Prevent subcontractors from shouldering full burden of price hikes

Yomiuri Shimbun file photo
The Economy, Trade and Industry Ministry. In Chiyoda-ku, Tokyo, Japan on November 3, 2020

Many subcontracting businesses are suffering from the coronavirus pandemic and soaring material costs. It is imperative to promptly create an environment in which increased costs can be passed on to major companies.

The government has stepped up measures to prevent large companies from demanding that subcontractors keep prices extremely low.

Beating down prices is a violation of the law governing subcontracting, which aims to ensure proper transactions between large companies and small and midsize firms, but the pressure on subcontractors has reportedly been increasing recently.

The Economy, Trade and Industry Ministry will survey tens of thousands of firms in October to understand the actual situation regarding transactions. Interviews by experts who investigate problems involving subcontracting will be expanded, and the Fair Trade Commission will work to gather relevant information.

The government must strengthen its monitoring efforts and swiftly address problems if it finds any.

Rising costs have been affecting various fields. Starting in October, the national average minimum wage will be ¥930, up by ¥28 from the previous fiscal year. The record-high increase means greater labor costs mainly for small and midsize companies.

The domestic corporate goods price index, an indicator of trade prices among companies, increased by 5.5% in August compared to the same month last year, due to rising prices of raw materials, including crude oil, copper and wood.

On the other hand, consumer prices, the prices of everyday goods and services, have remained stagnant, reflecting persistent deflationary sentiment. This is likely to have a greater impact on small and midsize companies, which are in weaker positions.

According to interviews conducted by the economy ministry, a subcontractor in the automobile industry said whenever the contact person at one contractor is replaced the company receives verbal demands to lower prices by 5% to 10% without sufficient reason or discussions.

A subcontractor in the machine manufacturing industry said it received few new contracts after refusing to reduce prices by 20%. There were also many cases of subcontractors who had been told that if they did not accept price cuts, the contracting companies would change their suppliers.

Such actions could be interpreted as violations of the subcontracting law.

Many subcontracting businesses claim they do not have the opportunity to negotiate prices with major firms. The economy ministry has asked the Japan Business Federation (Keidanren), which comprises major firms, to accept subcontractors’ requests to negotiate price hikes. It is important to have a forum where both the contracting and subcontracting sides can have fair discussions.

Even amid the pandemic, business is picking up among some major companies, especially in the manufacturing sector. Such firms should be willing to accept higher prices from subcontractors who are struggling due to increased costs.

A virtuous economic cycle must be created in which consumption is boosted as pay increases in a wide range of fields, in addition to the minimum wage hike. To realize such a cycle, it is hoped that many companies will be able to increase their profits by passing on appropriate costs.

— The original Japanese article appeared in The Yomiuri Shimbun on Sept. 14, 2021.