The So-Called "2024 Problem" in Logistics Weighs Heavy on Japan, Inc.
Hey wait a minute! It just became 2023, and the Japanese are already up-in-arms about the countdown to the transportation equivalent of Y2K. What's the story?
What’s new: Like how a generation ago many feared that the so-called “Y2K” transition at the very end of 1999 would cause massive disruption on a global scale because many legacy computer systems were not designed to be able to handle a date in the year 2000, a similar looming deadline is striking fear into the hearts of supply chain specialists across Japan. It has been dubbed the "2024 Problem,” and it is likely to affect just about everyone in the country from April 1, 2024.
Similar to how most workers have been protected by labor reforms since 1985, effective April 1, 2024 regulations on overtime work for truck drivers in Japan will finally be capped at 960 hours per year or an average of 80 hours per month. In addition, no more than 100 hours of overtime will be permitted during any single month, and an average of more than 80 hours per month during a 2 ~ 6 month period will be prohibited. As the clock continues to count-down toward the beginning of the traditional fiscal year in 2024, there are dire predictions for how this regulatory change will cause a major mismatch between supply and demand in the transportation sector.
Why it matters: Demand for home delivery in Japan skyrocketed during the pandemic and shows no signs of letting up. This growth—fueled by deliveries for e-commerce transactions--comes just as the country's logistics industry grapples with a growing labor shortage. The new regulations limiting overtime for truck drivers are only going to make the situation worse, and something has got to give.
By the numbers: Even now there just is not enough capacity to handle the volume of deliveries across the country.
There were more than one million truck drivers in Japan in 2000, but by 2030, that number is forecast to halve. Grueling hours and low pay have made the job unpopular, and Japan's rapidly aging population means fewer people overall are entering the workforce. Delivery companies are finding it increasingly difficult to recruit staff.
Industry analysts predict that by 2030, there will be a 35 percent gap between demand for delivery and the size of the logistics labor force. That scenario would leave one-third of cargo in Japan undelivered.
The problem is, moreover, not some distant threat far into the future. A private-sector logistics expert has estimated a 14% shortfall in truck transportation capacity compared to fiscal year 2019 as early as 2024 once the new regulations kick in.
The big questions: The impact of the new regulations is likely to shake up the entire logistics industry.
It will reduce sales and profits for transportation and logistics companies. The regulations will curtail the amount of cargo that can be transported in a day, which means that unless freight rates are raised, revenues will decrease.
However, raising freight rates is not an easy task, as over 60,000 carriers are competing against each other. Shippers are willing to go with the lowest-cost carrier, making it difficult for carriers to negotiate prices with shippers.
In addition, the new regulations also stipulate an increase to the premium wage rate from 25% to 50% for drivers at small and medium-sized companies that work 60 hours of overtime per month. This will increase labor costs and lead to a decrease in profits.
The income of truck drivers will, most likely, go down. Truck drivers are paid an operating allowance based on the distance they drive. However, if the distance they can drive is reduced due to restrictions on working hours, their income will decrease.
Lingering concerns: Visitors to Tokyo often marvel at how delivery truck drivers literally sprint to deliver packages to a customer’s door. This extreme display of customer service makes it seem as though everything is delivered just in time in Japan, but the high-touch service model is actually covering up a lack of efficiency.
Japanese consumers and corporate customers have become accustomed to this practice, but it remains to be seen whether logistics companies can increase their average load factor. In Japan, the average load factor—the percentage of a vehicle's cargo capacity that is actually utilized—is only around 40 percent vs. approximately 60% in Europe and the U.S. Experts say this is because Japanese consumers tend to be more specific about when they want their products delivered, meaning fewer orders are shipped together. Japanese food processing giant Ajinomoto and its partners are, for example, working to increase their load factor by standardizing packaging and implementing cooperative distribution networks. It is an example of how manufacturers are devising their own solutions to reduce the pressure on carriers.
Related to this issue is the high cost of having to visit the same delivery address more than once if nobody is at home to receive the initial delivery. This issue is a real headache for delivery truck drivers in Japan, as a large portion of consumers are not comfortable with simply having packages left at their doorstep. It is prompting discussion about how retailers have been touting “free shipping.”
“Goods are valuable only when they are transported. It is important for people to understand this, but it is not easy to change. Perhaps free shipping is appealing in a literal sense. However, the correct description should be ‘We bear the shipping cost’ or ‘Shipping cost is included.’” – Hiroaki Oshima, director of NX Logistics Research Institute and Consulting, Inc.
What’s next: It may turn out that the development and diffusion of new technology may be the key toward solving these contentious issues.
Can Japan leverage recent advances in supply chain technology? In February 2022 the Ministry of Transport and the Ministry of Economy, Trade, and Industry together tested the use of a driverless fleet of delivery trucks. Firms such as Rakuten, Panasonic, and Japan Post are, moreover, exploring how to use drones and robots to eliminate delivery personnel.
Can Japan utilize the “physical internet” to address bottlenecks? In the same way that data travels through a series of networks and servers, the “physical internet” ships cargo through a unified route of networks that include various modes of transportation. The concept is gaining traction in the European Union, where logistics companies hope to use AI technology to get a system off the ground by 2030.
We have about 14 months to go until new limits will cap the amount of overtime that truck drivers can log in Japan. It might be wise to empty your shopping cart and stockpile some supplies in advance.
Links to Japanese Sources: https://www3.nhk.or.jp/nhkworld/en/news/backstories/1771/, https://www3.nhk.or.jp/news/html/20230117/k10013951381000.html, https://www.traffic-probe.jp/wp_all/wp03_1.html, and https://toyokeizai.net/articles/-/366267
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Interesting article!!