Questions:

1. With reference to the Japanese eye-glass manufacturing industry, discuss why productivity differs within an industry.

2. What does a buyer get from acquiring a Fukui manufacturer of eye-glass frames? Compare the benefits to Luxoticca vis--vis a private equity firm.

3. Do you agree with Mr Takeuchi that automation is a buzz-word?

4. If you were Mr Matsumura, where would you locate your factory? Discuss the advantages and disadvantages of locating in a cluster.

Fukui: Eye-Glass Prefecture(c)

Fukui Prefecture is situated on the northwest coast of Japan, over 400 kilometers west of Tokyo. In 2014, over 95 percent of Japanese-produced eye-glass frames were made in Fukui Prefecture, principally in the cities of Fukui and Sabae. In the early 20th century, the Fukui economy was dominated by agriculture. Taking advantage of the seasonal lull in employment during the winter months, Mr Masunaga Gozaemon and his brother Kohachi started a business in the village of Shono to manufacture celluloid eye-glass frames. Initially, the quality of Fukui-made eyeglasses was low. To raise standards, Mr Gozaemon established a guild like system in which full-fledged craftsmen could set up their own businesses. Production took off during World War I, and by 1937, the Fukui industry comprised 70 factories employing 800 workers, and producing 1.5 million pairs of eyeglasses a year.

In the 1980s, Fukui manufacturers perfected the production of titanium frames. These are light and sturdy, and cause fewer allergies than conventional metals, but require considerable skill to make. The strong tradition of craftsmanship in Fukui enabled the production of titanium frames.

Mr Shoji Gozaemon, great grandson of the pioneer, Masunaga Gozaemon, emphasized, "One of the characteristics of Japanese craftsmanship is a kind of redundancy of detail. There is a tendency to pay careful attention to the minutest details. The spirit of Japanese craftsmanship often involves spending more time and effort over producing something than is strictly necessary" (Nippon.com 2012).

Besides manufacturers of eye-glass frames, the Fukui industry also includes manufacturers and suppliers of lenses, sunglasses, reading glasses, parts, materials such as titanium wire and preformin, and machines and tools.

With the entry of low-cost Chinese manufacturers into the market, the manufacturing of eye-glasses in Fukui prefecture peaked in 1992. Within twenty years, by 2012, 40 percent of Fukui eye-glass manufacturers had gone out of business, and employment and production dropped by one-third. Another challenge is demographic. Japan is a rapidly ageing society. In just eight years between 2011-17, the working population of Sabae fell by 11 percent to 30,000.

One possible response is automation. Fund manager, Howard Smith, asserts that "with chronic depopulation challenges in rural areas, most companies must adapt or die. That involves planning for succession and investing heavily in automation" (Financial Times, 2018).

Mr Ryozo Takeuchi is chairman of Takeuchi Optical, founded in 1932 and presently employing 80 persons. Mr Takeuchi is also president of the Fukui Optical Association. He describes automation as a buzz-word, and maintains that metal frames must be finished by hand. In his factory, titanium frames pass through the hands of ten different workers and are then polished for 72 hours in a bath of pulverized walnut shells.

Another response has been to shift away from the previous OEM (original equipment manufacturing) model, in which Fukui produced eye-glasses and parts for international brands such as Prada and Dior. In 1996, Fukui manufacturer Boston Club launched its own brand, Japonism, and followed up in 2002, by opening a retail store in the fashionable Minami-Aoyama district of Tokyo.

Chief designer of Boston Club, Kasashima Hironobu, remarked, "Traveling to international fairs overseas ... brought home to me that constantly emphasizing the technical know-how we have built up over the years is not enough to make us internationally competitive. We need to promote the worldview expressed by our brand and appeal to the consumer by emphasizing the values that lie behind it" (Nippon.com 2012).

Boston Club's previous strategy had been to design products that could only be made with Japanese technology. Turning design convention on its head, Boston Club decided to emphasize durability - to produce eyeglasses which could be used for life. It developed the new Rudder Hinge which can be detached and replaced when necessary. With replaceable parts, the frames can be used almost indefinitely.

In 2003, over 20 Sabae manufacturers joined to develop an industry brand, "291." In 2008, they opened Glass Gallery 291, a retail outlet in the Aoyama district of Tokyo and then another outlet in the Megane Museum at Sabae. In 2017, Masunaga Optical, the company founded by pioneer Masunaga Gozaemon, employed 173 workers at its factory, and operated retail stores in Tokyo, Osaka, Nagoya, and Nara.

However, not all Fukui eye-glass manufacturers have been able to adapt. Some lack the managerial expertise or capital. Looking out from his factory, Mr Takeuchi pointed to three businesses that had recently gone bankrupt.

Some owners are selling. Founded in 1966, Fukui Megane presently employs 170 workers and specializes in making titanium and solid gold frames. It pioneered multi-colored gold frames and is still the only the producer in the world. In March 2018, Fukui Megane sold a 67 percent stake to multinational eyeware manufacturer, Luxottica, which owns brands including Ray Ban and Oakley, and manufactures for brands such as Chanel, Prada, and Giorgio Armani.

Luxottica Group Executive Chairman, Mr Leonardo Del Vecchio, explained that "The acquisition of Fukui Megane represents a first step for the entry of our Group in the world of Japanese production. We intend to continue investing to re-create a productive pole of excellence in Sabae, in line with the Luxottica model. For the first time in the history of eyewear, we will have under the same roof two great artisan schools such as the Italian and the Japanese ones" (Luxoticca 2018).

The aging ownership of other Fukui eye-glass manufacturers without successorship plans presents an opportunity for mergers and acquisitions. Specialists, Nihon M&A Center, M&A Capital Partners, and Strike, can help find buyers and consolidate and automate the industry.

In 2007, former investment banker, Mr Kenzo Matsumura, bought five companies that were spun off from the merger of Japanese toy manufacturers Tomy and Takara. Among them was a trading house that sold reading glasses through a television shopping channel. Mr Matsumura expected that, in a fast ageing society, the demand for reading glasses would boom. However, the reading glasses were bad and hardly profitable. The cost of production was 3,300 Yen, the trading house charged a wholesale price of 3700 Yen, while the television channel priced the glasses at 10,000 Yen.

The condition of the factory in Sabae was parlous. In Mr Matsumura's words, "The machinery was battered and looked 40 years old. There were women doing lens coatings by hand. Everything was manual. The defect rate was 30 percent" (Financial Times, 2018).

Major lens manufacturers like Hoya and Nikon outsourced production to China and Thailand. Mr Matsumura criticized their strategy, "If you fully automate a factory, you can be in Japan running that factory more productively and at lower cost than in China" (Financial Times, 2018).

He set up an automated factory in Chiba prefecture, east of Tokyo, which produces Hazuki reading glasses at a rate of 20,000 a day. Shrouded in secrecy, with further automation, the factory is expected to triple the rate of production.

Hazuki has also repositioned the product as a sophisticated fashion item, while maintaining the retail price at 10,000 Yen. In February 2018, during the Winter Olympics, Hazuki spent US$5 million on television advertising, which led to a spectacular boost in sales.