Large firms must not abuse power in transactions with subcontractors

Editorial

12:41 JST, January 14, 2022

Amid soaring costs for raw materials, many small and midsize companies find it difficult to pass the expense on in their selling prices.

Large companies are said to be placing orders with their small and midsize subcontractors at extremely low prices, among other activities.

In response to the situation, the government has drawn up measures to make it easier for subcontractors to pass on the rising costs in their selling prices. It should investigate the actual situation and strengthen enforcement.

With the recovery of the global economy, prices of a wide range of products, such as crude oil, steel and grain, are rising. The domestic corporate goods price index, a measure of transaction prices between companies, rose 9% in November 2021 from a year earlier.

But it is difficult to raise the prices of consumer items, and the consumer price index in November rose only 0.5% on a year-on-year basis. It is said that the resulting burden has been concentrated on small and midsize firms.

According to a survey by the Japan Chamber of Commerce and Industry, a little more than 80% of small and midsize companies said they had been unable to pass on the increasing costs in their selling prices.

When the central government conducted an interview survey on them, it was found that one electronics and telecommunications-related subcontractor had been threatened by its prime contractor with replacement by another subcontractor unless it lowered prices to the same level as those of competitor firms.

Industry associations comprising firms in the transportation industry, the majority of whose members are small and midsize companies, claim that even if they ask shippers to let them reflect rising fuel costs in freight rates, their requests are often turned down.

The law governing subcontractors prohibits activities such as large companies using their dominant bargaining positions as prime contractors to unilaterally demand that subcontractors reduce prices.

According to the Fair Trade Commission, it could be an illegal act in violation of the law if large companies do not respond to negotiations with subcontractors even though fuel and other prices have gone up, or ignore requests from subcontractors to raise prices.

In fiscal 2020, the FTC issued recommendations and guidance in a record high of about 8,100 cases of violations of the law. Since then, as raw material prices have continued to soar, there is an urgent need to strengthen the surveillance of such illegal activities.

The FTC and other entities plan to designate industries that have major problems and conduct intensive on-site inspections. In fiscal 2022, the number of experts assigned to investigate problems involving unjust activities of major companies will be doubled from the current 120 staffers.

Prime Minister Fumio Kishida is urging the business community to raise wages in order to achieve the goal of his signature policy of a “virtuous cycle of growth and distribution.” For Kishida’s aim of improving the income of the middle class, it is essential to spread the income increase to the small and midsize firms that account for 70% of the nation’s employment.

Many large companies are showing good corporate performance, mainly in the manufacturing industry. They need to accommodate price hike requests from small and midsize companies as much as possible and make efforts to shore up the overall economy.

— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 14, 2022.