Japan’s New Clout
November 2 2005 by Eamonn Fingleton
It is not often that a company’s public relations department publicly contradicts the chairman of the board, but that is what happened at Toyota Motor this past April. The episode began when Chairman Hiroshi Okuda hinted that the Japanese car industry might raise prices in the U.S. to throw a lifeline to a struggling Detroit lest there be an eruption in U.S.-Japan trade relations.
Toyota’s own public relations department quickly rushed out a statement disavowing any such intention. But the cat was out of the bag. Okuda had made explicit what had been implicit for some time: Japanese carmakers have been deliberately pulling their punches to keep Detroit on life support. A few weeks later, even Prime Minister Junichiro Koizumi weighed in, saying: €˜The auto industry is a symbol of the United States, and we wish the best for General Motors.’
Japanese carmakers are obviously doing well and so is most of the rest of Japan’s manufacturing sector. Despite all the talk in the 1990s of a declining, even collapsing, Japan, its manufacturers are today stronger than ever. Japan’s current account surplus last year after all came to $172 billion. This was not only a record for any nation, it was three times Japan’s surplus in 1989 (the peak year of American popular concern about Japanese trade prowess). Moreover, it was also three times China’s 2004 current account surplus.
If Japan’s trade is so strong, why haven’t we heard more about it’ The answer is that the American press focuses only on bilateral balances with the U.S. In the past five years, China has surged way ahead of Japan as the nation with the largest bilateral surplus with the U.S.
But China’s overall trade performance is far weaker than its bilateral surpluses would suggest. In fact, China actually runs large deficits with the non-U.S. world, not least with Japan. Moreover, most €˜Made in China’ goods these days are actually made by Japan because their high-end capital-intensive components are made in Japanese plants in Southeast Asia or Japan, and merely assembled in China. So although American trade figures count an imported camcorder from China as part of America’s bilateral imbalance with China, in reality much of the value-added originates from Japan.
A classic example is Apple’s sensationally successful iPod. Officially, it is made in China, but as calculated by Merrill Lynch, 82 percent of the components are made by Japanese companies. Not all of these components are made in Japan’s €˜mother factories’ at home, of course, but key ones certainly are; the rest are produced by Japanese subsidiaries spread from Sumatra to Heilongjiang.
If there is a unifying theme in Japan’s manufacturing progress, it is that the action continues to shift away from making consumer goods to concentrating on producers’ goods such as advanced components, high-tech materials and sophisticated equipment. Here are key producers’ goods that have been keeping Japan’s factories humming and its exports soaring:
Miniature capacitors. The explosion in demand for mobile phones has created a huge demand for these. Japanese companies like Nichicon, NEC and Hitachi play a leading role in the industry. Although capacitors are relatively simple to manufacture, these companies continue to produce much of their capacitor output in their home factories. Why’ Nichicon Chief Executive Ippei Takeda says customers are prepared to pay a significant premium for the sort of defect-free production that Japanese factories are famous for. €˜The unit price of a capacitor is very low,’ Takeda told the Financial Times, €˜but if you have a single bad one, you will ruin the whole piece of equipment, whose final price may be $500 or even $10,000.’
Charge-coupled devices. Essential in everything from guided missiles to advanced mobile phones, charge-coupled devices (CCDs) have been described as the digital equivalent of photographic film. These light-sensitive microchips have been enjoying a boom thanks to explosive growth in sales of both digital cameras and camera-equipped mobile phones. Sony claims a near-70 percent world market share in CCDs for still digital cameras and about 60 percent for camcorders. The company is aiming for a 50 percent share in camera phones.
CMOS sensors. These perform much the same function as CCDs, and while they do not yet quite match the quality of CCDs in some applications, they are regarded as the emerging technology. They are less expensive and they consume less electricity than CCDs. Major producers include Sharp and Toshiba. Sony has invested nearly $500 million in a new factory that will start production in Japan in 2006.
Laser diodes. These are the key components in laser printers as well as in the ever-growing CD/DVD family of laser-based devices. Sony, known in the West these days mainly for its PlayStation, is probably far prouder of the fact that it produces about half of all the world’s laser diodes.
High-powered miniature batteries. These are in high demand for everything from mobile devices such as the Apple iPod to the latest military equipment deployed by American soldiers in Iraq. Sony enjoys a strong position in lithium ion polymer batteries while Matsushita has the lead in oxyride batteries, which are expected to replace alkaline batteries in many applications.
In hundreds of key niches, Japanese manufacturers are so strong that they dominate their markets. Their modus operandi is that they make the higher-grade and newer versions of their products in their €˜mother’ factories in Japan, while they devolve the lesser grades and older versions to €˜daughter’ plants in China or elsewhere in East Asia.
A typical example is lenses. Apart from Germany, no other nation has a significant presence in advanced lens making. Leadership in production of high-tech lenses helps explain why Japanese companies dominate the world market in everything from television studio equipment to endoscopes.
Lens technology also gives Japan an inside track in semiconductors because advanced optics are at the heart of so-called steppers, which are the photolithographic machines that print minute electrical circuits onto silicon chips. Japan’s champion lens cutters, Canon and Nikon, make more than two-thirds of the world’s steppers.
Japan also dominates in the field of semiconductor-production equipment such as photomasks, as well as key materials including silicon, gallium arsenide and epoxy cresol novolac resin with ever-purer versions needed for each new generation of computer chips.
In mobile phones, the Japanese are likewise strong. Although Western brands like Nokia and Motorola appear to lead the industry, today’s sleek mobile phones would not exist without Japan. Two decades ago, Japanese electronics makers embarked on a massive government-led effort to miniaturize the various mobile-phone components. A survey by Deutsche Bank found that as of 2000, 29 of 36 suppliers of the nine key components in mobile phones were Japanese.
Perhaps the single most surprising area of Japanese success is in aerospace. Japan has quietly captured key positions of leadership in avionics, carbon fiber and titanium. As acknowledged by Boeing, Japanese contractors will build 35 percent of the new super-advanced Boeing 787, a big jump over their 21 percent share of the Boeing 777, according to David J. Pritchard, co-author of a major study on the hollowing out of Boeing. €˜When you trace all the inputs to their ultimate source, the 787 may well turn out to be more a Japanese plane than an American one,’ says Pritchard.
All this concentration on producers’ goods is not to suggest that Japan lacks for global reach in consumer products. As the Tokyo-based consultant Gerhard Fasol points out, many Japanese electronics companies still punch way above their weight in consumer markets and often do so while maintaining leadership in key components and materials. One of the most notable examples is Canon, which has a global lock on printer engines, the key components in laser printers sold by Hewlett-Packard, among others. The company also is a huge supplier of lenses to camera makers of all sorts. Meanwhile, its presence in consumer markets is particularly strong in digital cameras and camcorders as well as traditional film-based still cameras.
Canon’s Chief Executive Fujio Mitarai is one of Japan’s most outspoken advocates of home-based production. In his current three-year investment program, he is devoting about 80 percent of the total budget to upgrading and extending the company’s operations in Japan. Mitarai’s rule is that where direct labor accounts for more than 5 percent of total costs, production should be located in China or elsewhere offshore.
Sharp Has an Edge in TVs
Perhaps the one CEO who rivals Mitarai as a poster boy for Japanese manufacturing these days is Katsuhiko Machida, president of Sharp. When he ran Sharp’s television division in the 1980s, Machida was tortured by the realization that he was always playing second fiddle to better-established companies. The problem was that Sharp did not make cathode-ray tubes and was therefore little more than an assembler. After Machida became president in 1998, however, he bet the company on the coming technology, liquid crystal displays (LCDs). Beginning in 2001, he also invested heavily in establishing a television brand name, Aquos, which he has subsequently built into the biggest thing in television since Sony launched Trinitron in the late 1960s.
Sharp is now the world leader in advanced LCD sets, with a global share of 25 percent in 2004. That was more than double Sony’s share of 12 percent and three times Panasonic’s 8 percent. Perhaps even more impressive is Sharp’s pricing power. Sharp can sell its sets for $200 to $300 more than Sony. This, of course, constitutes a total turning of the tables compared to the days when Sony enjoyed unquestioned leadership in cathode-ray tube televisions.
If Sharp is the current leader in display technology, the ultimate exemplar of Japanese manufacturing prowess is Toyota. In an industry hotly contested by major corporations on three continents, Toyota enjoys a lead in manufacturing skills almost unprecedented in world business history. Consider the figures. As calculated by Automotive News, Japanese carmakers accounted for 30.9 percent of the global market for automotive vehicles in 2004. That compared with a global market share of 24 percent for North American manufacturers. Not only has the Japanese industry now decisively passed Detroit, but it broke ahead in the 1990s precisely the time when Japan was being written off as a basket case.
Within the Japanese industry, Toyota is clearly king, accounting for more than one-third of all Japan-badged cars produced worldwide. Toyota passed Ford Motor in 2004 to become the world’s second largest maker. As Automotive News has reported, Toyota is now clearly positioned to overtake General Motors by 2008. With 2004 earnings of $10.2 billion, it is in a league of its own running more than double the performance of both Nissan and Ford and more than four times that of GM.
For the U.S., the most striking aspect of Japan’s manufacturing performance is this: Converted at market exchange rates, wages in Japan these days run about 20 to 30 percent higher than in the U.S. This reflects the fact that the Japanese yen has risen by more than 20 percent against the dollar since the spring of 2002. Yet all the evidence suggests that this rise has not been enough. Thanks to decades of protectionism that have greatly enhanced their profitability in their home market, the Japanese have enjoyed enormous profits, which they have reinvested in building ever more automation into their factories.
There are some less than bright spots in Japan’s economic picture, to be sure. The financial sector is still burdened by bad debts, although they’ve been whittled back significantly. Not every manufacturing company is thriving; Sony and Sanyo have stumbled in electronics, as has Mitsubishi Motors in autos. And profits in many sectors are lower than stock analysts would like to see. But overall, Japan’s manufacturing clout has never been more solid.
Eamonn Fingleton is the author of In Praise of Hard Industries (Houghton Mifflin, 1999) and Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000 (Houghton Mifflin, 1995).