Market Environment

Market Environment

Japanese companies have been steadily increasing their R&D and software expenditures for a long time. However, as technologies advance and the number of technical fields requiring development grows, companies have found it difficult to conduct R&D and software development by using in-house staff alone. Accordingly, a growing number of companies have chosen to use external resources. As a result, the technical human resource services market, centering on engineer dispatching, has continued to grow faster than R&D and software expenditures. In recent years, the pace of technological advancements in the automotive and IT sectors has been remarkable, and these investments continue to increase in such fields as AI, IoT, robotics, electric vehicles (EVs), energy saving and self-driving cars. According to a survey by the Nikkei, Japanese companies will increase their R&D expenditure by 4.5% year on year in the fiscal year ending March 31, 2019. This would be the ninth consecutive year of increases. R&D is a lifeline for corporate growth and is relatively unaffected by short-term economic fluctuations. However, the supply of workers in Japan is limited due to a shrinking working-age population, and the shortage of engineers is increasingly serious. Against this backdrop, the market for the outsourcing of design development, R&D and software development is expected to expand further.

Trends and Growth in the Engineer Staffing Market

The engineer dispatch market including manufacturing engineers is ¥1.8 trillion*1 out of a total worker dispatch market of ¥6.4 trillion*2 in Japan. TechnoPro is the largest company in the Engineer Staffing Market.

  • *1, *2:Based on “Results of Engineer Dispatching Business Report” and “Engineer Dispatching Business Status as of June 1, 2017, ” Ministry of Health, Labor and Welfare

The Eight Companies in the Engineer Dispatch Market

Rank Company Net Sales
(Millions of Yen)
Share
1 TechnoPro Holdings, Inc. (R&D Outsourcing, Construction Management Outsourcing) 148,966 8.3%
2 PERSOL HOLDINGS CO., LTD. (Professional Outsourcing SBU) 105,826 5.9%
3 MEITEC CORPORATION (Engineering Solutions Business) 99,461 5.5%
4 OUTSOURCING Inc. (Domestic Engineering Outsourcing Business) 91,367 5.1%
5 Yumeshin Holdings Co., Ltd. (Construction Technician Temporary Staffing, Engineer Temporary Staffing) 51,281 2.8%
6 BeNEXT Group Inc. (Engineer Segment) 43,886 2.4%
7 WDB Holdings Co., Ltd. 43,108 2.4%
8 Altech Corporation (The Outsourcing Business) 33,911 1.9%
9 VSN, Inc. *wholly-owned subsidiary of Adecco Group 32,619 1.8%
10 Forum Engineering Inc. 32,115 1.8%
  • Sources:Data calculated and prepared by TechnoPro based on materials published by individual companies (used earnings information only from operations in Japan).

In addition to engineer dispatching, the TechnoPro Group undertakes contracting and meets outsourcing demand in other ways. Japan’s Information services industry has a value of ¥16 trillion. Outsourced development is itself a major market, with outsourcing costs accounting for ¥6 trillion*. Our research shows that 25% of IT engineers are working at client sites, and most of these people are not from engineers dispatch companies but from smaller IT companies. We have an opportunity to take this market from smaller IT outsourcing companies that lack resources and licenses.

*2018 Current Survey of Selected Service Industries, “Ministry of International Trade and Industry”

Shortfall in IT Wokers

The pace of technological advancements in the automotive and IT sectors has been remarkable, and these investments continue to increase in such fields as AI, IoT, robotics, electric vehicles (EVs), energy saving and self-driving cars. A decreasing population means that increases in the supply of new human resources in Japan will be limited.
Against a backdrop of increasingly severe engineer shortages, the engineer staffing services industry is likely to continue growing.

Forecast Shortfall in IT Workers

Source: Ministry of Economy, Trade and Industry“Survey report about supply and demand of IT staff”

Mismatch between Japanese Employment Practices and the Labor Market

A mismatch exists in the Japanese labor market. Even today, many large domestic companies maintain traditional Japanese hiring practices: hiring of new university graduates, seniority-based compensation, and lifetime employment. Under this system, young workers receive relatively low salaries, with wages rising with years of service. This system incentivizes workers to remain in the same company, but creates a mismatch between productivity and wages for mid-career hires. Japan’s labor market mobility is consequently low, leading to concerns that the country’s international competitiveness will fall. In addition, workers who wish to change careers may consider the risk too great and be unable to fully utilize their skills. Another mismatch between supply and demand occurs because new-graduate recruits tend to prioritize the stability of lifetime employment, so prefer to work at large companies. Companies, however, are incentivized to minimize such hiring because of difficulties in adjusting staffing levels. To address such mismatches, TechnoPro provides engineer staffing that shields individuals from the risk of career changes, while at the same time placing engineers in optimal positions for leveraging their skills and experience. In these ways, we are raising the market value of engineers and helping make Japanese companies more internationally competitive.

  • Seniority-Based Wages and Wages Based on Work Productivity (Hourly)

    Source: “Equity Research Reprinted Report,” May 1, 2017, Investment Information Department, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
    Note: Produced by Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., based on the “Basic Survey on Wage Structure,” Ministry of Health, Labour and Welfare, Naganuma and Nishioka (2014) and other materials
    This curve of correspondence between worker productivity and wages was created by estimating worker productivity by age, looking at the proportionality of wages and productivity, and using trial calculations to hold total personnel costs at a constant level.
    Worker productivity by age uses trial calculations based on estimates from the “Background for Changing Wages in Japan: Seniority-Based Wages and the Impact of the Aging Workforce” Naganuma and Nishioka (2014).
  • Jobs-to-Applicants Ratio for College Graduates, by Scale Based on Number of Employees

    Source: “37th College Graduates Job Opening Survey,” Recruit Works Institute

An Increasingly Severe Shortage of Engineers and a Lack of Appreciation of Technology Skills in Japan

The shortage of engineers in Japan is growing increasingly severe; one reason for the mismatch between supply and demand is that Japanese engineers receive low compensation relative to their counterparts overseas.
According to a study the TechnoPro Group commissioned to Yoshifumi Tanaka, a professor at Doshisha University who specializes in research on the cultivation of STEM personnel, as of 2016 salaries of Japanese engineers were around 50% to 60% of US engineers.
The study also found that in the United States, engineer salaries were 2.5 to 2.8 times those paid to assemblers

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