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How We in Japan Can Save Detroit : To: The Vice Minister From: Michio Watanabe Planning Department/ North American DivisionMinistry of International Trade and Industry

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The General Motors announcement merely confirms what we have known for nearly a decade: America’s so-called Big Three auto makers cannot survive in their current form. Their combined 1991 losses exceed 848 billion yen ($6.6 billion). By 1997, we estimate that Toyota will outstrip GM as the world’s largest automobile manufacturer. Barring an unanticipated shokku , we will effectively dominate the world’s automotive market by the end of this decade.

But now is not the time to gloat or offer crocodile tears. Now is the time to define a new agenda for cooperation and co-evolution. When President Bush and his automobile entourage meet the Prime Minister next month, we must not simply react to their polite threats and intimidations. We must make them realize that the future of America’s automobile industry now lies in cooperation, not economic confrontation. We have to show that we care both about political realities and the well-being of the American economy.

For the Americans, the outstanding issue is, of course, the 4.8-trillion-yen ($40-billion) auto trade deficit. But this is a foolish issue and we should not allow the Americans to use it to define our dialogue. For one, America now runs a $20-billion surplus with Europe. Any effort they make to bully us will be closely watched by the European Community and dutifully imitated. We will politely point this out.

In contrast to the Europeans, America’s car makers have yet to make an automobile suitable for export to Japan. Although GM swears that it will build a right-hand-drive Saturn in 1993, our sources inform us that this will not happen. I think it will be easy for us to persuade the American people that Detroit’s arguments are ridiculous. (We are told that an American advertising agency has prepared an ad showing a fast-talking Joe Isuzu-type car salesman trying to sell a right-hand-drive car to an American family.)

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By now, we believe that America’s Congress and President have learned that “voluntary quotas” essentially provide our companies with an immensely profitable cartel that has given America’s automobile companies a price umbrella with which to gouge consumers. Should the President request a new round of quotas, we should fight the proposal with every ounce of our bureaucratic strength--and then make sure we sullenly accede. It will be the single most profitable acquiescence we can make this decade.

But the real issue isn’t quotas, the “trade deficit” or “protectionism.” It’s rebuilding the American automobile industry and its jobs. For political, economic and humanitarian reasons--not to mention simple pragmatism--we must do everything in our power to encourage Japan’s auto makers to invest in America’s people and its companies.

Remember, Henry Ford didn’t just invent the assembly line. He established the principle of paying his workers $5 a day. He made it possible for his employees to buy the products they were making.

We must do the same for the customers in our best market. Our economies are intertwined. We are fools to behave as economic imperialists.

Look at our successful efforts to encourage our steel industry to invest in and transfer technology to America’s steel industry. Over the past seven years, NKK has acquired National Steel; Nippon Steel has invested heavily in Inland Steel; Sumitomo Metals is vested in LTV; Kobe Steel has intimate ties with USX. Indeed, these ventures have even been exporting steel back to Japan.

This experience offers a useful model for administrative guidance for the automobile industry. Clearly, the time for greenfield investments is past. (Over the past decade, our automotive companies invested more than 900 billion yen ($7 billion)--over 15% of capital spending--into greenfield plants in America.) Now is the time to encourage direct investment in America’s automotive infrastructure.

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Toyota has over $12 billion available for investment. Perhaps we should point out that investments in Dana Corp. or Federal-Mogul--both leaders in America’s $30-billion auto parts industry--would be well-advised.

Given their tight relationship, it would make sense for Mazda and Nissan to each acquire 10% of Ford Motor Co. This would facilitate technology transfer and provide the company with--to use an American phrase--a sorely needed “white knight.” As you know, Nissan is already designing a minivan with Ford. Indeed, Ford already owns 25% of Mazda, so cross-holding makes sense.

When Lee A. Iacocca finally retires, Mitsubishi should be able to step up its investment in Chrysler and also acquire shares in its supplier network. No doubt, General Motors will continue to hold itself aloof--but we suspect that GM is prepared to put up at least 25% of its supplier business for sale or direct investment.

Obviously, investing money isn’t enough. We must do whatever we can to train and retrain American workers. We must encourage our companies to train U.S. suppliers in quality control standards so they can be as qualified as Japanese suppliers. We must invest in our American work force at least as much as we have invested in our own.

We must take great pains not to position this as a takeover. These are all cooperative ventures that reflect our growing interdependence, not Japan’s growing dominance. It has worked for steel; we must try it for autos.

It is the best move we can make to preempt political and economic retaliation. Even better, it’s the best move we can make for America’s economy. We have won the automotive race. Let’s be graceful, magnanimous and prudent in our victory.

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(My thanks to Nomura Research Institute analyst David Garrity , University of Michigan economist Gary Saxonhouse and Lazard’s David Braunschvig for their help in “translating” this memo.)

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