PSST! WANNA BUY A USED STEEL PLANT?
When word got around that Manila-based National Steel Corp. planned to build an integrated mill in Cagayan, senior supervisor Noel Lagan was besieged by Japanese companies offering to supply billions of dollars' worth of equipment. What they were hawking, he says, was not shiny new machinery but used equipment from Japan's growing backlog of idle production lines. Among those on the prowl for buyers are famous names such as Mitsubishi Steel Manufacturing, Sumitomo Metal Industries, and Kawasaki Steel. "You better believe they are aggressive," says another Philippine steel executive. "They know our requirements and approach us with deals."
Driving this campaign to unload second-hand machinery abroad is a staggering $206 billion worth of excess Japanese production capacity, according to Industrial Bank of Japan Ltd. This vast array of idle equipment, from textile machines to cement plants, has been accumulating for four years, since Japan's bubble economy burst and put an end to its biggest-ever capital spending binge.
The hangover is all the worse because Japan is undergoing a transformation from an Asian dynamo to a more mature economy, with jobs shifting from manufacturing to services. Says Dick Beason, senior Tokyo economist for James Capel Pacific: "All those people who were saying Japan was unique are disappearing into the woodwork." Many Japanese managers can wait no longer for a recovery to bail them out--so the fire sale is on.
Nippon Paper Industries, for example, plans to shut down six of its 60 mainstay paper machines this year and is looking for buyers for them, as well as for coating and spooling equipment. And in June, Sony Corp. shipped 12 machines for stamping parts onto circuit boards to a joint venture in Indonesia.
What the pileup of idle machinery--and the push to unload it--signify is a radical rethinking of capital spending practices. A slower-growing economy may spell the end of the frequent factory upgrades that have helped Japanese companies keep ahead of foreign rivals.
UP ON THE BLOCK. The sales of plants to potential competitors also signal a shift from Japan's former island-fortress business mentality. Tokyo-based corporate lawyer Lynn Pickard recalls just a few years ago watching a Japanese executive being harangued by a TV newscaster for selling some of his factory's used equipment overseas. "It was like there was something unpatriotic about it," Pickard says.
These days, even the Japanese government is giving a hand in the sell-off. The Ministry of International Trade & Industry has been pushing the idea of selling some excess petrochemical installations to China. Industry sources expect an ethylene plant of Mitsubishi Chemical Corp., to be formed by a merger in October, to go on the block.
Also helping companies hawk used equipment is the Japan International Development Organization (JIDO), an arm of the business federation Keidanren. JIDO is negotiating a deal for Toyo Rayon Co. to sell $30 million worth of spinning machinery to a company in Uzbekistan.
To tap the lucrative business potential in brokering such deals, trading giant Sumitomo Corp. early this year set up a joint venture with Pittsburgh's Tippins Inc., which buys and refurbishes steel-making equipment and resells it. Sumitomo has identified about 20 mills in Japan and Southeast Asia that are selling or scrapping equipment, and Tippins hopes to make its first deal as a result of the joint venture within six months. Meanwhile, Sumitomo has gotten inquiries from Japanese companies looking to sell everything from auto assembly lines to chemical plants.
Despite the flurry of plant sales, exporting used machinery is still a touchy issue. Says Keinosuke Yamada, a Sumitomo manager who is helping with the Tippins venture: "There is often a concern that after the equipment is sold, it'll be used to make stuff that will be shipped back to compete in Japan."
IN A BIND. The fears run deeper than that. With Japanese companies pouring $36 billion a year into direct investment overseas, corporate captains are warning that the nation's industrial base may be fast hollowing out. And keeping employment high is a sacred cow for major Japanese companies. So far, they have been shifting excess workers to affiliates and lending them to other companies, rather than firing them.
Such policies put Japanese industry in a bind. Susumo Kato, an economist at CS First Boston (Japan), says it may be years before there's much improvement in Japan's current capacity utilization of only 70% in manufacturing (chart). Next year, Japanese companies may see a 10% rise in profits--which will help cover the costs of closing down more lines. But events may be overtaking such gradual adjustments. For the first time in modern history, industrial capacity fell over the past two quarters. With the domestic economy slowing to a mature pace just as the high yen is braking export-led growth, more radical remedies may be needed.
That's why Japanese companies are overcoming their aversion to packing unneeded machinery off to distant shores. The former taboo against such moves "is rapidly losing force," says Sumitomo's Toru Umehara, another manager involved in the Tippins venture. If that taboo is falling, can lifetime employment be far behind?Larry Holyoke in Tokyo, with Keith L. Alexander in Pittsburgh and Teresa Albor in Manila