Has Japan Lost Its Edge?

The Ford Taurus has overtaken the Honda Accord as America’s best-selling car. Intel Corp. has surpassed NEC Corp. as the world’s largest chip maker. Japanese computer makers such as Fujitsu Corp., once seen as a threat to American companies, are losing ground at home to U.S.-based Apple Computer and Compaq Computer.

And, looming over Japan like a dark storm cloud are its ailing stock market, plunging land prices, troubled banks, rattled political system and rising yen.

Is the once-frightening specter of Japanese competition fading from the world stage? Has Japan lost its edge?

Don’t count on it.

“A year from now (Japan) will stand up 6 feet tall. Everybody will say, ‘My God, I thought they were dead. I thought we put a spike through their head,’ ” said James Abegglen, a Tokyo-based consultant and longtime expert on Japan.

“The danger for us is to declare victory and relax, “ warned Andrew Grove, chief executive of Santa Clara-based Intel.

To be sure, Japan’s economic problems are serious. The collapse of the speculative boom of the late 1980s wiped out more than half of land and stock values almost overnight, and scared consumers into cutting spending. Japanese companies that invested heavily in plants, equipment and hiring during the boom are now saddled with high costs and lower revenue.

The government’s efforts to solve economic problems may be thrown off track by the political revolt of the past two weeks that has thrown the ruling Liberal Democratic Party into turmoil and which may lose its 38-year control of the government in an election scheduled for July 18.

Moreover, Japan’s ability to export its way out of the downturn is hampered by pressure from its trading partners. During the July 7-9 economic summit of the world’s seven richest industrial countries, the United States will be pressing for a significant reduction in America’s trade deficit with Japan.

At the same time, Japan has considerable underlying economic strengths: a high savings rate, a skilled work force and cooperative government and business leadership that is devoted to long-term planning. Once companies get expenses under control, economists and analysts say, these basic strengths will allow Japanese industry to maintain leadership positions in major markets worldwide.

“Japanese companies aren’t sitting still,” said Kenneth Courtis, economist at Deutsche Bank Group Tokyo. “They are moving like lightning.”

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A visit to the Suwa Lake region northwest of Tokyo erases all doubt about Japan’s ability to remain the world’s leading manufacturing center.

This picturesque region--which likes to call itself the Switzerland of the Orient because Japan’s watchmaking industry was born here--is now the design and engineering center of the nation’s still-expanding computer equipment business.

Here, small companies such as Hiraide Precision are key links in the region’s product development chain.

Hiraide generates about $9 million a year in sales filling orders for custom metal parts for making samples of new products. Basically, the work is metal bending, but it is hardly low-tech.

The parts are designed on computers and cut by computer-controlled lasers. So automated is the factory, with its self-propelled carts and robots, that the production line can be programmed to work through the night unmanned. Heating coils embedded in the concrete floors prevent temperature fluctuations that could shrink or expand metal and throw off measurements the tiniest bit.

The precision and speed of hundreds of small factories like Hiraide enable Japanese companies to get working prototypes made within one day. These are projects that might take a month elsewhere.

The Suwa Lake factories supply Japan’s large multinationals, such as computer equipment maker Seiko-Epson; their efficiency helps explain the rapid product development and high productivity across Japanese industry.

In the auto sector, for example, sophisticated parts makers with strong design capabilities help Toyota and other auto makers produce new models every four years, compared to Detroit’s six years. And, even with the recent advances in the United States, Japanese car companies are still more productive. It took just 132.7 work hours to produce a Japanese automobile in 1989, compared to 158.4 hours for a U.S.-made car, according to a Mitsubishi Research Institute study.

Japanese auto makers have lost market share in the United States recently because the rising yen (after drifting at about 125 yen to the dollar, it gained strength to about 105 this month ) makes Japanese cars cost more dollars. But they are responding, too, moving aggressively with design changes and cutting expenses in order to hold the line on prices.

“These companies are aiming to be competitive at 90 yen or 100 yen to the dollar,” said Courtis. He noted that Toyota managed to reduce costs by $400 million in the second half of last year without laying off workers.

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Japanese companies see growth even in many industries that American companies have dismissed as mature, low-tech businesses.

Consider Mitsubishi Electric’s elevator and escalator business. The company got its elevator technology from Westinghouse in 1935. Today, it boasts of producing the world’s fastest elevators. Its factories, the size of several football fields, are beehives of activity as workers rush to fill orders that jumped 50% from last year, mostly because of demand from Chinese department stores.

Mitsubishi also is doing a steady business in air conditioners and refrigerators. The $200-million auto electronics components maker is one of the company’s fastest-growing divisions.

“These products all seem mundane, but they are really pretty high-tech,” said Yoshito Yamaguchi, deputy general manager of international operations at Mitsubishi Electric.

Without doubt, Japanese companies have a serious problem: They can’t seem to make much money. Burdened by excess production capacity and big payrolls, profit margins--in decline for three years--are down to a razor-thin 1%. While companies must operate at about 90% of capacity to break even, Japanese industry overall is operating at about 70% of capacity now. The strong yen has made Japan a costly place to make things. Manufacturing wages, which average about $18 an hour at current exchange rates, these days are sharply higher than the U.S. average of $11. While companies such as Sony have raised consumer prices a few percentage points in recent months, the price increases have not been enough to cover the yen’s steady climb.

Japanese managers, who two years ago showed total confidence in their ability to ride out any storm, now are groping for a new direction.

NEC, Matsushita and Fujitsu--once hailed as the best of Japan--now are being trashed for mismanagement in the Japanese press and even by their own employees. In a recent survey of 476 Matsushita employees conducted for Nikkei business magazine, 98% of the respondents said the company had become too rigid and bureaucratic to respond to market needs.

One problem for Japanese companies: While analysts say they have a million or 2 million excess workers, social pressures against layoffs and factory closings make it difficult to cut back in a downturn.

When Pioneer asked 35 workers to take early retirement this year, it was savaged by the press. Japan’s Labor Ministry was so troubled by that and similar efforts that it called in Japan’s top business leaders and urged them to avoid making decisions that might “create instability” in the labor market.

“Japan is good at attacking, but it isn’t very good at retrenchment,” said Yasuo Tsuchiya, an analyst at Mitsubishi Research Institute.

Still, in fits and starts, Japanese companies are beginning to take the necessary measures.

NEC has stopped making videocassette recorders; Isuzu is out of the passenger car business. Minebea, a ball-bearing maker, sold its money-losing semiconductor division to Nippon Steel.

The most dramatic example of retrenchment was Nissan’s decision to close a plant in Zama, near Tokyo, within two years. It was a choice made easier by heavy losses and the $1.7 billion in revenue expected to come from selling the land under the factory.

If Japan’s slump continues through the end of the year, tougher measures may lie ahead.

“The first step is companies shifting their production to newer plants and closing old plants,” said Akio Mikuni, who runs a bond-rating service. “The next step is determining who is going to survive.”

When the smoke clears, Japan could be left with a strong, lean army of companies once again ready to do battle in the world market.

“We’ve been through difficult times in the past,” said one senior official at the Ministry of International Trade and Industry. “We make adjustments and then move on.”

For example, since it was forced to restructure during the 1974 oil crisis, Japan’s shipbuilding industry is making good money again. The industry invested in the latest safety systems and specially crafted, double-hulled ships. Today it is reaping the benefits, with orders from shippers concerned about oil spills.

Managers hardened by past battles do not seem shaken by today’s problems, either. Mitsubishi’s Yamaguchi remembers taking over his company’s U.S. operation in 1974, when it was crumbling.

“One distributor asked if I would be a superman and turn the company around,” Yamaguchi recalled.

When he succeeded, pushing sales from $45 million to $1 billion in less than a decade, they started calling him “Super,” a nickname now on his business card. It did not take breakthrough technology for him to succeed. The unlikely focus of growth: upscale consumer products, including giant-screen projection television sets.

To Yamaguchi, the management formula that worked for Japan then will work today: lifetime employment, group orientation, hard work. Japan’s problem, he says, lay in drifting away from these practices to find easy money gambling in land and stocks. Japan, he says, has to “return to basics. We have to adjust to slower growth, but it is not the end of the world.”

Since corporate ownership in Japan is stable, concentrated among companies that own each others’ shares, companies feel little pressure from shareholders looking for short-term results. Mitsubishi Electric actually increased its research budget amid a 70% drop in profits. Although capital spending was cut 40%, the $1 billion or more the company spent in the year ended March 31 still was high by historical standards.

Japanese companies do not have to earn as high a return on equity to keep their shareholders happy. Even today, with stocks at depressed levels, shares are trading at 70 times earnings--more than double the level of American stocks.

Japan’s unemployment rate is only 2.3%. Even if it rises to 3%, as some expect, the nation’s labor problem can hardly be considered serious.

“Two years ago, they were telling us there was a 1 million to 2 million worker shortage,” said Ikuro Takagi, labor economist at Tokyo Women’s University. By 1995, he says, Japanese companies once again will be complaining about not having enough workers.

Indeed, many of Japan’s current woes could evaporate with an economic upturn.

The semiconductor industry, which was deep in a slump last year, is recovering rapidly now as a result of increased U.S. demand. Since the beginning of the year, for example, Toshiba Corp. has more than doubled its production of 4 megabit DRAMs, the most widely sold memory chip, to 6.5 million a month.

Japan also is benefiting from its virtually unassailable position in the world’s fastest growing market--Asia.

Japanese steel companies have been saved from excess capacity by the surge of orders from China. Japanese electronics manufacturers have 492 factories in Asia that provide a base both for exports and a foothold in local markets. Auto companies are busily setting up plants in the region to meet demand that is expected to rise by 30%, to 1.65 million vehicles annually, by 1995.

While Japanese investment will drop 30% in the United States and Europe this year, investment will rise 9.2% in Asia, according to a survey done by Nihon Keizai Shimbun, a major business daily.

Even Japan’s creativity gap may turn out to be temporary.

“In a few years you will see (computer products) with the look and feel of consumer electronics products,” said Grove of Intel. While the ideas for those products are coming from the United States, most will be built in Japan.

“Miniaturizing is a skill and competence of Japan,” he said.

Japanese companies also will continue to tap American creativity by licensing technology and buying equity positions in small start-up firms.

Matsushita’s new generation of multimedia products will be based on a sophisticated game machine designed by Silicon Valley start-up 3DO Co., in which Matsushita owns shares.

Toshiba is working with American hospitals to develop medical equipment. Meanwhile, it is in a joint venture with AT&T; and Siemens to come up with the next generation of semiconductors.

Japanese industry’s overriding strength may be its ability to fuse technologies for new markets, relying on its diverse capabilities in a broad range of areas. One example: Tsuneharu Nitta, director of Matsushita’s Central Research Laboratory, says the company is working on a robot vacuum cleaner that moves around on its own, sucking up dust.

Another goal is to develop devices that not only wash and dry cloths but also iron and fold them--an innovation that draws on Matsushita’s electronics and robotics technologies.

Japanese companies have plowed more than $500 billion into research and development over the past six years to improve creativity in the future. So, as new products emerge from Japan’s laboratories, competitors may find Japan a tougher rival than ever.

Japan’s Economic Weaknesses Are Glaring. . . Declining Factory Utilization 1988: 80.7% 1989: 82.4% 1990: 85.2% 1991: 83.6% 1992: 75.5% 1993*: 70.4% *first quarter

U.S. Comparison: Factory utilization, 1st quarter 1993: 81.4% Sources: Ministry of International Trade & Industry; S.G. Warburg, Federal Reserve

Sliding Corporate Profits (operating profits, in percent) 1988: 22.1 1989: 3.8 1990: -8.1 1991: -19.1 1992: -25.8

U.S. Comparisons: Fortune 500 profits, 1992 vs. 1991: +17.5% Source: Nomura Research Institute: Fortune

Shrinking U.S. Auto Market Share JAPAN 1988: 22.8% 1989: 25.4% 1990: 27.9% 1991: 30.3% 1992: 30.1% 1993*: 27.6% U.S. 1988: 69.4% 1989: 67.9% 1990: 65.7% 1991: 64.2% 1992: 64.5% 1993*: 67.6% *Estimate, January-May Source: U.B.S. Securities, Tokyo office: Ward’s Automotive News

. . . But its Strengths Are Long-Term

Steadly Increased Investment in Research and Development R & D Spending (billions of dollars) 1988: $65.6 1989: $75 1990: $84 1991: $88% 1992: $90

Corporate Research Staff

1988: 260,846 1989: 279,298 1990: 313,948 1991: 330,996 1992: 340,809

U.S. Comparison: Corp. R&D; spending, 1992: $157.4 billion *Estimate Source: Management and coordination Agency, Tokyo: National Science Foundation

A Soaring World Trade Surplus (In billions of dollars) 1988: $95 1989: $77 1990: $63 1991: $103 1992: $132 1993*: $150 *Estimate Sources: Bank of Japan; Deutchebank Capital Group

Disciplined Savings Habits (Savings as a percentage of disposable income) JAPAN 1988: 14.8% 1989: 15.3% 1990: 14.1% 1991: 14.6% 1992: 15.1% 1993*: 15.3$ U.S.1988: 4.3% 1989: 5.6% 1990: 4.5% 1991: 4.9% 1992: 5.0% 1993*: 5.0% *Estimate Source: Organization for Economic Cooperation and Development