Japanese firms moving more production overseas

March 27, 1995|By Thomas Easton | Thomas Easton,Tokyo Bureau of The Sun

TOKYO -- High-wage America lost its hold on television manufacturing in the 1960s to low-wage Japan. Now itself a high-wage country -- perhaps the highest -- it comes as no surprise that Japan recently became a net importer of televisions.

That's what is supposed to happen when a nation's currency dramatically appreciates to record levels, as the yen has. And the implications of high costs, as America's past shows, can be ominous.

The same factors that push television production overseas also affect the production of everything else, from cars to watches to clothes. Local industries lose out to those abroad. They, in turn, must either shift production to lower-cost locations, or die, either way dooming jobs and communities in the process.

While there is much screaming in Japan about this "hollowing out" of industry, there's another perspective: that Japan isn't losing out. It is getting stronger. Its share of the global economy has consistently grown despite repeated rounds of currency appreciation, expanding from about 7 percent in 1970 when the yen began its climb, to just under 16 percent at the end of 1992, a number that has no doubt increased.

Relative to the United States, which has seen its currency steadilyweaken, the change is even more dramatic. Japan's economy was only about 20 percent the size of the United States' in 1970. At the end of 1994 -- and therefore before the most recent 10 percent rise in the yen -- it was 70 percent as large.

Underneath those amorphous macro statistics are numerous companies effectively fighting to retain market share and becoming increasingly powerful in the process. In televisions, for example, RCA and GE may have given way to Sony and Matsushita (Panasonic), but Japanese producers have no intention of ceding markets. Instead, the high yen has made it possible for them tolower costs by spreading production facilities across the globe.

The television sets in Japanese stores may be made somewhere else, but it's almost impossible to find one in Japan made by a non-Japanese company. Even abroad, where these manufacturers don't receive the same powerful home court edge, they are continuing to not only survive, but grow.

"Televisions, as well as the VCRs and 35 mm cameras, are still being made by Japanese companies and the best jobs are still in Japan, even when other parts of the production has moved overseas," said Keith Henry, a researcher on an MIT project examining Japan's involvement throughout the Far East. "The 'made in Japan' label is disappearing, to be replaced by 'made in Asia -- by Japan.' "

The largest television plant and the largest air conditioner plant in the world are now in Malaysia. Both are owned by Osaka, Japan-based Matsushita, according to Mr. Henry, and both are just the tip of years of direct investment by Japanese companies that for years have been the largest investors in the Philippines, Indonesia and Thailand, and a major investor in western countries.

"They now get revenue from those investments and that permits them to stay in a business, create new wealth, and use that wealth to move up the value chain to new technologies and new business," Mr. Henry said.

A just-released report by Japan's External Trade Organization provides numerous examples of Japanese companies sending overseas production of low-end goods, ranging from low-speed copiers to cheap fax machines to small computers while keeping production of the more sophisticated versions at home.

The current surge in the yen as well as the Kobe earthquake have revealed what a simple look at economic statistics could not -- how effectively Japanese firms have indeed moved up the value chain to reach a point where cost is not the most important factor in sales.

For key products like the liquid crystal displays used in laptop computers, the numerically controlled machine tools common in sophisticated manufacturing, the ceramic casings for microchips, and even the wound steel used in automobile engines, there is no substitute for what is still made in Japan.

U.S. companies, of course, also use overseas sources of production, especially when the dollar is strong, but traditionally they have different goals and methods.

"For the most part, American managers were more interested in just defending the domestic market," said Ronald Bevaqua, an economist with Merrill Lynch. "They invested abroad to avoid American labor costs, and American labor problems, and then brought the products back home. They weren't primarily focused on developing foreign markets."

In many cases, U.S. companies have been willing to subcontract manufacturing to potential Japanese competitors and then apply their brand names and marketing. That has been the case for Gillette in pencils, AT&T and Pitney Bowes in facsimile machines, and Packard Bell and Apple in computers.

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