Land of Rising Yen Struggles to Retain U.S. Market

Bob Miller, a vice president of Radio Shack, recalls the jittery days at the company last year as the Japanese yen soared higher and higher on international markets while the dollar took a swan dive:

“I was panicked,” said the executive of the retailing firm, which relies on low-priced suppliers from Japan and other countries for the electronic gadgets it sells throughout the United States. “We were just devastated. We didn’t know what would happen--but not very much did happen.”

Corporate executives and government officials had expected the higher-valued yen to make products from Japan much more expensive, thereby giving import-battered U.S. factories a desperately needed boost. Consumers would find it cheaper to buy American. Companies that had benefited from inexpensive Japanese products--such as Tandy Corp., which owns Radio Shack--would bear part of the burden. According to the textbooks, it had to happen.

But it hasn’t happened.

The experience at Radio Shack, where Japanese price hikes on semiconductors, switches, transistors and other parts have been relatively insignificant, symbolizes a painful lesson only now being absorbed by American industry: International competition in the 1980s has become so ferocious that foreign producers are prepared to slash their profits--even swallow losses--in order to keep their customers.

They also are tightening their belts and producing products at even more competitive prices.

What this means is that selling U.S.-made products at home and abroad is an even tougher challenge than many envisioned. As a result, the widely held view that a weaker dollar can cure America’s imbalance in trade with Japan and other nations is now being questioned, even as the dollar plunges on world markets as it did last week.

“It’s like grabbing the horn to stop a bull,” said Gilbert Benz, an economist with A. Gary Shilling & Co. in New York.

A Commerce Department trade analyst acknowledged that the Reagan Administration currency policy has yielded disappointing results so far: “To be honest, we really haven’t seen a lot of improvement yet. We’re finding that things don’t work the way economic theory says they should.”

The theory is simple enough. As a nation’s currency rises in value internationally, the products of that nation cost more for foreigners to buy with their own cash. When a currency falls, the opposite happens. So, while it may seem that a weak dollar is a bad thing, it does not have to be. In theory, at least, it means that U.S. products can be sold more cheaply--and more easily--throughout the world.

That in mind, the United States, Japan and three European countries agreed in September, 1985, to drive down the dollar. The other countries had their own reasons to cooperate with the United States. Their fortunes are linked to a healthy U.S. economy, and they fear the growing congressional sentiment to restrict imports.

Contrary to American hopes, however, the U.S. trade figures with other countries have remained dismal since the agreement at New York’s Plaza Hotel. U.S. consumers continue to indulge their tastes for foreign goods, and U.S. exporters continue to have trouble competing--not only with Japan, but with suppliers from many countries.

The deficit with Japan is of special significance, however, both because of its magnitude and because of Japan’s successful challenges to American industry in automobiles, electronics, machine tools and many other areas. “It’s part of an overall picture, although Japan stands out because it is an extreme,” observed Irwin L. Kellner, chief economist with Manufacturers Hanover in New York.

In 1985, for example, the United States bought $72.4 billion worth of products from Japan, while selling the Japanese just $22.6 billion worth, for a whopping trade deficit of nearly $50 billion, according to the Commerce Department. The 1986 imbalance is expected to be even larger, in the range of $60 billion.

That is the largest single portion of a U.S. trade deficit with the rest of the world that is likely to exceed $170 billion when the figures for 1986 are finally added up.

Many specialists still expect a turnaround in 1987. And to be sure, it can take a long time for established trading patterns to alter, despite price changes. But if that is to happen, it is important for U.S. manufacturers to sell more goods to Japan and other nations and for Americans to buy fewer imported products.

Anecdotal evidence suggests at least minor progress for U.S. exports to Japan. Geert Jensen, whose Algert Co. in Los Angeles ships goods internationally, said he now is moving U.S.-made kitchen cabinets there for the first time in a decade. “Right now, we’re selling products in Japan that we haven’t sold for years, simply because we weren’t competitive,” he said.

Stymied by Restrictions

The big-ticket American items traditionally marketed to Japan include agricultural commodities, factory and office equipment, coal, oil products, chemicals, drugs and airplanes. In many cases, Japanese import restrictions, however, have stymied U.S. attempts to make further inroads.

Jensen, for instance, recalled with chagrin how a shipment of dozens of General Electric refrigerators was stranded for two months on the dock in Yokohama last year because of a dispute over their plastic content. “While our business to Japan has increased, the Japanese are still trying to put a stick in the wheel,” he maintained.

Others chastise U.S. industry for failing to be more aggressive in marketing to Japan: “It was a wonderful opportunity for us to go in there and get a bigger share of the market,” said Charles H. Nevil, president of Meridian Group, an export management company in Los Angeles. “And in my estimation, we didn’t do it.”

Nobody would accuse the Japanese of similar sins. For years they have been building factories in the United States, while maintaining full production capacity in Japan and not cutting back on exports.

And, if much of their motivation has been to deflect protectionist sentiment, the moves also have economic value in today’s environment. Honda, for example, recently announced a planned $450-million expansion in Ohio, meaning that all the major parts in its U.S.-built cars will be American by 1990.

Restrict Price Hikes

Nonetheless, earnings are down sharply in many industries, including autos, because of the yen. And companies are scrambling to cut costs, frequently relying on suppliers in South Korea, Hong Kong and other offshore locations where the labor is cheaper. Yet the Japanese are proving their determination to keep customers by restricting price hikes to far less than the leap of more than 50% in the yen’s value since early 1985.

They have boosted prices on automobiles, electronic goods, office equipment and other products. But, with some exceptions, the increases have been small enough to prevent any serious defection of customers. For instance, prices at Yamaha International Corp., which markets musical instruments and sporting goods, rose about 10% to 12% last year, according to spokesman Bill Nye. “We couldn’t possibly go up 50% or we wouldn’t have any buyers at all,” he said.

In some cases, prices have not gone up at all, leading to charges of unfair competition. Jerry K. Pearlman, chairman of Zenith Electronics Corp. in Glenview, Ill., complained that 19-inch color television sets from Japan sold last fall for $40 less than they sold for in early 1985. “You ought to be looking for a 50% increase in dollar prices, but in our industry you’re seeing prices decline,” he said.

The dollar-yen relationship is of crucial importance to Japanese executives who must set prices for their export products. An Industrial Bank of Japan economist said the average break-even point for manufacturing firms involved in exports had been lowered to between 180 and 190 yen to the dollar last fall, compared to between 200 and 210 yen to the dollar a year earlier.

In September, 1985, the time of the Plaza Hotel agreement, it required 242 yen to buy a dollar.

Widespread Concern

Since then, the dollar has fallen sharply--to levels that appear lower than what many Japanese exporters need to break even in the United States, and concern is widespread. Just last week, the Bank of Japan bought billions of dollars on world markets in an attempt to keep the U.S. currency from sinking any further against the yen. Friday’s rate was 153.22 yen to the dollar.

The reasons for the bank’s action are clear: In industry after industry, Japanese profits plunged in 1986, from an estimated 18% in photo equipment and textiles to as much as 41% in automobiles, according to estimates by Nomura Research Institute, a private organization based in Tokyo.

Consider Sony, which lost $1.7 million for the quarter ending Oct. 31--the first loss in its 40-year history. A year earlier, when the yen’s value was 48% lower, the giant corporation enjoyed a $107-million profit for the fourth quarter.

As a result, Sony is struggling to increase efficiency, for instance, by hastening plans to expand television production in Tijuana, Mexico. “I don’t know of anything that will cause it (the situation) to reverse very quickly unless the yen were to take a quick dive, and I don’t see that happening,” said Robert E. Dillon, Sony’s executive vice president and chief financial officer in the United States.

Sony is hardly alone. Nissan, the huge auto maker, slipped into red ink as well last year. Earlier this month, NEC Corp., a major electronics manufacturer, made news in Asia with its decision to hire South Korean and Taiwanese companies to produce television sets and other products for export to the United States, Europe and Australia.

Yet sacrifices by Japan hardly guarantee any benefit for Americans. No major U.S. company even manufactures its own videocassette recorders, for example. “It doesn’t matter if the American consumers are buying Japanese, Korean or Brazilian,” observed Ralph J. Thomson, senior vice president of the American Electronics Assn. “It’s still no gain for U.S. industry.”

Missing an Opportunity

And even where American firms are alive and well, some have disappointed observers by continuing to raise their own prices rather than aggressively marking them down to lure new customers--or perhaps lure back their old ones. “Here is a tremendous opportunity for U.S. companies,” Thomson said. “Let’s take advantage of it. For us not to recapture markets is high folly.”

Recapturing markets is not easy, though. Of the five main Japanese companies that export cars to the United States, only Nissan sold fewer cars last year than in 1985. By contrast, 1986 sales by General Motors and Ford were slightly down from the banner year of 1985. And that comes despite Japanese price hikes in the 14% range since late 1985. To cite one such example, the sticker price of a Honda Accord soared from $9,299 to $10,625 from 1986 to 1987. By comparison, U.S. auto makers increased most of their prices 3% to 4%.

“You could look upon this yen-dollar situation as a reprieve for the domestic (U.S.) manufacturers, but they have raised their prices also, though not as much,” observed Chris Cedergren, an auto analyst with J. D. Power & Associates. He added: “The Japanese know that they really can’t raise prices much more without impacting their business.”

Japanese photocopier producers boosted prices three times last year, so that the cost of many machines ultimately went up about 12%, said Bruce England, a research analyst with Dataquest, a market research firm in San Jose. By comparison, such U.S. competitors as Xerox and International Business Machines held prices steady, despite flat sales.

“There’s a period of vulnerability for the Japanese, but a company like Xerox, which would be in the best position to take advantage of it, hasn’t been able to lower prices because of the slow U.S. economy,” England said.

Cost of Parts Rose

In any case, Japanese price hikes are not necessarily good news to U.S. companies that rely on products made in Japan. Xerox, for example, gets engines for its laser printer from a Japanese subsidiary. “We feel the effect of a strong yen, as well as we feel the effect of a weak dollar,” said Peter Hawes, a spokesman for the corporation based in Stamford, Conn.

Many, nonetheless, argue that the change in currency cannot help but improve the U.S. trade balance with other countries sooner or later, even if it is not a cure-all. The recent earnings figures provide ample evidence that Japanese companies are feeling heat from the high-powered yen. Moreover, many of these same firms may have been operating on time borrowed from the years when they enjoyed hefty profits--time that now is running out.

One hint of this came earlier this month, when giant Matsushita Electric Industrial announced that it would stop supplying color television sets to General Electric because the stronger yen had made it impossible for the two firms to agree on financial terms. Contrary to the trend of recent years, General Electric said that it might make the sets itself at an RCA facility in Bloomington, Ind.

“The cushion doesn’t last forever,” observed Susan MacKnight, chief economist for the Japan Economic Institute, a Washington research group financed by the Japanese government. “At some point they are going to have to pass on some of that increase and risk losing sales.”

Roger Bolton, a spokesman for U.S. Trade Representative Clayton K. Yeutter, said the Reagan Administration still expects the currency change to diminish the U.S. trade deficit, but he counseled patience: “You can’t undo five or six years worth of damage in six months or a year. It’s simply going to take some time.”

CUTTING INTO THE BOTTOM LINE

Japanese corporate profits,

annual percent change

‘84 ’85 ‘86* Textiles 51.5% 8.1% -17.5% Electrical/ electronics 38.4 -23.6 -24.7 Autos/parts 27.7 -10.2 41.2 Office equipment 21.9 -0.4 -37.9 Photo equipment 9.8 21.2 -17.7 Precision instruments 33.5 -17.0 -22.2

*Forecast

Source: Nomura Research Institute