Germany and Japan have
manufacturing industries accounting for more then 20% of GDP. It appears that the Japanesemanufacturing industry does not easily yield to earthquakes and other disasters, and in addition,5

it seems to have stubborn staying power even in the face of adverse conditions in global
competition after the end of the Cold War. This is the real condition of Japanese manufacturing,something which has eluded the attention of numerous newspaper articles and editorials that do
not properly look at long-term trends in manufacturing.
2.3. The domestic manufacturing facilities remain largely uninterrupted
In the news on COVID-19 we often hear how office employees can work from home whilepeople working at hospitals, supermarkets, restaurants, logistics companies, etc., need to bephysically present at their workplaces. That is undoubtedly so, and it also holds true for people
working in factories since, with the risk of stating the obvious, without any people at all a factorywould simply not run. However, we rarely hear in the media that a large number of factories inJapan are still operating even in the extremely adverse conditions of the COVID-19 pandemic.
This lack of attention is probably because it is seemingly normal that factories can still operate
during a pandemic. However, this is certainly not so. (On a side note, in April 2020 many car
factories in Japan had to suspend temporarily their production operations almost entirely due toreasons related to decreased demand for products or component shortages, not because thefactories themselves were directly affected by the COVID-19 pandemic).
Thus, it can be argued that, although falling short of achieving total victory over fierce global
competition in the last 30 years after the end of the Cold War, on the whole Japanese domestic
manufacturing has survived and is still in fighting shape. Opinions in the media proclaiming theend of manufacturing in Japan can hardly be substantiated, empirically or theoretically, and if we
consider the huge gap in wages (in the 1990s new factory workers received roughly 200,000 yen
per month in Japan versus 10,000 yen in China), the success of the numerous remaining
manufacturing facilities in Japan is not just modest, it is in fact astounding. The best Japanese
domestic manufacturing facilities have demonstrated great persistence not only in the face of
tough competition but also toward multiple devastating disasters as in the 1995 Kobe earthquake
and the 2011 earthquake and tsunami. Let us, then, take a look at some of the fundamental
discussion points concerning disasters and supply chain robustness.
3. The basics of the response to visible disasters
3.1. Visible disasters and invisible disasters
The current COVID-19 pandemic is the first truly global disaster in the era of global
competition. Consequently, attention should be given not only to the most recent emergency
responses but also to changes that will take place in the after-COVID 19 era in the industrial
competitiveness of individual countries, the structure of global industry, and the geographicaldistribution of global supply chains.

6As mentioned before, despite having to fight against heavy odds during the post-Cold War
era, the surviving Japanese manufacturing industry (more than 20% of GDP) has developed great
tenacity to present stubborn resistance to both devastating disasters and strong competition. Withrising wages in China and manufacturing facilities around the world thrown into confusion due
to viral infection, it is even possible that the Japanese manufacturing industry, which has alreadyshown great fighting spirit in adverse conditions, will be able to receive greater internationalrecognition.
Simultaneously with short-term emergency countermeasures, now is the time to also
consider a long-term response to severe global competition. The best Japanese firms (Toyota andothers) have been tempered by visible domestic disasters such as earthquakes and floods thatcause physical damage to their facilities; however, there are a number of question marks regarding
their ability to respond to invisible global disasters such as the current COVID-19 pandemic.
Some of these question marks are generated by the fact that the current situation differs fromprevious disasters in two major aspects. Firstly, it is a global disaster, meaning that it is notpossible to predict what factory in what part of the world will have to stop operating, and secondly,
it is an invisible disaster, meaning that even if there is no damage to facilities, employees may
still not be able to be in the facility due to viral infection. The challenge here is whether the best
Japanese manufacturers can deal with these newly emerged aspects of disasters.
To begin with, let us consider the basic differences between visible disasters and invisible
disasters. In the event of a visible disaster that causes physical damage, whether it affects a large
area as in earthquakes, tsunami, and floods, or a locality as in fires and explosions, damage isdone inside production facilities, including those of suppliers. In addition to daily preventive
measures, the key to effective response to visible disasters is supply chain recovery capability inthe early stages of a disaster. This capability has two major components: on-the-spot recovery
capability and substitutive production capability.
3.2. Response to visible disasters
Effective response to visible disasters needs to be built on the following considerations(Fujimoto and Heller, 2018). First, regardless of whether it is finished products or components,for each article produced by the plant the following four items need to be examined urgently:
demand volume per day, inventory volume, lead time for on-the-spot recovery, and lead time for
substitutive production. Then, the number of days worth of inventory on hand can be obtained by
dividing the inventory volume by the demand volume per day. The result will vary depending on
the product but most likely it will be somewhere in the neighborhood of two weeks. Extraattention needs to be paid to products whose demand may increase sharply depending on the7nature of the disaster (for example, medical devices or masks), in which case the number of days
worth of inventory on hand will decrease rapidly.
Having made this first step, there will be three basic options for ensuring supply chain
robustness, both domestically and internationally. The main goal is to ensure that the number ofdays necessary for supply chain recovery does not exceed the number of days worth of inventoryon hand (i.e., supply will not stop). First, if the lead time for on-the-spot recovery at the damaged
facility is shorter than the lead time for substitutive production, then all efforts should be directed
toward on-the-spot recovery, with substitutive production having a backup role. Second, if thenumber of days worth of inventory on hand and the lead time for substitutive production are both
shorter than the lead time for on-the-spot recovery at the damaged facility, then temporary
substitutive production should be selected until production at the damaged facility can resume.
And third, if production at the damaged facility cannot resume in the foreseeable future, thenproduction should be transferred to another area or region permanently, with preference given to
production facilities of the same firm in unaffected regions over those of different firms or inhouse production.
Also, preliminary measures to minimize supply chain disruption need to be considered
before a disaster actually occurs. In relation to that, it has often been suggested that such measures
include inventory increase and permanent multiplication and dispersal of production lines. Note,however, that under the guiding principle of balance between competitiveness and robustness,inventory increase and redundancy in production lines should be chosen only if they do not reducethe competitiveness of products and production processes, so basically they should be
implemented only as a last resort, with capability building in disaster response having top priority.
3.3. Virtual dual sourcing of production lines
On the assumption that the leading Japanese firms and the best manufacturing facilities havestrong on-the-spot recovery capability and substitutive production capability, the author argues
that virtual dual sourcing of production lines (i.e., making a single production line potentiallyserve as two production lines by ensuring rapid transfer of design information), is more effective
than permanent duplication of production lines, which carries the risk of reducing operating rates(Fujimoto, 2012; Fujimoto and Park, 2014). Installing two production lines in different places for
products with identical designs without regard to future consequences is likely to jeopardize longterm global competitiveness if the operating rates of both lines drop and manufacturing costs risedue to redundancy. What is important is to always strive for balance between competitiveness androbustness. Leaning too far to one side or the other may easily lead to wrong decisions.
The discussion so far has been centered on the role of organizational capability in theemergency response to visible disasters as exemplified by Japanese firms. Can this organizational

8

capability also help with the emergency response to invisible disasters such as the COVID-19
pandemic? The next section will address this question.
4. COVID-19 and the defensive capability of supply chains
4.1. Response to invisible disasters
In general, the main difference between visible disasters and invisible disasters lies in thelocation of the damage. Visible disasters strike inside production facilities and the response isdirected toward recovery inside, whereas invisible disasters caused by viruses striking outside
production facilities and the response is to protect the inside of the production facilities fromdamage coming from outside, i.e., a protective response is directed toward defense against outside
threats. The latter can be likened to a besieged castle where the defenders need to bring inprovisions and at the same time prevent the enemy from entering the castle.
A recent example of an invisible disaster is the Fukushima nuclear disaster where
manufacturing facilities in the vicinity of the nuclear power plant had to be permanently closed
down due to inability to prevent radiation from entering the facilities. To continue with themetaphor, in that case the castle fell to the enemy and had to be abandoned.
Unlike radiation, however, COVID-19 needs human-to-human transmission or indirectcontact via contaminated surfaces to spread itself, so if proper screening procedures for people
and supplies are conducted, manufacturing operations in plants can continue largely uninterrupted,
unless the national or local authorities order closure.
4.2. The defensive capability of manufacturing facilities against contamination
If employees get infected, it means that the defense has been breached, the manufacturing
facility has been contaminated and has to be shut down, and can reopen only after a thoroughdecontamination and proper countermeasures to prevent cluster infections among its employees.
If proper measures (e.g., sanitary control, physical distancing between employees, staggered
commuting and working hours, readjustment of production operations, teleworking foradministrative personnel, etc.) have been implemented, they are likely to reduce the risk of cluster
infections, thus potentially reducing the time the plant has to remain shut down.
These defensive measures are shown in Figure 1 in a more organized form as flows of humanbeings, materials, and information. Assuming that COVID-19 spreads via respiratory droplets andcontaminated surfaces, and that the infection is still active outside the factory, the minimum thatneeds to be done to keep operating rates high includes the following countermeasures (the basic
premise being that the authorities do not shut the facility down):91.

Border control (checking employees at the entrance of the factory for anti-virus protection)

2.

Hygienic control of inbound direct materials, food, etc., for anti-virus protection

3.

Hygienic control within the factory (washing hands, disinfection, wearing masks andprotective clothing, ventilation, positive/negative pressure rooms, etc.)

4.

Using physical distancing and staggered work times on the shop floor for anti-virus
protection (stopping assembly lines where work is manually transferred; restoring automaticconveyor lines; inserting sanitation/disinfection stations between manual stations; more lines
with fewer people; automation for eliminating or reducing manual work; one-way traffic in
aisles/pathways inside the factory building; measures for physically separating workers fromvisitors; replacing morning/evening meetings with remote ones; remote communication
between workers and supervisors; time spacing between shifts; dispersing employees
checking-in time to avoid congestion, etc.)

5.

Reducing number of employees in the factory (remote working by white-color employees;
reducing operation time by decreasing production; remote-controlling of production lines,
etc.)

6.

Anti-virus protection measures while commuting (avoiding public transportation as mush as
possible; using POVs (privately owned vehicles), car-pools and ride sharing by employees,
etc.)

7.

Checking and supporting employees’ health management while at home; employees’
education on anti-infection protection and countermeasures if infected8.

Hygienic control of products and other outbound materials

19.

Quick and thorough sanitation and washing activities for quick recovery from factory shutdown if infection occurs inside the factory.

10. Support for downstream and upstream factories, warehouses, and other sites in theirprotective

capability-building

andrecoveryefforts(both

in-house

sites

and

suppliers/vendors)
If we consider the historical background and the present state of organizational capability
building, it will be seen that the best Japanese firms have already proven that they possess strong
recovery capability against physical damage and, with regard to the above-mentioned
countermeasures, it is quite possible that they will be able to demonstrate strong defensive
capability against viral infections (the latter still needs to be verified with data).
As mentioned before, regardless of how strong their protective capabilities are,manufacturing facilities have to shut down and the flow in the supply chain has to stop if thenational government or the local authorities mandate a lock-down. In the spring of 2020 theJapanese government or local authorities did not mandate a lock-down, so employees could still
go to work and, compared with facilities in other world regions, Japanese domestic manufacturing
facilities basically continued to operate (with the exception of April 2020 when manufacturing
facilities in the automotive industry had to adjust their production volume due to demand
shortage).
4.3. Global disasters and the Japanese manufacturing facilities
During global disasters of the kind represented by COVID-19 where it cannot be reasonably
anticipated what manufacturing facility in which country will stop production operations, it isentirely plausible that, of all global supply chains, the Japanese domestic manufacturing facilities
will be the last to stop and the first to ramp up production operations once the disaster is over.
Although domestic facilities in Japan have been at relative disadvantage due to high wages, notonly have they reached high standards for productivity, quality, and flexibility in manufacturing
as illustrated by the so-called mother factories, but they are also likely to have sufficientorganizational capability to be the driving force behind global supply chains, irrespective ofwhether the disaster response calls for supply chain recovery capability for visible disasters or
supply chain protective capability for invisible disasters like COVID-19.
In the long run, by demonstrating excellence in recovery capability and protective capability
in past and current disasters, the best Japanese domestic manufacturing facilities may raiseawareness of the importance of global supply chain reconstruction among manufacturers in theafter-COVID-19 era.

1

5. Global/Local supply chains in the after-COVID-19 era – the example of Asia
5.1. The supply chain triangle in Asia
Based on the preceding observations, this section presents a rough estimation of the possible
course that global supply chain reconstruction and the restructuring of international division oflabor may take in the after-COVID-19 era. Let us first consider a simple model.
The model, as shown in Figure 2, depicts the global supply chain as a triangle, with one
manufacturer in country J (assumed to be Japan), one in country C in Asia (assumed to be China)
and one in country A (assumed to be an ASEAN country, for example Vietnam).

Country J is a high-cost country, however, owing to high productivity, quality, flexibility andrapid response to changes, the manufacturing facilities there have been able to fend offcompetition for thirty years and are currently acting as mother plants for facilities in other regions,continuing to produce a number of cost-competitive products. These facilities are so-called“competing mother plants” that have a strong recovery capability and substitutive production
capability when disasters strike domestically and, in addition, a strong substitutive production
capability when disaster affect other world regions.
The facilities in country C formerly had a competitive advantage in cost due tooverwhelmingly lower wages, however, since 2005 the labor cost in Country C has been basicallydoubling every five years, so that the local wages which used to be twenty times lower than in1

country J in the 1990s are currently only three to five times lower, with the consequence that alarge number of products made by export-oriented facilities in that country have been losing theircost competitiveness. On the hand, however, the domestic market in country C has been growing
rapidly, meaning that it still makes sense to have manufacturing facilities there to satisfy the needsof the expanding domestic market. The supply chains in country C benefit from a well-developed
transportation infrastructure; however, past experience (problems with the supply of rare earth
metals, the recent seizure of masks, etc.) shows that the authorities there do not hesitate to placeentire plants and their supply chains under direct government control, which erodes trust in the
supply chain system.
Before the 1980s the manufacturing facilities in country A were run by the government andwere primarily used to meet the demands of the local market but since the 1990s the importanceof export markets has been increasing. The economy of country A has been growing and thedomestic market looks promising. Although the growth in recent years has lead to a gradualincrease in wages, labor costs in country A is still lower than county C and it is quite possible that,in terms of cost competitiveness as an export base, the domestic manufacturing facilities may bepositioned better than those in country C. The domestic transport infrastructure and supplier base,however, need a significant amount of assistance to get to the desired level of development.
Thus, confronted by rising costs, it is likely that some manufacturers may opt to relocate partof their facilities from country C to country A. This will lead to a situation where in country A
there will be manufacturers from Country J (with predominantly integral product architecture,
relatively higher wages and productivity) and manufacturers from country C (with predominantly
modular product architecture, relatively lower wages and productivity). Consequently, thegovernment of country A may need to adopt various policies and strategies to be able toaccommodate both types of manufacturers.
5.2. Supply chain flexibility
Building on the preceding discussion, let us assume that manufacturers in all three countries
are under the threat of plant closure and lock-down imposed by the authorities due to concerns
related to the spread of a viral infection. Figure 3 shows what would happen if the manufacturers
in country C are forced to shut down their facilities temporarily.

1There are a number of supply chain configurations that are potentially well-adapted tooperate under these conditions. Taking into account the logic of economics and strategy theory,
as well as actual successful examples, however, the number of available options does not seem tobe very large. One effective strategy that provides a significant degree of flexibility is to have
manufacturing facilities in all three countries, with facilities in country J acting as mother plants
maintaining overall competitiveness, facilities in country C producing mainly for the local market,
and facilities in country A acting as an export base. When there is no crisis, this configuration iswell-adapted to facilitate competitiveness internationally. If a crisis occurs, for example apandemic, this configuration can be reconfigured into one that facilitates supply chain robustness
by the swift adoption of reciprocal substitutive production.
The key point here is supply chain flexibility. In other words, instead of relying on a single
configuration, firms should adapt to unexpectedly changing circumstances by rapidly modifying
their supply chains to facilitate either competitiveness or robustness. To be able to do so, firms
have to constantly improve their supply chain competitiveness, recovery capability, substitutive
production capability, and protective capability.
5.3. Switching between competition-focused mode and disaster-focused mode
In the last thirty years, American firms have been making good use of China with its large
population and low wages as a low-cost manufacturing base; however, in the current COVID-19

1

pandemic there are voices calling for a return to domestic sourcing, pointing out the weaknessesof overstretched supply chains. If carried out, this change would represent a move from one
extreme end to the other. This is an argument that arises from the enormous intimidation caused
by a global disaster, yet it clearly ignores the realities of global competition and the need forbalance between competitiveness and robustness, and it is definitely not a wise long-term strategy
for the after-COVID-19 era.
Regardless of the nature or ferocity of a global disaster, there is no need to contract supply
chains to the limits allowed by domestic industry. When there is no crisis or emergency, choosing
the location of a manufacturing facility should be based on striking a balance between two
principles: comparative advantage (facilities concentrated in countries that provide the best
opportunities as export bases) and local production (facilities dispersed among multiple countries
locally manufacturing products and components with high transportation costs). So, before andeven after COVID-19, the most competitive supply chains are always built on the optimal longterm considerations of international business.
However, once a crisis occurs, manufacturing facilities in Japan, with their integrated
manufacturing organizational capability that draws on team strength, need to provide support for
the recovery of facilities and component supply in disaster-stricken countries, and at the sametime they need to be prepared to shift to domestic substitutive production rapidly in case supply
from affected regions stops (i.e., they need to be able to reconfigure their supply chains rapidly).
The dynamic capability that enables firms to do so has to be developed and accumulated from thetime before a crisis occurs.
Moreover, not only manufacturing facilities in Japan but also all those in countries C and A
in the model need to develop their competitiveness and accumulate recovery capability,
substitutive production capability, and protective capability to make their supply chains resistantto both strong competition and devastating disasters. The accumulation of these capabilities needs
to start before a disaster strikes and incapacitates their supply chains. Naturally, it is the
manufacturing facilities in Japan with their rich experience in recovery from disasters that shouldpave the way for others to follow.
Thus, the optimal strategy for manufacturers is to make full use of global supply chains toenhance their competitiveness and at the same time to consistently develop their response
capabilities (recovery, substitutive production, and protection) before a disaster strikes, and when
it does, to shift rapidly to a configuration that enhances their supply chain robustness, and if
necessary, to switch over to local supply chains.
Or conversely, manufacturers may prefer to give priority to competitiveness and build
multiple reliable local supply chains based on domestic sourcing, and if any of the local supply
chains is stricken by a disaster, shift to a global supply chain based on substitutive production. In

1any case, such flexible global/local supply chains are one of the feasible strategies for the afterCovid-19 era that can be implemented in all three Asian countries in the model.
In the 21st century, firms that expand globally need to carefully pursue strategies for their
response to both competition and disasters. However, creating supply chains that are too rigid andconstrained within the tight limits of a local area due to an adverse experience caused by the initialshock of a disaster and thus forgetting the constancy of global competition and sacrificing
international competitiveness is an overcautious reaction that can hardly be a feasible strategy inthe medium- to long-term. Even firms with well-developed and competitive local supply chains
may find themselves in an undesirable position if, confronted by a large disaster such as anearthquake, for no other reason than risk distribution they decide to disperse their production lines
geographically, which may lead to a decline in their operating rates and cost competitiveness.
What is important in the era of stiff international competition, catastrophic disasters, andinfectious diseases is to prioritize competitiveness when there is no emergency and response
capability when there is an emergency, as well as to swiftly reconfigure supply chains whennecessary (i.e., it is important to have supply chain flexibility).
Addendum: Government projects for strengthening manufacturing facilities in Japan and
ASEAN countries
Here, with the help of the concepts and the framework proposed in this paper, an attempt ismade to examine the significance of two projects of the Japanese government from April 2020,
namely, to promote networking among overseas supply chains and to provide monetary incentives
for investment in domestic supply chains.
It can be argued that there is a certain amount of logic in a policy that encourages thestrengthening of Japanese manufacturers domestically and in ASEAN countries since in the longrun, having the goal of achieving an optimal global footprint for Japanese firms, this policy
provides incentives for the balanced positioning of manufacturing facilities in Japan, China, and
ASEAN countries. However, incorporating such policies in the COVID-19 emergency economic
package does not appear to be a very sound budgetary decision
Change in the balance of triangular supply chains in Asia: First, let us consider the
aforementioned projects in the long run. What the Japanese government is probably referring toin its newly promulgated policy is the issue of balancing production in the triangle of global
supply chains in Asia, i.e., the model suggested in the previous discussion, consisting of country
J (assumed to be Japan), country C (assumed to be China), and country A (assumed to be in
ASEAN). So, let us take a brief look at the historical background and future outlook of this issue.
A look at the history of the issue will demonstrate that until the 1980s the major
manufacturing facilities of Japanese firms were, of course, first in Japan, then in the West to deal1with trade frictions, and in some developing countries. However, in the 1990s after the end of theCold War, taking full advantage of overwhelmingly low wages and its ability to mobilize its workforce, China became the world’s factory, spurring a large number of Japanese firms on to establish
a manufacturing base there.
Among these firms were some which, pursuing short-term cost reductions, relocated all their
manufacturing facilities to China or other Asian low-cost countries without leaving a mother plantin Japan and because of this they deprived themselves of the key to global capability building.
Consequently, the entire supply chain of these firms was left to rely on low wages, with overseas
manufacturing facilities struggling to increase their productivity and their long-term global
strategy, instead of being successful, came to a dead end. The number of Japanese firms thatappear to have gone too far in transferring manufacturing overseas is not small. The author of thispaper is critical of the shortsightedness that appears to govern decisions made at the headquartersof such firms.
After the initial surge in the number of manufacturing facilities, the ability of China toprovide low-cost labor reached its limit in the mid-2000s and since then wages have been doubling
every five years, causing a gradual decline in the cost competitiveness of manufacturing facilities
serving as an export base in China. To put it in perspective, although being perfectly aware that it
is imperative to have manufacturing facilities in China, some firms began to suspect that they may
have been too enthusiastic in moving their production base to that country.
However, for a variety of reasons Japanese firms with their large number of manufacturing
facilities in China find it difficult to withdraw and, considering their efforts to establish an optimal
global footprint, it is quite possible that many of these firms are still overly dependent on theirChinese production base. This problem stems largely from the irreversibility of global strategy,
which in turn is generated by historical path dependence.
Many countries in ASEAN, on the other hand, are favorably positioned when compared with
China in terms of labor cost (for example, Vietnam is about half that of China), and with gradually
improving genba (on-site capabilities, workplace skills) and infrastructure levels, these countries
are turning into an ideal export base for Japanese firms. In fact, even some Chinese firms are
already relocating their manufacturing facilities to ASEAN countries.
To summarize, in the light of historical path dependence, accumulated experience of global
competition in the last thirty years, and in contrast to the what this paper considers to be thecurrent optimal strategy, it is likely that Japanese manufacturers have found themselves in asituation where they have too many manufacturing facilities in China and too few in Japan and
ASEAN countries.
The importance of domestic facilities in Japan: In fact, some leading Japanese firms are
already restructuring their supply chains along the lines suggested in this paper. In the 1990s the1electronic equipment company O relocated the production of its health care equipment products
to its plant in China due to the modular product architecture of the main products which is notwhere Japan has a comparative advantage, thus practically shutting down its domestic
manufacturing facility for the products. The Chinese plant of the firm was successful indeveloping its manufacturing capability and on the whole was able to achieve excellent results
but due to rising labor costs in China it could no longer continue to serve as an export base, forcing
company O to build a new manufacturing facility in a lower-wage ASEAN country. However, thefact that the company had plants in only two regions raised concerns over stability and generated
internal debates so after all it was decided to reopen the almost defunct domestic facility which,although small in size, possessed significant flexibility and soon became a mother plant. It wasthought internally that the reopening of the domestic facility laid the foundations for a more stable
triangular organization of global production. So, it appears that the revision of global strategy
with the goal of strengthening domestic and ASEAN facilities had already been carried out
independently by some leading firms well before such a strategy was promoted by the Japanese
government.
So, with regard to modifying the long-term global footprint of Japanese manufacturers andtheir supply chains, the two current projects of the government calling for a more balanced
distribution of production capacity in Japan (mainly mother plants), China (old export base), and
ASEAN (new export base) are not in conflict with the strategic orientation of leading Japanesecompanies.
More specifically, the projects of the Japanese government to encourage firms to strengthen
their manufacturing facilities in Japan (monetary incentives for investment in domestic supply
chains) and ASEAN (promote networking among overseas supply chains) fall in line with theintention of Japanese firms to optimize their long-term global strategies. In that sense, the author
is of the opinion that as a long-term industrial policy these projects are adequate. If this policy
indeed leads to a more balanced triangular organization of supply chains, then it should meet thedemands of Japanese manufacturers in the 2020s.
Budget issues: However, putting projects aimed at long-term strengthening of manufacturing
footprints domestically and in ASEAN countries in an economic relief package together withurgent economic countermeasures aimed at curtailing the COVID-19 spread that are necessarily
short-term in nature, raises some questions. The first impression is that these projects appear tobe taking advantage of the COVID-19 crisis.
The rationale behind the current government proposal is not entirely clear and the argumentthat the intention is to work out countermeasures against the spread of COVID-19 may be a farfetched explanation of the existing problem. If the proposal is motivated by an intent to reduce
dependence on imports from China and encourage investment in domestic manufacturing and in1

countries best fitted for export due to the adverse experience of domestic shortages of masks andother protective clothing made of non-woven fabric for which Japan relies on imports from China,
then this proposal does not contribute enough to achieving the original goal of providing support
for restructuring global footprints and supply chains, which is what the long-term strategy ofJapanese manufacturers should be.
To conclude, in contrast to what the optimal global footprint of Japanese firms should be,
the cumulative effect of their global strategy and their history of competing globally for a long
period of time is that numerous Japanese firms have most likely found themselves in a situation
where the have too many manufacturing facilities in China and too few in Japan and ASEAN
countries. In this context, the author thinks that the above-mentioned two subsidies with their goalof encouraging investment in domestic production and in ASEAN countries are appropriate as along-term industrial policy.
However, the inclusion of these subsidies in the emergency economic package against
COVID-19 is quite unexpected and gives the impression that financial stimulation for the
restructuring of supply chains is piggybacking on the COVID-19 budget. To put it bluntly, thepurpose of these subsidies is clear but the way they are granted is a little strange. Projects that
tend to be financed by taking advantage of political or other trends can be frequently seen in thegovernment budget and, personally speaking, this appears to be one of the techniques ofbureaucratic organizations to operate in the gray area that represents the border between what isallowed and what is not allowed.
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MMRC Discussion paper Series, No. 530, 1-15 (in Japanese).
Fujimoto, T. and Heller, D.A. (eds.) (2018) Industries and Disasters: Building Robust and Competitive
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Fujimoto, T. and Park, Y.W. (2014) Balancing supply chain competitiveness and robustness through“virtual dual sourcing” : Lessens from the great east Japan earthquake. International Journal of
Production Economics, 147, 429-436.
Nishiguchi, T. and Beaudet, A. (1998) The Toyota group and the Aisin fire. MIT Sloan Management
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