Review of Subcontract Law: It Is Time to Change Unreasonable Business Practices

Editorial

14:59 JST, August 11, 2024

The situation in which unreasonable business practices impose burdens on small and midsize companies cannot be left unchecked. The government should review the Subcontract Law and correct long-standing practices.

The Japan Fair Trade Commission and the Small and Medium Enterprise Agency have held the first meeting of an expert panel to study revisions to the law. The panel will reportedly compile a revision bill by the end of this year.

Japanese companies’ business transactions are structured like a pyramid with multiple layers of many subcontractors. It has been pointed out that small and midsize companies have weak bargaining power and are unable to fully pass on increased costs to transaction prices.

The COVID-19 pandemic brought this adverse effect to the surface. The business performance of small and midsize companies deteriorated, and the situation worsened as the prices of raw materials and energy soared due to Russia’s aggression against Ukraine.

It is only natural and necessary to continually review laws and regulations in light of economic realities.

First, the practice of imposing lower prices on subcontractors when making purchases must be eliminated.

The JFTC has presented its opinion that if a large company refuses to negotiate with a subcontractor and leaves the transaction prices unchanged, this constitutes a bullying practice of imposing lower prices that is banned by the Subcontract Law.

In reality, however, there are not only cases in which large companies do not engage in prior negotiations — the discussions sometimes become a mere formality even if they do participate. The law should be revised to make it possible to advise large companies to take corrective action when prior price negotiations are insufficient.

The practice of large companies forcing their subcontractors to store molds free of charge, as seen in recent cases in the automobile industry, should not be overlooked.

Under the current provisions, it is considered a violation of the law only when a large company that has ownership of molds forces a client company to store them free of charge. Since last year, the JFTC has found five companies, including a subsidiary of Toyota Motor Corp., to be in violation.

Conversely, it is said that there are cases in which a subcontractor is given ownership of molds and is responsible for the cost of storing them, but the decision on whether to dispose of them depends on the convenience of the large company.

It is necessary to clarify that regardless of who retains ownership, it is also a violation of the law if a subcontractor is forced to store without payment molds that are effectively under the control of a large company.

There is also a focus on the logistics industry. Currently, transactions between shippers and carriers are excluded from the law, but the revision of the law is intended to bring such transactions within its scope.

Many transport operators are small, midsize or tiny businesses. If transportation fees are raised, drivers’ wages can be expected to rise. The law revision should also lead to an improvement in the so-called 2024 logistics problem, such as the shortage of truck drivers.

(From The Yomiuri Shimbun, Aug. 11, 2024)