The Overstretched Superpower
Does America Have More Rivals Than It Can Handle?
Japan is losing its Inc. The interests of Japan and its giant corporations, for so long the same, are diverging. The Mitsubishis, Toyotas, and Matsushitas -- the pride of Japan's postwar rebirth -- are joining the great multinational Diaspora. During the 1990s, the nation's best companies have been shifting production overseas faster than ever before. And the trend is likely to become more pronounced: capital investment abroad, a precursor of offshore production, has grown at a blistering pace over the decade. According to the Bank of Japan's semiannual survey of business, annual growth rates broke into double digits only in 1993, but probably topped 30 percent in 1996, while capital investment at home has lagged far behind. Partly this is pure economics, a response to the high yen and the maturing of Japan's economy, as well as the ever stronger pull of the global marketplace. But the numbers also represent a stinging corporate rebuke to Tokyo. The message of the multinationals is this: The low productivity and growth of this overregulated marketplace no longer work for us. Japanese firms across the board have seen dramatic deterioration in the break-even points and efficiency of their Japan-based operations.
CAPITAL LEARNS TO FLY
Today these companies must obey a new taskmaster -- not Tokyo's fractured alliance of businesspeople, politicians, and bureaucrats, but a global marketplace that has become, for many key industries, merciless toward the provincial and unproductive. It is a marketplace changed utterly by lowered barriers to capital, goods, and services, by ever more complex and expensive technology requiring strategic alliances across borders -- witness the "multimedia" melding of Japanese consumer electronics and American software -- and by the rise of opportunities and would-be challengers everywhere as capitalism burgeons universally. Just as important, it is a marketplace in which a slew of new Asian "economic miracles" has emerged to take Japan's place as the low-cost producer of manufactured goods. Japanese companies, opening up daylight between themselves and the home economy, have identified their interests with these foreign economies (in Malaysia, more than four percent of GNP is derived from Matsushita alone).
What this means is that while many Japanese multinationals will remain world pacesetters, the Japanese economy as a whole may not. The domestic economy, for instance, has all but lost important industrial segments like color televisions, VCRs, facsimile machines, and cameras. Not so Japanese companies. In fact, their global market share in these segments has not budged, thanks to their manufacturing networks outside Japan, mostly in Asia.
Japan's economic success was based on a consensus that what was good for Toyota was good for Japan. But that neo-mercantilist system, knit together by cross-shareholding among companies and lifetime employment for workers, is unraveling. With scarcely concealed relief, Japanese multinationals are leaving a very different Japan behind them. It is not the vibrant dynamo of legend, which once flooded the world with its exports, but an aging doyen of economies that is choking on regulation and unable, to a serious degree, to generate entrepreneurial replacements for its best and brightest. The slow growth that comes of maturity -- as well as the economy's giant size -- means that Japan cannot simply export its way out of recession. Whizzing technological change and convergence have made a mockery of the government's bureaucratic division of markets. And in the era of the outsourced corporation and fast, flexible alliances, many keiretsu relationships seem more of an unpleasant obligation than a strategic edge.
RETHINKING JAPAN INC.
Only now, after five years of economic stagnation, has it become evident that the problems run deeper than a cyclical downturn. Among business executives there is something of a new consensus -- against the rest of the system. A blue-ribbon panel of industrialists last year predicted that their manufacturing capacity in Japan will continue to lose competitiveness, a trend they blamed on globalization and the transfer of technology and skills abroad. They estimated that the number of workers in Japan's manufacturing sector, including autos and electronics, will drop by ten percent over the next three years. Their conclusion: Let's rethink Japan Inc. Japan's economic and social systems "have become largely ineffective and irrelevant," Shoichiro Toyoda, chair of Keidanren, Japan's most powerful business organization, observed bluntly in a newspaper column last summer.
This growing divergence between corporate, public, and private interests is probably the most important change in Japan in the 1990s. It is helping to alter the structure of the Japanese economy. And it should change the terms of the U.S.-Japan debate as well. Washington's most basic assumption about the "Japan problem" was always that Japan's corporate, public, and private interests were the same. The threat of Japan Inc. lay in the fact that these three sectors had united to create an export leviathan that, by the late 1980s, seemed certain to fulfill the vision of "Japan as number one" first laid out by Harvard's Ezra F. Vogel in a book of that title nearly two decades ago.
COMPETITION COMES HOME
Last November Prime Minister Ryutaro Hashimoto began an ambitious reform program to downsize the primary author of that vision, Japan's bureaucracy. But Japan's corporate giants are no longer waiting for Tokyo to make painful adjustments. Increasingly, they are reassessing their stake in Japan Inc. and giving Japan less weight in their investment calculations. The bigger and more successful the company, the faster it tends to go abroad -- which has only added to the aura of legitimacy around the abandonment of Japan Inc. Japanese investors on the Tokyo Stock Exchange, who once thought a bet on any company was safe, are now funneling their investments into multinational stocks and shunning the regulated sectors of the economy. By moving abroad gradually, Japanese companies can also circumvent the social taboo against layoffs and engage in slow-motion downsizing.
According to a 1996 Ministry of International Trade and Industry survey, in 1995 for the first time Japanese companies manufactured more overseas than they exported from home. The nation's Economic Planning Agency estimates that the ratio of overseas production to GDP, which hit a new high of 10 percent in 1995, will double by 2010, putting it nearly on a par with America's and surpassing Germany's, which hovers between 15 percent and 20 percent. The companies of the Tokyo Stock Exchange had 20 percent of their total productive capacity overseas in 1995, and that figure should jump to 22 percent for 1996. Most of the transfer has been to Asia; since 1993, well over half of Japan's foreign direct investment in manufacturing has landed there. Corporate Japan has hired more than 500,000 employees in the region, while unemployment in Japan reached a 40-year high.
Corporate Japan's outward expansion has had repercussions at home, further breaking down the business alliances that have characterized Japan Inc. As cheaper goods manufactured in Asia by Japanese multinationals have been sold in Japan, they have transformed the way consumers shop and retailers and producers do business. Consider the television industry. It was one of the first to be tempted by the effects of high yen appreciation and the appearance of lower-cost manufacturing bases in the rest of Asia. A massive transfer of capacity increased the "reverse" import share of color TVs in the domestic market from less than 10 percent in 1990 to more than 50 percent in 1995. The sudden availability of huge numbers of lower-priced TVs boosted sales by almost 20 percent in 1995 but triggered kakaku hakai, a retail price collapse fed by the increasing discount fever of strapped Japanese consumers. The drop in domestic prices caused a drastic reduction in margins for producers and retailers alike (for the latter, from 30 percent in 1992 to less than 15 percent today). That in turn compelled the sellers to sell more and more units, further pushing down prices in an endless spiral. Such cutthroat competition is unwinding the old cartelized relationships between manufacturers, wholesalers, and retailers -- the price-it-high-at-home-and-dump-it-abroad system that is the heart of Japan Inc. For decades, consumers' willingness to pay high prices at home subsidized industry's relentless seizure of market share abroad.
PENALTIES OF PIETY
Nothing epitomizes the new era so well as the alliance announced last fall between Matsushita and Japan's maverick retailer, Daiei. For years Daiei has alienated some of its biggest manufacturers by selling cheap. In 1964 Matsushita began a 32-year boycott of Daiei when the retailer tried to sell its products at a discount, threatening the 27,000 Matsushita- sponsored mom-and-pop outlets nationwide, which always sold at uniformly high prices. Because Matsushita must now increase volume to counter its ever- decreasing margins, it apparently no longer feels it can support its family of retailers. In December the two companies announced that Matsushita products would be sold at all 245 high-volume Daiei outlets. Matsushita's wholesalers have fared no better; their numbers have been slashed from 60 nationwide to just seven.
Notwithstanding the continuing pressure on corporations to maintain a large proportion of production in Japan, it is increasingly clear that companies that follow the old rules will suffer. Take Casio and Pioneer. In 1984 the two companies had similar balance sheets in terms of cash flow and return on equity. Then their strategies diverged. In response to the dramatic surge in the value of the yen in 1985, Casio began to shift manufacturing to Southeast Asia in a big way. Today its factories outside Japan account for nearly 80 percent of its manufactured product sales. Meanwhile, it has maintained high-value-added production in Japan through enormous investments in flat-panel displays and digital imaging technologies. Casio now has dominant market share in digital cameras worldwide and a significant stake in LCD pocket calculators and related electronic components, which it produces outside Japan. Pioneer, on the other hand, was slow to move production abroad; today less than 20 percent of its manufacturing is overseas. As a result, its strategy of remaining a diversified electronic component and audio-visual equipment manufacturer has lagged, punished by increasingly lower returns on investment. This translates directly into job losses -- pointing up the futility of bowing to social pressures to keep production at home. In September Pioneer announced the attrition of 800 more jobs in 1997. During the 1990s, the profit margins of corporate Japan's Asian operations have averaged 5 percent, considerably higher than domestic plants, which average a little more than 3 percent.
Corporate flight from the national nest is just another means -- if a faster one -- by which Japan's economy is maturing. As with U.S. companies, corporate Japan's movement abroad began with mere plants where Japanese-made parts were assembled, moved to outright manufacturing, and then graduated to transplanting whole cottage industries of suppliers. Today Japanese companies go abroad not to circumvent trade restrictions or ease frictions, which was the case when they built factories in the United States and Europe in the 1980s, but rather to escape their economy.
In this era of globalized markets, the process has been turbo-charged. New markets are not just opening at the usual rate, they are springing up everywhere at once. Some three billion people have been thrust into capitalism since the end of the Cold War, with tens of thousands of state companies privatized. Multinationals can no longer afford merely to export to these markets; they must be on the scene to compete with budding local rivals.
Production itself has become transnational. In emerging high-tech industries, multinationals must collaborate much more closely than before to create value. In fact, mixing and matching nationalities is almost an imperative for many strategic alliances -- witness the rise of long-distance phone partnerships like Concert (MCI and British Telecom) and Global One (Sprint, Deutsche Telekom, and France Telecom). Or consider multimedia, which cuts across the traditional (and, in Japan, heavily bureaucratized) boundaries dividing computers, telecommunications, electronics, entertainment, and film.
For these reasons, as well as the stubborn inefficiencies of Japan Inc., the transnationalization of Japan's companies is likely to happen faster than that of America's. Indeed, the growing discontent at home with the Japanese model has parallels worldwide. For the first time in history -- far more so than the pre-1914 era of globalized economies -- a truly multinational set of norms for corporate behavior is emerging. Almost no one talks about "Japanese" or "American" business styles much anymore, as was the vogue in the 1980s. The best practices of each country have been digested after a decade of intensive global bench marking. Few Japanese are unacquainted with the legend of Bill Gates, who has become the new icon of success in Japan, a figure of almost MacArthur-like awesomeness, even as there is hardly an American manager who has not taken up kaizen, or continuous process improvement, and just-in-time inventorying. And no company in an especially international industry like computers, autos, or finance can afford not to reorganize its divisions along global product lines.
What do all these corporate transformations mean for U.S. policy toward Japan? Mainly, U.S. trade negotiators must digest the implications of the globalization of Japan's multinationals. Three decades of trade negotiations should have taught them that it is extremely difficult to alter Japan's fundamental economic structures at the negotiating table; the marketplace is a much better forum. The United States should identify and apply pressure at the points in Japan where change is occurring because of the unwinding of old alliances.
Japan's major concession last April on pension industry deregulation, for example, was more the result of the rebellion of Japan's multinational manufacturers than of pressure at the bargaining table. Although Japanese life insurance firms howled that they sacrificed too much after the conclusion of talks to open their domestic market last fall, hard-pressed Japanese multinationals saw deregulation as essential to introducing international competition to Japan's financial sector, which has yielded abysmal returns. In fact, straddling the two worlds of a still somewhat insular Japan and a global marketplace, Japanese multinationals may have become their nation's principal trade diplomats. In two other major negotiations with Washington in the past two years, on autos and semiconductors, it was Japan's private sector that saved the day, hatching face-saving agreements at the eleventh hour that have helped bring U.S.-Japanese tensions to their lowest level in years.
Having created tens of thousands of jobs in the United States, Japanese companies have also acted as benign tutors to an American public that is far more sophisticated about trade than in the Japan-bashing 1980s, as Pat Buchanan found out to his dismay in his bid for president. While Detroit has squawked about Japanese incursions for decades, Americans have largely benefited. Total U.S. auto industry employment, at 993,000, is 11 percent higher today than in 1965, before Japan's onslaught -- in part due to U.S.-based Japanese plants. And few would disagree that, thanks to competition from the likes of Honda, Nissan, and Lexus, Detroit now makes much better cars. Little wonder that Japan-bashing no longer cuts it as a campaign issue, and that while foreign investment in the United States is at all-time highs, scarcely a peep of nationalistic backlash has been heard.
Japanese companies, even the multinationals, will likely always be a little more insular than the rest, if for no other reason than linguistic and cultural differences. But for them, the lesson of the 1990s is that the forces of globalization are far more powerful than Japan Inc., and if there is one thing that characterizes a classic Japanese businessman, it is pragmatism. Japanese companies in Asia, for instance, were once alleged to guard their best technology jealously and permit other Asians only an assembly line-level knowledge. But in 1993, according to the 1996 annual survey of Japan's Management and Coordination Agency, they began exporting more technology than they imported for the first time since World War II. In 1995 corporate Japan's technology exports jumped 21.6 percent, while imports rose by only 5.7 percent.
Corporate Japan's integration into Asia has helped create a true "co-prosperity sphere" there. Washington must now address the economic threat, if indeed there is one, as a pan-Asian, not a Japanese, problem. But that seems unworkable: Asian countries often do not see eye-to-eye with their Japanese partners, as Asia-Pacific Economic Cooperation forum meetings in recent years have made plain.
The end of Japan Inc. will not mean the end of the nation's economic strength. It will remain a wealthy and stable economy and society. And if Hashimoto's reforms work, Japan's multinationals may look to reinvest back home -- in a deregulated economy. Rather than controlling things, the erstwhile leaders of Japan Inc. will increasingly find themselves caught in the middle of national squabbles over budget cuts in an era of diminishing expectations -- a fate not too different from that of policymakers in Washington.
In most trade disputes with Japan, the United States can afford to let the World Trade Organization work things out, or badger and cajole it when it fails, rather than resort to draconian, trade-war- threatening measures like the Super 301 countervailing tariff provisions of U.S. trade law. China Inc., far more than its sclerotic Japanese predecessor, seems to be the main problem these days. Meanwhile, far more attention should be paid to the behavior of individual multinationals, whether Japanese or American, and their observance of norms and laws affecting the environment, labor practices, and human rights. But let us not forget that to the extent that Japan is at long last abandoning its international anomie, and becoming part of the world, its multinationals are leading the way.