U.S. Firms Cash In on Japan’s Woes : Soaring Yen Gives American Industry A Competitive Boost
An American product built in an American plant. Dog bites man. Nothing newsworthy.
But wait. Here in this college town, General Electric is making really big, national news--simply by using its own factory. GE has just moved the production of 500,000 color televisions back from Japan to its Bloomington plant, mainly because the rapid rise in the value of the Japanese yen had made production in Japan too costly.
“Right now, we have the opportunity to be competitive in color television production with Japan,” says Joseph Fogliano, vice president for manufacturing at GE’s consumer electronics division. “The yen’s movement has given us a window of opportunity, and we have to take advantage of it.”
Clearly, when American factories can build televisions as cheaply as plants in Japan, a shift of mammoth proportions is in the works. Indeed, the rapid rise in the value of the yen is finally starting to whittle away at Japan’s manufacturing edge over the United States, an edge that at one time looked so permanent that many feared America might be destined for second-class economic status.
It’s taken nearly two years, much longer than most economists and politicians first expected. But now, in industry after industry, American producers of both capital and consumer goods report that the overwhelming cost advantages that Japanese manufacturers enjoyed over their U.S. competitors as recently as 1985 have been all but eliminated.
A 40% decrease in the value of the dollar against the yen since September, 1985, has dramatically increased Japan’s costs of producing goods for export, forcing Japanese firms to raise prices, while also reducing their profit margins, in order to stay in business.
Certainly, America manufacturers still face a number of other hurdles, such as improving the quality of their products and overcoming trade barriers, before they can compete head-to-head with the Japanese around the world. But, the first unmistakable signs of the shift in relative manufacturing costs are sweeping across the industrial landscape.
Big shipments of American-made steel are on their way to Japan for the first time in a generation. Japanese auto makers, forced to raise their U.S. prices by more than 20% to cover their higher production costs in Japan, are struggling, and some are now suffering through their first significant sales slumps in the American market in nearly a decade.
And, in places like Bloomington, American companies that had previously given up on the domestic manufacture of import-sensitive products such as televisions are moving out of Japan and coming home.
Even deeply troubled industries, such as the machine-tool makers, that have been all but overwhelmed by Japanese competition over the last five years, are getting a breather. Warner & Swasey Co., a Cleveland machine-tool maker, is in the process of moving the production of its computerized numerically controlled lathes and punch presses back from its Japanese joint venture to its own plants in Ohio and Pennsylvania. In 1985, when the yen was at 250 to the dollar (compared to 144.6 on Friday), “they a had a huge, huge advantage,” says Bud Aspatore, president of Warner & Swasey. “But now, machine tool production costs in Japan and the U.S. are comparable.”
Upset Strategies
Now the Japanese are reacting as well, moving as quickly as their American rivals. Japanese producers of everything from televisions to auto parts, desperate to reduce their yen-related costs, are opening or expanding U.S. production facilities at breakneck speed.
“The change in the exchange rate makes U.S. auto component manufacturing much more attractive relative to Japan, and there is a large movement of suppliers coming from Japan to the U.S.,” says Jim Trask, director of economic analysis at General Motors. Indeed, a recent report by the U.S. Consulate General’s office in Osaka, Japan, found that “earlier projections that 300 auto parts makers were considering investment in the United States may be low, particularly if materials suppliers are included. The flood of inquiries to the Tokyo offices of Midwestern states (concerning plant site locations) continues unabated.”
“I was just in Japan, and the Japanese executives were telling me it is just shocking what the yen has done to their corporate strategies in the last year and a half,” adds Chuck Peters, vice president for corporate strategy at Amana Refrigeration, an Iowa-based appliance maker. “They have had to shift away from just trying to get greater manufacturing productivity gains in Japan; they’ve had to look at building new plants in the U.S., or setting up plants in countries with low wage rates, and they’ve had to consider establishing joint ventures overseas.”
Not too long ago, it looked as though America would never be able to catch up with the export-driven industries of Japan; the Japanese seemed to be able to produce a broad array of manufactured goods more cheaply and with higher quality than their tired old rivals in the United States.
But the yen’s boom has begun to change all that.
Now, Japanese costs, especially labor rates, have soared in dollar terms; Japanese wages are now close to American standards. Last year, hourly compensation for manufacturing workers in Japan soared 46.6% in dollar terms, while American hourly pay rose just 2.9%, according to the Bureau of Labor Statistics. Unit labor costs for manufacturers rose a staggering 42.6% in Japan in 1986, while unit costs actually fell 0.6% in America’s manufacturing sector.
Domestic Growth Jumps
These shifts in relative costs are now starting to show up in a big way in a wide range of economic indicators that have just been released by the federal government.
Aided by strong export growth, U.S. industrial production rose 0.5% in May, following several months in which production declined or remained unchanged, the Federal Reserve Board reported last week. Meanwhile, the nation’s merchandise trade deficit, measured on a balance of payments basis, declined to $38.3 billion in the first quarter, down from $38.6 billion in the fourth quarter of 1986, according to the Commerce Department. The bilateral merchandise trade deficit with Japan in April stood at $4.7 billion on a customs basis, unchanged from April, 1986, but down sharply from last November’s record high of $6.4 billion.
Most impressively, the U.S. gross national product increased by a healthy 4.8% in the first quarter, fueled in part by declining imports and increasing exports.
“The GNP growth was partly due to the growth in manufacturing inventories during the quarter, which is clearly not a bullish signal, but the improvement is still genuine in that we are exporting more and importing relatively less,” observes Walter Joelson, GE’s chief economist. “We have an improved international situation, with clear improvement especially in capital goods exports.”
Still, manufacturing experts around the country warn that America’s windfall from Japan’s woes may be short-lived. “Japanese companies like Toyota and Honda, which are undergoing dramatic cost-cutting programs, are showing what they can do on a crash basis,” says Jim Harbour, an international manufacturing consultant who has conducted comparative cost studies of the Japanese and American auto industries. “They will recover.”
And, even while Japanese manufacturers slash costs to regain their competitive advantage, new, low-cost producers in the Third World are rising up to take over the markets that slip away from Japan. “I think the U.S. steel industry is very definitely benefiting from the yen’s rise,” says Louis Schorsch, a consultant to the steel industry with McKinsey & Co. in Pittsburgh. “But in the future, we could see Japan’s share of the U.S. market fractionalized among lots of smaller Third World producers.”
Indeed, some American manufacturing executives now say that the current focus in Congress and the White House on Japan is somewhat misplaced; the threat, they caution, is no longer only from Japan but also from countries such as South Korea and Malaysia.
“What we see in Japan today, is that on production and material costs on microwave ovens, we can compete with them very closely,” says Marv Carney, vice president for materials at Amana, which manufactures microwave ovens in Iowa.
Production Shifting
“But the problem we have, is that microwave production volume is shifting to (South) Korea. The trend is now definitely away from the Japanese and towards South Korea and other Asian manufacturers.”
But while Japanese and American conglomerates on the prowl for low labor rates are rapidly building factories in the newly industrialized nations, the Third World’s manufacturing base remains relatively small; countries such as South Korea and Brazil have yet to develop enough production capacity to take up the slack left by Japan. The growth of the South Korean auto industry, for instance, is being slowed by the absence of a well-developed auto parts industry in the country; most cars assembled there are equipped with Japanese parts, which have become expensive since the yen began its rise.
As a result, America, with its much larger industrial base, still has a chance to take advantage of Japan’s new vulnerability.
“Obviously, the relative attractiveness of producing in the United States has improved substantially over the last year or so,” says Ford Motor’s chief economist, John V. Deaver.
In the steel industry, for example, the turnaround in the cost picture has been so dramatic that two of the nation’s largest steelmakers, USX and Bethlehem Steel, have both been exporting steel to Japan in recent months. In the past two years, steel production costs at major Japanese mills have risen an average of $137 per ton because of the yen’s appreciation, while American costs have remained virtually unchanged, according to Paine Webber’s World Steel Dynamics report. Steel industry labor costs in dollar terms in Japan have soared during the same period, from $11.24 per hour in 1985 to $16.05 today.
So it now costs Japanese producers an average of $550 to make one ton of steel, while production costs at major American mills average just $515 per ton.
As a result, Japanese steel shipments to the United States--while still far larger than U.S. shipments to Japan--fell nearly 22% in the first four months of 1987.
In the auto industry, meanwhile, Japan’s celebrated cost advantage over Detroit has almost disappeared as well.
Five years ago, Detroit’s slumping auto makers publicly complained that it cost $2,000 to $2,500 less to build a small car in Japan than in the United States. GM, Ford and Chrysler made frequent use of such estimates to gain contract concessions from their workers, and also to win support for import quotas in Washington. But today, GM and Ford officials agree that the gap has been narrowed to just $400 per car.
At Honda, the gap has been eliminated completely. Honda officials say production costs at the company’s Accord assembly plant in Ohio now match those at its Sayama, Japan, factory, and the company is thinking about exporting U.S.-built Accords back to Japan.
But in the auto industry and other sectors that have narrowed the cost gap, Japanese quality is often still a moving target. Car buyers, for instance, still seem willing to pay a premium for higher Japanese quality: a few leading Japanese car companies, including Honda and Toyota, have been able to sharply raise prices while still increasing sales.
In fact, manufacturing executives caution that a more expensive yen won’t cure all of America’s industrial ills.
Domestic markets for many products remain sluggish, and U.S. manufacturing employment has actually declined slightly over the past year. And, looming on the horizon are manufacturers in South Korea, Taiwan and Singapore.
“The exchange rate has given us an opportunity, but that’s all it is, an opportunity,” stresses GE’s Fogliano, as he tours the Bloomington plant. “And we should recognize that there are other players, like Korea and Taiwan, that have the same opportunity to take advantage of the situation as we do.”
