Japan Is Cutting Back, But Not Along The Cutting Edge

Atsushi Muramatsu is finding it hard keeping his colleagues off his back. As Nissan Motor Co.'s finance director, his job is to wade through capital spending requests and keep this year's budget at $2 billion, down 18% from last year. "I'm trying to stall everyone," he says, especially those asking for things such as new office air-conditioning and remodeling.

But Nissan is far from stingy when it comes to seeking future business. "We will defer some capital investment but not when it comes to product development or environment-related technology," says Nissan President Yutaka Kume. For example, he is charging up investment in electric-car and battery research, including the FEV, or future electric vehicle, on display at the Tokyo International Motor Show this month. He hopes the FEV will be on the market within four to five years.

Across Japan, executives are making the same tough decisions. After several years of fat increases in capital spending, they are now headed for a second year of leaner times (chart). An economic slowdown and tight money are forcing corporations to become increasingly selective about how they use their money.

'KNOCKDOWN PRICES.' But from autos to electronics, Japanese companies are continuing to funnel resources toward creating new products. The goal: to come out of the slump as competitive as ever with snazzy devices such as Nissan's fingerprint-reading systems that lock and unlock car doors by reading registered prints. The likely outcome is that U. S. rivals will be hard-pressed to keep up with the Japanese. "They'll be back on the attack with knockout new products at knockdown new prices," says Kenneth S. Courtis, economist with Deutsche Bank in Tokyo.

The electronics industry is putting its money where it matters most -- in cutting-edge technology. Although Toshiba Corp.'s profits sank 62% in the first half, the company is moving ahead with major investments in advanced integrated circuits. Of the $480 million that Toshiba has earmarked for new research and development equipment and the $2.15 billion set aside for R&D programs this year, a major chunk will go toward the new chips. Toshiba engineers are now designing memory cells for a still-theoretical one-gigabit memory chip, a device that will hold a billion pieces of information. The target date to hit the market: the year 2000.

Fujitsu Ltd. may have posted a 31.5% profit decline for the fiscal half-year ended Sept. 30, but it's plowing ahead with new technologies, too. It recently opened a $230 million production line to make integrated circuits out of gallium arsenide, a new material that is faster and more energy-efficient than silicon. And Canon Inc. will keep pumping money into new flat-panel display screens to be used in desktop publishing by next year.

To keep the funds flowing into product development, Toshiba, Hitachi, NEC, and other chipmakers are tightening their belts in other areas. The industry got carried away in the easy-money days of the 1980s. Now, it's stuck with excess capacity. Companies poured money into production lines for 4-megabit DRAM chips, but a poor market for personal computers overseas is keeping demand low, and prices have sunk 33%, to about $15 per chip since April. Hitachi Ltd. cut this year's capital spending on integrated circuits by 18%, to $692 million. Toshiba is delaying the opening of a $770 million plant for 4- and 16-megabit DRAM chips in central Japan by at least six months. And analysts say Mitsubishi Electric Corp. will be forced to delay starting up the second 4-megabit line at its new Saijo plant.

READY ROBOTS. After years of investing large sums in new equipment, many companies now hope to ride out the storm. Sony Corp. hints that it will soon cut its $3.4 billion capital spending budget by 10% to 20% for next year. But even with less new investment than in the past, "they can coast for three to four years on what they've got," says Boris Pasterik, an analyst with Barclays de Zoete Wedd Securities (Japan).

Similarly, most auto and electric machinery companies have highly automated plants and facilities. "The best robots are in place and ready," says Jesper Koll, economist with S. G. Warburg Securities (Japan) Inc. Despite a six-month slump in auto sales, Toyota and Nissan will both open assembly plants next spring in Kyushu. Mazda is completing a new factory near Hiroshima. "We've finished the capacity spending we need," says Takashi Matsuda, managing finance director for Honda. His company cut capital spending by 22%.

Bucking the trend, many large-scale retailers are boosting their spending. Nichii Co., a major supermarket chain, jacked up this year's capital expenditure plans 22% over their original forecast of $554 million. Buoyed by recent moves toward deregulation, retail chains are expanding: They're buying and leasing property, building new stores, and even automating. To keep up with demand, Japan's nine electric power companies will also spend a record $31 billion to upgrade and build plants next year.

There's no question that overall business-investment growth rates will wallow for another year or so. But to assume they'll stay there, notes Warburg's Koll, "is silly." Even while spending is down, Japanese companies are busy sharpening their edge.

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