Dennis Tachiki
Donald Reid
Stephen Parker
Shorenstein Reports on Contemporary East Asia
Number 1
September 1994
Despite the fact that the Japanese economy has been slumbering in a recession for the last forty months, its long-term strengths should not be underestimated. This was the central argument put forward by Dennis Tachiki, the first guest speaker at this year Shorenstein Seminar series. About 60 Bay Area business and academic leaders turned out to hear Mr. Tachiki's predictions about the strategies Japanese management will pursue during the next few years and the implications of these strategies for those seeking to do business in Asia.
Mr. Dennis Tachiki is a Senior Researcher for the Center for Pacific Rim Business Studies at Tokyo's Sakura Institute of Research. The center's large research staff conducts studies on the Asia-Pacific economy for policy makers and Japanese managers. Mr. Tachiki writes about issues related to quality control, management and production systems, and technology diffusion. He has also served as a consultant for firms in the United States, Asia, and Europe.
As a self-described "American in disguise" (he is a third-generation Japanese American and California native), Mr. Tachiki offered a unique insider view into changes that are of vital concern to the assembled audience. A summary of Mr. Tachiki 's remarks follows.
Chairing this session was Professor Joyce Kallgren, Associate Director of the Institute of East Asian Studies. Donald Reid, Chief Compliance Officer, Legal and Governmental Relations Department of Sumitomo Bank of California, and Stephen Parker, Chief Economist of The Asia Foundation, commented on the talk.
Dennis Tachiki
After forty years of near-continuous growth, Japan has finally experienced a sustained recession. Simultaneously, and perhaps not coincidentally, the country has had three prime ministers in the past year. The depths of this recession and the shifting political landscape have obscured important changes that have taken place in the Japanese economy over the past decade -- changes that challenge many of our long-held views of its organization, its strengths, and the opportunities it offers to outsiders.
Traditional tariff barriers are largely gone; Japanese tariffs are now among the lowest in the world. The Japanese market remains difficult to penetrate for two reasons, both of which are currently changing: the bewildering maze of state regulations (covering 42% of GNP) and the reluctance of Japanese consumers to purchase foreign goods (aside from high status luxury items).
With tariff barriers gone, deregulation is clearly the next item on the liberalization agenda. Unfortunately, reform will most likely require a more stable political climate, one in which politicians have the strength to challenge the entrenched interests of protected sectors and their supporters in the bureaucracy.
In the meantime, some foreign firms have learned that the Japanese distribution system can be breached successfully. Coca-Cola, for example, has circumvented high Japanese production costs by exporting cola to Japan; Ford has seen sales rise by 70% in recent months after it abandoned its exclusive franchise agreement and built a dealership network in Japan. These encouraging trends are supported by a Japanese consumer weary of bearing the costs of an antiquated distribution system and increasingly willing to take advantage of the import bargains created by the strong yen.
The strong yen is also forcing Japanese firms to fundamentally revise their management strategies. With the yen/dollar exchange rate hovering at ¥l00=US$1, the average Japanese wage costs are 30% higher than those of U.S. firms and up to 90% higher than average wage rates in the rest of Asia. The cost of money and raw materials in Japan has also gone up.
These facts have forced Japanese firms to undertake difficult changes. They have already cut production costs to the bone; future cuts will almost certainly require firms to rethink their lifetime employment policies.
Traditional strategies for identifying new opportunities have also been revised. Domestic manufacturing production costs are increasingly noncompetitive at world prices. The well-known Japanese strategy of borrowing innovations from U.S. firms and building market share through mass production techniques is, quite simply, no longer tenable. The ability of MITI to identify new opportunities for business has been undercut by these changes, as recent Japanese failures in high definition television (HDT) and supercomputers make clear.
Leading Japanese firms have responded to these challenges with a three-pronged strategy: a movement at home from manufacturing to service industries (such as multimedia); a new foreign direct investment oriented strategy, evidenced by the fact that FDI by Japanese firms between 1986 and 1991 exceeded total Japanese FDI over the previous 35 years; and a transformation of the structure of inter-firm relationships. The first of these strategies should be quite familiar to observers of American business, but the latter two deserve closer examination.
Japanese managers have identified a tremendous opportunity in the two most important trends in the Asia-Pacific economy- the liberalization of markets and the emergence of a substantial middle class across the region. Where Japanese managers once viewed Asia as a site for low-cost production, more and more firms now see the region as a vast consumer market in its own right. While average Asian incomes are low by European or North American standards, the size of the market has encouraged firms to build market share now. In fact, 20% of Japanese exports are already destined for the Asia-Pacific market.
The character of Japanese FDI is illuminating for U.S. firms who want to be players in Asia. Two-thirds of Japanese FDI is in joint ventures. This approach allows firms to control costs and risks in a region where business risks (e.g., corruption and patent enfringement) are high. More critically, while contract laws exist in Asia, the enforcement side is weak. In this uncertain business environment, interpersonal relationships based on trust become important. Ironically, cooperation is the key to competing in the Asia-Pacific markets. Joint ventures with local partners are gateways that allow Japanese firms to access these networks. This is especially true of China, where much Japanese investment is mediated and managed by joint partners, particularly from Hong Kong.
The growing importance of joint-venture strategies is forcing Japanese firms to move away from their traditional practices of procuring parts and supplies from within their keiretsu. The increasing openness of Japanese firms represents a new opportunity for U.S. suppliers. At the same time, however, the Japanese are building a new set of partnerships with Asian firms that may leave U.S. firms on the outside if they fail to redouble their efforts in Asia.
U.S. firms have finally taken the lessons of Japan's lean production strategies to heart. But before the rejoicing begins, we would do well to learn from an emerging Japanese strategy that emphasizes economies of networks rather than economies of scale. The idea here is that well-coordinated investments in networks linking telecommunication, transportation, and computer technologies can overcome differences in costs of transportation that have until now limited the development of regionwide production strategies in Asia.
Sony, for example, has developed a new logistics network that instantly relays information from Circuit City's point of sales (POS) system to Tokyo and then on to Malaysia, where it is used to schedule production. The Japanese confidence in the future importance of network economies is demonstrated by the growing use of satellite communication systems and by the considerable interest of Japanese firms in hypersonic commercial air transport and super-technoliners (ships). MACH 3.5 airplanes are on the horizon in the twenty-first century; however, the Japanese government has already tested an experimental model of the super-technoliner that will be able to transport 1,000 tons of goods between any two points in Asia in one or two days.
Advances in network economies have already facilitated the emergence of "growth triangles" throughout Asia-triangles that join together regions with very different competitive advantages. For example, the emerging triangle of Singapore, Johore, and Indonesia brings together finance, cheap material inputs, and low-cost labor, allowing each country linked in this triangle to overcome its own competitive disadvantages. This has created investment corridors in subregional areas of the Pacific region.
Two features of the new Japanese management strategy could be incorporated successfully into Bay Area business practices. The first of these features is the recognition that cooperation is the sine qua non of a successful competitive strategy in Asia. Not only do joint partnerships deepen the value-added chain of local business, but they often provide access to markets that are simply too risky or too closed to reach in any other way.
The second of these features is the increasing importance of growth triangles in Japanese business strategies. The Bay Area, with its highly educated labor force, excellent international transportation facilities, and proximity to the Pacific Rim, is exquisitely well-positioned to build its own triangles with the Western states. To ensure that local businesses are important players in the most important emerging market in the world, they must be, in short, on-line and enroute.
Donald Reid
Japanese banks have seized the opportunity of an emerging Asian market to become directly involved in investing and developing loan business in the rapidly growing Asia-Pacific region. This is the first time in 80 years that developing countries have had such capital needs; about US$ 10 billion is being sought. The Japanese are now the preeminent lenders. Thirty percent of the loans made in these countries are made by Japanese banks. Moreover, much of that lending is transacted by banks with substantial presence. Three of the four largest Japanese banks have U.S. headquarters in San Francisco.
U.S-owned banks have been too shortsighted in their lending strategies, risking their exclusion from a region that is clearly growing and will continue to do so. Bay Area firms should take a lesson from Japanese firms and capitalize on the natural strengths of our region's economy by increasing investment in research and development and by encouraging government policies that support intraregional cooperation.
Stephen Parker
The changes described by Mr. Tachiki imply important lessons both for U.S. trade negotiators and for U.S. business. Mr. Tachiki notes that the high cost of production in Japan is driving Japanese production overseas, especially to East Asia, and that Japanese distributors and consumers are becoming more open to imports, again especially from East Asia. One could interpret Mr. Tachiki's comments to predict a new strategic approach by Japanese firms to emphasize the "economies of networks" to shift their traditional focus on production efficiency from a Japan base to an East Asia base, a base especially attuned both to meeting rising demand in the rapidly growing Asian markets and providing competitive and flexible export supply bases. The Japanese government apparently has little influence over the development of these new strategies, but it is using official development assistance to help build up East Asian infrastructure in support of these efforts.
Mr. Tachiki's comments suggest several new trends. First, there is little reason for U.S. manufacturing firms to invest in Japan. Second, U.S. firms should be able to increase exports into the Japanese market significantly over the next several years. Third, U.S. exports will come both from U.S. supply bases and from East Asian production bases.
This implies for U.S. trade policy that less attention should be paid to the need for increased U.S. investment in the manufacturing sector in Japan (although pressure to continue to open up distribution and most other services is needed), and more attention be paid to issues related to regional production network strategies for Asia. The Office of the U.S. Trade Representative could gain by moving away from a focus on U.S-Japan bilateral negotiations and placing more emphasis on regional approaches, possibly through APEC (Asia Pacific Economic Cooperation). For U.S. firms, which currently are out-competing Japanese firms in many sectors, Mr. Tachiki points out the long-run disadvantages of having limited foreign investment and joint-venture networks throughout East Asia, especially emphasizing how this lack might limit U.S. capabilities to adapt and service the rapidly growing Asian markets.
All of this will affect the Bay Area in two key ways. First, it will raise implications for how Bay Area technology leaders, especially in electronics, will be able to maintain their current technological and lower-cost production advantages over their Japanese rivals. Second, as Japanese firms become increasingly decentralized, it will raise needs to establish research and development bases outside Japan. Japanese firms will be comparing the attractions of the Bay Area with new technology centers in East Asia, such a Singapore, which are in the heart of the fast-growing Asian markets.
Rapporteurs: Ken Dubin, Laura Strausfeld
