The Journal The Authority on Global Business in Japan

Imagine a manufacturing plant in the perfect world of the Internet of Things (IoT). All machines are programmed, connected, and humming smoothly 24/7. Breakdowns are prevented by automated maintenance. Noise fills the plant, but no workers are in sight—with the exception of a few wearing white lab coats in a central control room.

That picture may be accurate today for some consumer products, such as pharmaceuticals, but, in reality, few fac­tories are so highly automated. One still sees technicians on the shop floor. This is particularly true outside consumer-focused industries.

Despite the hype around automation, the position is unlikely to change much for the foreseeable future—even in Japan, where labor shortages are especially intense.

Even the most advanced machinery makers say some tech­nologies will remain analog in a digitized world. A company may supply the most sophisticated industrial robots to customers, but to make them they often rely on 50-year-old machines operated manually by seasoned workers. If the machines break down, these skilled workers know how to fix them.

Even in a world of ubiquitous internet connectivity and automation, there is room for human intervention, because not everything can be digitized—at least not for a long time. Replacing equipment typically happens over multiyear cycles, during which workers take time to familiarize themselves with the kinks of the machines they work with.

The fashionable solution—in an increasingly tight labor market—is to use artificial intelligence (AI) to replicate human expertise. Many initiatives are underway to instill human nuance into AI so that it can reproduce a skilled technician’s movements precisely, eliminating the need for human apprentices.

Problem solved? Not so fast. AI, while perfectly capable of performing the tasks it is taught, cannot stumble across new and better ways of doing things. The advantage of person-to-person skills transfer is that over generations, we keep improving. Technological development is an accumulation of serendipitous accidents. This is the element often overlooked when presenting AI as a magic bullet in manufacturing.

Of course, human workers do have one huge disadvantage versus AI: they get older.

Like the Japanese population as a whole, the country’s manufacturing sector is suffering from population decline and a growing imbalance between young and old. According to a government survey, Japan’s manufacturing workforce shrank 9 percent, from 11.7 to 10.6 million between 2008 and 2018. While the share of workers in manufacturing aged 65 and over rose 2.4 points, from 6.5 percent in 2008 to 8.9 percent in 2018, the under-35 age group fell by almost four points from 29 percent to 25.1 percent.

Allowing older workers to stay on the job longer is one way to ensure continuity on the factory floor—traditionally a strength of Japanese manufacturing. Even so, today’s work environment is not kind to older staff. Most companies—79.3 percent of all companies and 88.7% of manufacturers—have a designated retirement age of 60, according to a 2017 Ministry of Health, Labour and Welfare survey. Although the revised Law for the Stabilization of Employment of Older Persons stipulates that employers must offer jobs to those who wish to remain employed up until the age of 65, their salaries are often slashed after they hit 60—by 20–40 percent.

When it comes to older workers, Japan could learn a lesson from Germany, another advanced manufacturing nation grappling with an aging workforce. Through a system of corporate governance that gives workers direct representation on company boards and a voice in management decisions, Germany works hard to retain older skilled workers. German manufacturers often provide tailored contracts to experienced technicians, who may work three hours a day, or on call. They sometimes receive mechanical assistance, for example, with heavy lifting.

ABB, an engineering powerhouse, founded a Generations Center in 2012 in Mannheim-Käfertal to promote a better workplace environment and in-house recruitment opportu­nities, as well as to address the healthcare needs of older employees. Bosch, a well-respected leader in the automotive sector, welcomes the retired experts to return as consultants on a project basis. Companies in Germany understand that these experienced workers value respect and care, which motivates them to work harder.

In Japan, a progressive approach to older staff is easiest seen at small to mid-sized companies, perhaps due to their acute labor shortages and the short distance between the shop floor and management. A mid-sized industrial pump manufacturer, for example, handcrafted flexible working conditions for a company veteran in his late sixties. Despite suffering cancer, the employee continues to contribute in quality assurance, his specialty, while teaching the trade to younger colleagues.

The traditional manufacturing sector in Japan is vertically constructed with layers of small to mid-sized suppliers which collaborate seamlessly, often despite a lack of capital ties. The older generation has built the trust to work together between companies, providing a hidden lubricant to the system. For this reason, we must not underestimate what older employees represent: human relationships in addition to technical competence.

For employers, investing in younger workers by offering training and benefits is a no-brainer. But young, talented employees may well jump ship, taking the current employer’s investment to another. Investing in senior workers—something employers may overlook—lowers that risk: senior workers have already demonstrated their loyalty.

Keeping older engineers happy, healthy, and working longer is a necessary defense strategy. Employers must ensure that their knowledge and skills are passed to the younger generation.

Older workers also preserve analog technologies and techniques. As companies digitize, analog processes are often neglected or dismissed by management. For those older staff who feel left out, a possible response might be management buyouts or starting their own companies.

There are examples of successful venture capitalists who focus on a niche group of entrepreneurs, such as SoGal Ventures, which specializes in helping women entrepreneurs. Why not a Japanese fund that would invest in older engineers with access to specialized, mature technology? With proper access to the global market, such companies could thrive.

Seeking external funding is not the only way to build scale. In the IoT era, factories are no longer islands. They can be connected online. If skilled tech workers and their shop floors are connected, they can form a networked manufacturing platform for outsourced operations through every step of the manufacturing process, from prototyping to scaling.

If those who need process expertise can be coupled with those who possess the equipment needed to do the job, older entrepreneurs can be an engine for the new “manufacturing-as-a-service” business.

The silver economy is a buzzword in developed economies. It tends to focus on older people as consumers, or their particular needs, such as healthcare. But one must not forget that older workers and entrepreneurs are a vital part of production in the silver economy. Older people are not simply warm bodies plugging a hole in the labor market, but a source of innovation and competitive advantage in manufacturing.

Nobuko Kobayashi is a partner with EY-Parthenon, a strategic consulting group within E&Y Transaction Advisory Services. Based in Tokyo, she specializes in the consumer sector with a special focus on multinational corporations operating in Japan.