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Hitachi Research Institute

President Column

Commentary by our President, Keiichi Shimada

#5: Digital and Metabolism

 How many companies do you think there are in the world? According to OECD statistics, the number of companies reached approximately 36.3 million in 2016. These figures are limited to 36 OECD member countries in Europe, the Americas, and Asia, and do not include emerging economies such as China. Referring to the numbers in China, according to the latest China Statistical Yearbook, in 2017 there were approximately 22 million companies (corporate organizations). This brings the total number of companies to 58.3 million. The number of companies in India and other emerging economies is unclear, but we can be sure that there are at least 60 million companies worldwide.

 Looking at statistical data from the past, a trend of increasing numbers of companies becomes apparent. For example, in China there were 10.6 million companies in 2012, meaning that the number has doubled over the past five years. In simple average terms, there has been an increase of 2 million companies every year in China alone. Unfortunately, no figures were published for some OECD countries in 2012, so we cannot identify the trend in total companies over the same period for these countries. However, it is clear that the number of companies has increased in almost all countries, albeit not to the extent seen in China. For example, the number of companies has increased from 4.12 million to 4.24 million in the United States, and from 2.18 million to 2.46 million in Germany.

 It is small to medium-sized enterprises (SMEs) that have supported this increase in the number of companies. SMEs account for approximately 36.2 million of the 36.3 million companies in OECD member countries. In other words, 99.8% of companies are SMEs. The definition of an SME differs from country to country. While the OECD definition of an SME is a corporation with 249 employees or less, in the case of manufacturing companies in Japan the definition of an SME is a company with 300 employees or less and capital or investments of 300 million yen or less (the OECD statistics are a simple total from countries with different definitions of SMEs). Looking at the figures from the various countries, there appears to have been little change over the past five years in the proportion of companies accounted for by SMEs, at around 99.6-99.9%. The number of both SMEs and large companies has been increasing. The figures show that as well as new SMEs coming into existence, some of these SMEs go on to grow into large companies.

 It seems likely there are several reasons for the growth in the number of companies. For example, potential reasons could include the metabolism of the industry, or the creation of new businesses. In terms of metabolism, we occasionally read articles about how the relentless development of e-commerce in the United States by the likes of Amazon and e-Bay has driven some department stores and supermarkets into bankruptcy. However, there are also reports that the number of stores is actually increasing domestically. The metabolism of distribution services is progressing, for example through warehousing clubs, specialty stores with enhanced customer service, or BOPIS (Buy-Online, Pickup-In-Store) with enhanced “last one mile delivery” to customers on the assumption of collaboration with the company’s own e-commerce. In the U.S. distribution industry, there are laws and systems to ensure a fair commercial environment, a typical example of which is the Robinson-Patman Act. When a claim is made on a company by a third party, the company has a responsibility to disclose information about price-setting and the grounds for calculating rebates, as well as contractual conditions, and to explain their legality. This removes barriers to entry by eliminating questionable business practices, such as use of a dominant position to force price adjustments or demand back margins, and it promotes the metabolism of the industry. This also has the secondary effect of encouraging the development and introduction of IT and digital systems that create more efficient trading between companies. This includes the visualization of cost structures for each product, introduction of EDI, and automated inventory management and order placement through the use of IoT.

 Innovation that leads to the creation of new business helps to attract talented personnel and investment, and promotes the birth of startups and further growth at existing companies. Professor Hermann Simon, who is from Germany, uses the term “Hidden Champions” to refer to SMEs in niche fields that secure a top three global market share, or the top share in a continent. As of 2015, there was a total of 2,746 Hidden Champions globally, and around half of them were said to be German companies. In Germany, progress has been made through industry-academia-government collaboration on the development of an environment that supports research and development at SMEs. These efforts are being led by federal and state government-supervised public research institutions, such as Fraunhofer and Max-Planck, which have research bases in many different regions, as well as by the Steinbeis Foundation, which supports joint research, and universities. Research and development is being carried out jointly with local SMEs with the goal of creating new business in fields such as healthcare, chemistry, automotives, materials, and industrial machinery. What’s more, efforts are being made to promote the digitalization of manufacturing through the “Industrie 4.0” policy, which has been built upon a regionally-distributed research environment through partnership between industry, academia and government.

 Incidentally, among OECD member countries, Japan is in a minority of countries where the number of companies is falling as a trend, alongside Italy and Ireland. Looking at Japanese domestic statistics, such as the White Paper on Small and Medium Enterprises, in 2016 the number of large companies was 11,000 and following a rising trend, but the number of SMEs had fallen by 270,000 from the 2012 level to 3.58 million. It is not just in the past five years that the number of companies has been falling in Japan. This is a long-term trend that has been happening since the late 1980s. Looking at the business startup and closure rates, the business closure rate has remained at around 5-6%, whereas the business startup rate has slumped at 1-5%. The fact that SMEs are not being taken over has not helped, but the figures give the impression that the fundamental problems is the low business startup rate. Even if the business closure rate were high, if the business startup rate were even higher, the number of companies would be rising. In other words, this is a question of the metabolism of industries, businesses, and companies. A number of procedures are necessary for opening a business, such as developing and improving commercial goods, developing partnerships and customers, and business continuity management. Today’s digital technology helps us to carry out these transactions efficiently. Developing an environment that helps to promote the business metabolism, such as ensuring fair competition and providing easy access to the latest technology, would likely act as a powerful incentive for companies to introduce digital technology.