Evasion of Subcontract Law: Don’t Allow New Practices of Bullying Smaller Businesses

Editorial

16:21 JST, October 31, 2024

There is no end to cases of large companies bullying small and midsize firms, and new practices are even spreading. It is hoped that the government will take thorough measures to prevent loopholes in the Subcontract Law.

An expert panel of the Japan Fair Trade Commission and the Small and Medium Enterprise Agency has begun studying measures against a commonly used practice in which large companies are evading the application of the law by making small and midsize firms increase their capital. The panel intends to compile a report as early as the end of this year.

The Subcontract Law is designed to protect small and midsize firms that are in a weak position in transactions with large companies. The law prohibits such actions as large companies imposing lower prices on smaller businesses and reducing the price to be paid after an order was placed.

Due to prolonged high prices, small and midsize firms are struggling to pass on increased costs through their transaction prices and have limited funds available to raise wages. The government is boosting its efforts to monitor violations of the law to ensure the growth of the Japanese economy. Under such circumstances, the revelation of a spate of evasive practices cannot be overlooked.

For the law to apply, there are certain standards such as a case in which the capital of the company ordering products is greater than ¥10 million but does not exceed ¥300 million, and a subcontractor’s capital is ¥10 million or less. Therefore, if the amount of capital of small and midsize firms is manipulated to exceed ¥10 million, application of the law is exempted.

In fact, a case has been reported in which an ordering company demanded that its subcontractor increase its capital and made it change from ¥10 million to ¥12 million. This is an act of taking advantage of the smaller firm’s fear of having a transaction be terminated if it refuses the demand.

There has also been a spate of cases in which, instead of making smaller businesses increase their capital, large companies reduce their capital and are treated as small and midsize firms. In addition, there reportedly are cases in which a large company creates a subsidiary with smaller capital and evades the application of the law through the transactions between the subsidiary and the subcontractor.

The government should consider effective new standards to prevent companies from evading the law. In addition to a conventional standard based on the amount of capital, criteria, such as on the number of employees and sales, could be established.

The Japanese economy is now at a turning point to shift from a cost-cutting economy, in which labor and other costs are reduced to sell products at lower prices, to a growth-oriented economy, in which both wages and investment increase.

It is essential for the vitalization of the Japanese economy to spread higher wage increases to small and midsize enterprises, which account for about 70% of the entire domestic employment.

Nevertheless, in recent years, there also have been a spate of problems, including violations of the law by major automobile manufacturers. For example, large companies forced their subcontractors to store molds for free, and others unilaterally lowered the prices they previously agreed to pay subcontractors for their products. These practices of bullying subcontractors are a deep-rooted problem that is an obstacle to growth. They are lamentable.

It is hoped that executives of large companies will recall the spirit of law — that they should grow together with small and midsize firms — and be aware once again of their own responsibility.

(From The Yomiuri Shimbun, Oct. 31, 2024)