Made in Japan Ain't What It Was

Detroit once underestimated its Asian rivals. Lexus is now doing the same to China.
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There was a time when U.S. manufacturers looked down on their Japanese rivals as purveyors of cheap, low-quality knockoffs. That 1960s conventional wisdom is taught these days in business schools as one of history's most glaring examples of corporate hubris. It's odd to see it catching on in Japan, of all places.

Lexus International Executive Vice President Takashi Yamamoto probably dodged a bullet by not building a car plant in China's grossly oversupplied market in recent years. Still, a factory that could escape import tariffs in the world's biggest auto market seems like a good idea at some point. Not so, according to Yamamoto: The first Lexus production line could be "several decades" away.

"There's too much quality risk in China to produce there,'' he told Bloomberg's Craig Trudell and Yuki Hagiwara. "Made-in-Japan guarantees quality." 

Without wanting to burst Yamamoto's bubble, Japan's reputation for quality has taken a bit of a hit of late. There's the fine of as much as $200 million that airbag-maker Takata agreed to pay Tuesday for installing defective, potentially fatal safety devices in 23 million cars, including Lexus models. Or the admissions by Lexus supplier Toyo Tire & Rubber that it falsified testing data for products including shock absorbers used in trains, ships and buildings.

The quality of Japanese cars sold in the U.S. fell below the industry average this year, trailing Korean and European models, according to J.D. Power. If you still believe Japanese product standards are on some sort of higher plane, there's a leaning apartment block I could point you to.

Moreover, what are Japanese companies getting in return for their reputations? Consider luxury goods makers: Investors don't buy their stock because they've got cool labels, but because their brands allow them to charge higher prices and earn better margins. That should be good news for corporate Japan. Consultancy firm FutureBrand said earlier this year it had the best "country brand" of 10 nations it tracks globally, with particular leadership in electronic goods

But Japanese consumer companies have the lowest operating margins in the Group of Seven, according to data compiled by Bloomberg:

With an average margin of 1.5 percent, Sony Chief Executive Officer Kazuo Hirai would doubtless be willing to relinquish Japan's brand standing in exchange for Apple's 29 percent. A reputation should be worth something.

There are two obvious paths ahead. One is to do the hard work of improving reputations and milking higher prices out of consumers in return. That's what the likes of Toyota did from the late 1960s, by offering longer warranties than their U.S. rivals and thereby convincing buyers their products were better. It's not something you can hope to achieve overnight, and given Japan's reputation is already pretty good, it's also no guarantee of better profits.

Perhaps a better approach in the short term is to accept Japan's loss of quality leadership, and focus on improving the efficiency of its supply chains by sending more work offshore. Emerging economies aren't just cheaper, they're also growing in sophistication in exactly the same way Japan did 50 years ago. Cars that are made in China have a lower fault rate than those in the U.S., according to J.D. Power:

Chart of China auto quality

Right now, Japan has the lowest stock of overseas investments of any Group of Seven member except Italy, meaning it's missing out on those opportunities. Indeed, Prime Minister Shinzo Abe wants to double foreign direct investment into Japan, and seems less interested in flows in the opposite direction. Fortunately for the country, Japan's executives have other ideas, and are investing offshore at a pace that outstrips their competitors in Europe and the U.S.:

Chart of FDI flows

Yamamoto should heed what his local peers are doing, and look for ways to move more production offshore. As Apple demonstrates, a widely dispersed supply chain can be quite consistent with premium branding. Being relentless in your pursuit of perfection is all very well, but it's worth keeping an eye on profits too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    David Fickling in Sydney at

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