U.S. Services Targeted by the Japanese : Southland at Center of Moves Into Travel, Finance, Advertising

Marie Flynn’s luck suddenly ran out a few weeks ago. The 46-year-old founder and owner of a sm all but prosperous travel agency in Lakewood, Flynn found out in early May that her biggest customer, Mazda’s U.S. auto import subsidiary based in Rancho Dominguez, would no longer do business with her firm, Paragon Travel.

Flynn was told bluntly by Mazda officials that she was losing the account, worth $500,000 in annual billings, not because the auto maker was unhappy with her work, but because she was not Japanese.

Mazda wanted to do more business with Japanese-owned suppliers, she was told, so its U.S. travel work was being transferred immediately to the Los Angeles office of Kintetsu International Express, a subsidiary of a Tokyo-based conglomerate that handles travel arrangements for Mazda internationally as well as inside Japan.

Now, with a third of her agency’s business gone, Flynn has been forced to cancel plans to open a second office, and is scrambling for new business in order to avoid laying off any of her five full-time employees.

Flynn and her company have been caught up in the dramatic growth of Japanese companies that have expanded into the service field in the United States, a field that until recently seemed impervious to foreign competition.

Following Clients

But now that so many Japanese manufacturing corporations have set up American operations, more Japanese firms in service fields such as cargo and shipping, construction, finance and banking, advertising, travel and insurance are following their traditional Japanese corporate clients. And Southern California has become the de facto capital of these Japanese-owned service businesses.

It’s unclear how many small American-owned companies such as Paragon have lost business as a result, but it’s certain that the Japanese firms moving in have added a new competitive edge to the local service economy, especially since many of them are expanding beyond their Japanese customer base to take on local clients as well.

Some Japanese service firms have been here since the early 1960s, coming over with the first big wave of Japanese imports of electronics and automobiles. Nippon Express U.S.A., for instance, is the U.S. subsidiary of a Japanese cargo company that opened in the Los Angeles area in 1962, and has acted as a freight forwarder for Honda since the Japanese auto company first entered the American market.

But most observers agree that the growth in the Japanese service sector in Southern California has been especially dramatic since the late 1970s, when the volume of Japanese imports of manufactured goods into the United States began to soar and bilateral trade between the United States and Japan became increasingly important.

Although Japanese corporations have recently been looking for new U.S. manufacturing plant sites outside California, partly to avoid the state’s unitary tax on multinational corporations, Japanese service companies continue to flourish and expand in the Los Angeles area.

“The Los Angeles area is a key point between the various Pacific Rim countries and the United States, and also South America, and it is very important for Japanese banks and securities, insurance and transport firms to have offices here,” says Yukinori Sato, manager of marketing research for the Los Angeles office of the Japan External Trade Organization, an agency of the Japanese government.

Today, according to a recent survey by the Japan Business Assn. of Southern California, the ranks of the nearly 600 Japanese companies with offices in the Los Angeles area include at least 29 banks, 20 construction and real estate firms, 12 travel and transport companies, 15 financial and insurance firms and 31 companies in communications and other service fields. Those businesses employ a combined total of nearly 9,000 workers, according to the survey, almost all of them Americans.

Local economists don’t believe that the influx of Japanese service firms has had much of a net effect on employment in Southern California. But it is an example of the type of trend that could be contributing to the narrowing of the nation’s trade surplus in services, since the Japanese firms’ revenues and profits are being sent back to Japan rather than kept in the United States, says Duane Paul, senior economist with Bank of America in Los Angeles.

Surplus Is Falling

Until recently, America had partially offset its mammoth trade deficit in manufactured goods by exporting services, but its edge in services has been steadily eroding over the last few years, Paul says.

And while Japanese firms still provide only a fraction of all of the services needed by big Japanese corporations in Los Angeles, the amount they do handle is growing rapidly.

“Many service-related companies are coming in, not just travel companies to serve the flow of people, but financial and securities firms and others to serve the flow of capital between Japan and the United States,” says Hiroshi Nakano, deputy director general of the Los Angeles office of the Japanese trade organization.

“It’s kind of logical that these companies would be coming to the United States--it is part of the internationalization of Japanese industry,” says Susan MacKnight, senior economist at the Washington-based Japan Economic Institute, a research group funded by the Japanese government. “It isn’t surprising either, given the fast growth and huge volume of sales of Japanese products to the United States.”

Both Japanese and American business executives agree that many Japanese service companies locating here are taking advantage of a preference for doing business with traditional partners rather than with outsiders.

Traditional Relationships

“The (American) subsidiaries of the major (Japanese) corporations like to have the same kind of relations with the American subsidiaries of Japanese banks that their parent companies have in Japan with the parent banks,” says Toshiroh Ikehara, vice president of Dai-Ichi Kangyo Bank of California, which handles letters of credit and import financing arrangements for American Isuzu. Dai-Ichi Kangyo’s parent bank also handles banking services for Isuzu in Japan.

In fact, examples abound of how Japanese firms have entered the service economy here by carrying over traditional business relationships from Tokyo to Los Angeles:

Nippo Marketing & Advertising of Japan opened a Los Angeles office five years ago to handle specialty advertising for the U.S. sales arm of Nissan, which is a Nippo client in Japan.

Nippo’s Los Angeles office mostly handles advertising in Japanese-language media in the United States, work that was previously done by William Esty Advertising, a Madison Avenue agency that still has most of Nissan’s national advertising. Nakano Warehouse & Transportation, a large Japanese distribution firm, works as a custom house broker in Southern California for Sanyo, Seiko and Toyota, and is also a distributor of U.S. advertising materials for Toyota, a big Nakano customer in Japan.

And Shimuzu American, the U.S. subsidiary of Japan’s largest construction company, opened an office in Los Angeles in 1981 to work on U.S. projects for big Japanese corporations such as Sharp, Epson and Fujitsu, and worked with an American contractor to jointly build part of the new General Motors-Toyota joint venture car complex in Fremont, Calif.

Construction Projects

Its Los Angeles office is now handling U.S. construction projects outside California for Japanese firms building plants elsewhere to avoid the state’s unitary tax. “We’ve built for them (Japanese corporations) in Japan, so they come to people they’ve had success with,” says Jane Slevin, marketing administrator for Shimuzu in Los Angeles. “Originally, that is your (American) client base,” she adds.

But, as in the Paragon Travel case, such attitudes can lead to friction with American businesses.

“The only reason I lost out was that I’m an American,” Flynn angrily charges. “It was just discrimination.”

A Mazda spokesman insists that the company dropped Paragon simply because many of its Japanese executives felt more comfortable with a travel agency they had dealt with in Japan.

But Mazda officials, who privately confirm that Flynn lost the account because Mazda wanted more Japanese suppliers, add that the top Japanese executives of Mazda Motors of America (Central), Mazda’s main U.S. distribution arm, also hope to find Japanese companies with California branch offices that could replace their American suppliers of janitorial, security and gardening services for the company’s Rancho Dominguez headquarters.

“They (Mazda’s Japanese executives in America) feel they should extend the business relationships they have in Japan to Los Angeles,” says one American Mazda official who asked not to be identified.

U.S. Firm Upset

Meanwhile, executives at Barton Malow Co., a big U.S. construction company and one of the nation’s leading builders of automotive plants, are also upset at Mazda for selecting a Japanese construction company, Kajima International, to be the general contractor for its first U.S. assembly plant to be built in Flat Rock, Mich., outside Detroit.

Kajima, with offices in Los Angeles and New York, has built plants for Mazda in Japan, and apparently won the Flat Rock job without competitive bidding from U.S. contractors.

“Did we get a chance to be construction managers on the project? No,” says Tom Brady, senior vice president at Barton Malow, which has built assembly plants for General Motors and other auto makers throughout the nation. “It would have made sense for them to at least ask for bids from us, but we never heard from them.”

A Mazda spokesman said Kajima had been the “clear favorite” for the job because of its past work with Mazda in Japan, but he refused to say whether bids from other contractors were sought.

While many Japanese service sector companies initially come to the United States to serve their Japanese customers, most apparently soon realize they have to branch out quickly to win more American customers if they are to survive and expand. “I don’t think there is enough business just among Japanese businesses to support all these service companies,” economist MacKnight says.

As a result, they are now vying with locally based competitors, both for the business of Japanese corporations as well as for work with domestic U.S. customers.

Big Property Owner

One Japanese service-sector company that has successfully entered the mainstream of the local economy is Mitsui Fudosan U.S.A, a Tokyo-based real estate development company. Since its Los Angeles office opened in the mid-1970s, Mitsui has become one of the largest property owners in central Los Angeles, and owns, among other things, the 42-story AT&T; Center building downtown.

Another is Mitsubishi Bank of California, an arm of one of the world’s largest banks, which opened its Los Angeles office in 1972 to serve American Honda and several Japanese trading companies. It has now expanded to become the 281st-largest bank in the United States.

At the same time, the six Japanese-owned brokerage firms that now have Los Angeles offices do about 80% of their business here with American, rather than Japanese, institutional investors interested in trading in the Japanese securities markets, according to Masanobu Okabe, general manager of the Los Angeles office of Nikko Securities International.

“And I’ve heard that two or three more Japanese brokers will be opening offices here in the near future,” in order to work with American investors, he adds.

Despite their dramatic growth, however, some Japanese business leaders in Los Angeles believe that the Japanese service companies in Southern California could eventually languish as the American manufacturing and distribution operations of the big Japanese corporations, their primary customers, expand elsewhere and become less concentrated in the Los Angeles area.

“The Japanese companies are spreading out through the United States, making it more difficult for Japanese to provide services to the Japanese companies,” says Hiroshi Matsuoka, executive director of the Japan Business Assn. of Southern California. And ultimately, he adds, “the manufacturers and trading corporations can’t rely on Japanese businesses to provide them with services if they are to continue to grow in the United States.”

Times researcher Stephanie Droll contributed to this article