The sun also rises

After more than a decade of challenging domestic economic conditions, the past several quarters have seen all of Japan’s crane manufacturers reporting increased revenues and profits. To say that these improving results are welcome would be a serious understatement. They come on the back of the most challenging period in Japanese industrial history.

Japanese power and influence in the worldwide mobile crane industry peaked in the early 1990s. Having already created a huge market for mini crawler hydraulic excavators, it wasn’t surprising that Japan would become the birthplace of the mini hydraulic crane. 1989 saw IHI introduce the first mini telescopic boom crawler crane – the 4.9t CCH 50T, and Kobelco launched the first mini rough terrain – the 7t capacity RK 70. The introduction of these and, soon, many other ‘mini’ cranes helped re-invigorate domestic Japanese crane demand.

Bouyed by booming domestic demand, in June 1990 Tadano purchased the Faun crane business in Germany for what now seems a very low price of DMk50m ($30m) from O&K. 1991 was an all-time peak year for Japanese domestic crane demand with 1,454 lattice crawlers and 5,337 telescopic mobile cranes (including 4,285 rough terrains) sold. By then, Japanese crane makers were active in every country of the world – having entered the then-daunting US market in the mid-1980s. Within a few short years those halcyon days were little more than a distant memory.

Over the next 10 years, domestic Japanese crane production rose to a peak of 7,244 units in 1996, only to nose-dive by 68% to 2,033 units in 2002. At the same time, the revenues generated from the sale of new Japanese cranes also plummeted 68% from Y278 billion to Y88.8 billion. Not surprisingly there was red ink everywhere.

Finally, Japan’s manufacturers had to cope with some of the pain and suffering felt throughout the industries of America and Europe during the 1970s and 1980s. In some ways, after 40 years of uninterrupted post-war economic expansion, the reversal was even more difficult for the Japanese to handle. Manufacturers faced what had, until very recently, been unthinkable – the end of the much vaunted ‘lifetime’ employment, lay-offs, voluntary redundancies, factory closures, etc. etc.

The depression that began in 1992 became the longest and most challenging since Japan became an industrialised nation in the reconstruction years following World War II. To many Japanese manufacturers, it must have seemed a lifetime. Understandably, as signs of improvement began to emerge in 2003 and 2004, buyers treated them with caution and scepticism – especially, and as usual, in the capital goods sector.

At another level, many realised that the nation’s macro economic structural problems had not been addressed and, as in many of the world’s other economic powerhouses, Japan’s politicians seemed reluctant to take on the tough and radical choices. After a difficult first term, the snap election called and decisively won in September by Prime Minister Junichiro Koizumi’s Liberal Democratic Party (LDP), has great significance not just to Japan’s broader economic and political agenda but specifically to the nation’s powerful construction industry and therefore to it’s crane and construction machinery makers. His decisive victory has many long-term implications.

Domestic spending on public works programmes in Japan grew dramatically during the 1970s, under successive all-powerful conservative LDP governments. These propelled the growth of the world’s largest construction contractors and machinery manufacturers and also continued a tradition of massive pork-barrel spending and corruption.

As Japan slipped into its first major recession in the early 1990s, a well-worn formula was adopted – increased public spending, especially in the massive, labour-intensive construction industry. This continued until Japan’s burgeoning national debt demanded containment, resulting in dramatic spending cuts in 1998. Soon afterwards, many of the nation’s construction contractors and machinery manufacturers were bathing in red ink.

Unlike the experiences of American and European industry during the cyclical recessions that they have faced, at the end of the Japanese recession, essentially all the local manufacturers of cranes and construction machinery have been left standing. It is worth remembering the dozens of American and European mobile crane makers that were forced to close their doors during the 1970s and 1980s – often due to significant pressure from competitors that they could not attack on their home ground – Japan.

The list includes Pettibone, Bucyrus, Drott, Austin-Western, Lima, Coles, Jones, Gottwald, Weserhutte, Menck, Pinguely and so many others. Take a look at Japan’s 2005 line-up of crane makers and you won’t see many missing from a 1970s beauty contest: Furukawa-Unic, Hitachi, IHI, Kato, Kobelco, Maeda, Sumitomo, Tadano – everyone is still around.

What’s the difference? Well fundamentally it’s cultural. Whereas the Americans and European nations come together with a “one for all and all for one” attitude, or Dunkirk spirit as the British like to characterise it, during times of outright war, the threshold for Japanese competitors to work together is much lower.

Basically, it seems that whenever Japanese economic or industrial interests are challenged by overseas interests, then that’s enough for them to swallow their individual business differences and work for the national interest. But, in an increasingly inter-dependent global economy, such self-serving strategies don’t always work. The western dog-eat-dog model isn’t always fair but it’s Darwinian root does tend to develop tough, resilient competitors.

When Japan’s recession began, the ground was already moving. Japan’s international economic success was based upon its ability to produce relatively simple products to a very high standard of quality that, thanks to world-beating manufacturing efficiencies were cost competitive. In the context of the crane industry, it was these strengths that made the Japanese telescopic truck cranes and (relatively) small lattice boom crawler cranes the best selling in the world. But while these Japanese cranes took over markets from the UK to Australia, without a rough terrain crane, the Japanese recognised, they could not take on the US manufacturers - and win. Later they would learn that they couldn’t win in central Europe without all terrains.

Japanese manufacturers influence their domestic market more than any other manufacturing nation is able to influence its consumers.

Japan is the most homogeneous industrialised nation in the world. It is also a relatively newly-industrialised nation with many cultural traditions that are medieval in their roots. Trading - buying and selling – is one of man’s oldest traditions and in Japan the tie between buyer and seller is much deeper than in most western societies. It is these ties, which extend through today’s distribution systems that makes Japan very challenging for foreign marketers to penetrate.

But being able to keep foreign competitors out has its drawbacks. Freedom from the influences of the rest of the world is not always good and does not always lead to the right products or marketing judgments being made. For example, like crane users everywhere, Japanese contractors and rental companies like their cranes to be rock-solid, conservatively rated and with not a hint of flexibility in the boom or the frame. They also want lightweight, transportable machines – which means the use of thin high tensile, “flexible” steels. Something of a contradiction there! Or as the Rolling Stones sing “You can’t always get what you want”.

Buyers of European cranes were forced, often unwillingly, to accept that the benefits of the new steels (longer booms and lighter more transportable cranes) also meant compromise - cranes were more flexible than in the days of yore. How were Japanese buyers spared this uncomfortable choice? Well, the Japanese government seems to work for the good of industry (at least in the short view). In this case, it means that Japanese regulations are either changed to suit the needs of industry or alternatively exacting transport weight and dimension limits - that elsewhere would dictate lighter weight machines – are circumvented by gaining homologation by breaking a heavy machine into separately transported pieces e.g. upper and lower, because in practice police and traffic enforcement turn a blind eye.

This has allowed, for example, 45-50t capacity RTs with hydraulic steering, boom overhand projections of 5-6m (17-20ft) and axle loads of 17-18t to trundle around the streets of Japan at 50 km/hr (30 mph).

One of the downsides of this ‘cosy’ environment is that cranes that would be illegal in much of the rest of the industrialised world remain roadable in Japan. In part, this led to several serious road accidents involving RT cranes, and over the past three years resulted in the recall of some 19,000 Japanese rough terrains – even though the impact on the manufacturers was miniscule compared to what would have happened in the US.

The other unforeseen consequence of this peculiarly domestic market environment is that while it makes it very difficult for lightweight, flexible European ATs to be sold in Japan, Japanese hydraulic cranes became out-of-step with the demands of the rest of the world.

So, although all the players are still at the table, much has changed – and mainly not for the better. Kato, once a leading supplier to Europe, Australia and markets around the world, has vacated many markets. The company still manufactures very good cranes that continue to give Tadano a run for its domestic money, but after several attempts, Kato’s efforts to build all terrain cranes for international consumption ran dry. Last year Komatsu ceased production of its own RT cranes and signed an OEM supply agreement with Tadano, which now supplies the earthmoving giant with 25 and 50t RTs.

Three years ago, declining overseas demand for Japanese truck cranes meant that Japan’s crane carrier makers, Nissan and Mitsubishi, didn’t see the merit in installing Tier II engines. As a result, Kato and Tadano truck cranes were excluded from many traditional markets. Similarly, after winning significant support in markets like the UK and Scandinavia, small Japanese city cranes based on mini rough terrains, their limited 50 km/hr road speed caught up with them. Resulting low demand meant that the manufacturers did not see the economic merit in engineering the cranes with new engines to meet current European emission standards.

Tadano is also the beneficiary of Kobelco’s increasing focus on crawler cranes and apparently reduced interest in telescopic cranes. Two years ago, Kobelco joined with Tadano in a manufacturing partnership of sorts. Under this deal, component and material purchasing is combined and Tadano supplies Kobelco with its 10 and 16t City Cranes as well as the carriers for Kobelco’s 25 and 50t RTs.

Since the early 1960s, a great strength of the Japanese crane industry was its use of truck crane carriers built by Mitsubishi and Nissan to automotive quality standards that were far superior to the carrier manufacturing abilities of American and European crane builders. However, this too, gradually, reached its sell-by date. While manufacturing truck crane carriers employing tooling and components taken from the Nissan and Mitsubishi’s vast truck and bus businesses made sense, the same benefits didn’t accrue when the all terrain vehicle arrived on the scene.

As demand for truck cranes declined, these same automotive makers didn’t see the profit potential in developing their now low-volume crane carriers to meet rapidly evolving market and environmental needs.

For a while, it looked like goodbye to the Goose that laid the golden egg – the truck cranes. Then along came booming Chinese demand and a lifeline. First Tadano set up its joint venture with Beijing Crane Works – becoming a 50:50 arrangement. This plant seems destined to become Tadano’s sole global source for truck cranes mounted on its newly acquired Nissan carrier technology. Not surprisingly, and despite the tense political scene between Japan and China, Japan’s crane and machinery manufacturers are rushing to relocate production to this vast new market and low-cost production base.

Although, in recent years, Kato has lost much of its global presence in the crane market it is developing its first ever overseas plant in Jiangsu Province, China with start-up slated for April 2006. Kato says it plans to import crane parts to Japan to begin with. Hitachi-Sumitomo is also busy in China, preparing to build its 30t lattice boom wagon crane at the Hitachi excavator plant. IHI already has a joint venture to build similar wagon cranes in China with Beijing Crane Works.

No doubt 2006 or latest 2007 will see production of some complete or partial Japanese crawler cranes being transferred from Japan to China. Furukawa-Unic has a joint venture with Taian to manufacture its small telescopic truck loader cranes which should start to produce in the new year.

The ties between Manitowoc and Kobelco; Terex and IHI on crawler cranes, and the ‘global alliance’ between Hitachi, Sumitomo, Link-Belt, Tadano, and Faun all offer opportunities for closer long term-relationships. The next global downturn will hasten the process and when one domino falls, others are likely to follow. The best of these deals today is that between Terex and IHI which recently celebrated its 300th crawler crane sold in just over five years. However, without some shared equity, all of these deals fail to optimise their potential. That can’t stand.

After riding out some very challenging years, Tadano is again in growth mode, looking to develop a full line of ATs to match those of its three arch rivals. Meanwhile Kato remains an enigma. So much to offer, so little interest?