Japan's Sharp TurnKaren Lowry Miller and Neil Gross
Japan's corporate giants traditionally have relied on one tried-and-true mantra for keeping profits strong: Grow, grow, grow. Fierce competition in many of their markets meant razor-thin margins, so these powerhouses knew that to survive, they had to innovate, automate, and crank out products. The result? Sales ballooned, while profits generally headed upward.
Suddenly, there's no place to grow. The U. S., European, and Japanese economies are in the dumps, and Japan's $78 billion trade surplus makes carving out fresh market share abroad politically unacceptable. As a result, profits are slumping even for Japan's red-hot companies, including Matsushita, Nissan, and Honda. Even Sony Corp. expects to announce its first domestic operating loss in 34 years. Growth in volume no longer guarantees profits.
What to do about the problem has set Japan's corporate boardrooms abuzz. A few companies, led by the big carmakers, are already taking action. Most notably, Toyota Motor Corp. announced on Feb. 14 that, as of Mar. 13, it would hike prices 3.2% on U. S. models and 5% on the luxury Lexus line. Honda and Nissan Motor Co. say they may follow suit.
`CARTEL!' Chip and computer giants, consumer-electronics companies, and machine-tool makers can't do the same. "If Toyota raises prices, it's called leveling the playing field with Detroit," says an executive at one Japanese manufacturer. But "if Sony or Matsushita tried it, everyone would be screaming 'cartel!' " So they are developing less obvious strategies for avoiding red ink during a global recession. Their techniques: reducing development costs, migrating away from commodity goods, and milking hit products for as long as possible.
For beleaguered U. S. and European auto rivals, Japan's antirecession measures, including price increases from Toyota and others, could open big opportunities. "The worst of the Japanese onslaught is over," says Stephen Marvin, an auto analyst at Jardine Fleming Securities Ltd. in Tokyo. Indeed, Detroit's Big Three are already testing how best to take advantage of Toyota's move.
In other industries, Japan's solution to profit problems may just be to make the competition fiercer. For instance, such big chipmakers as NEC, Fujitsu, Toshiba, and Hitachi are spending heavily to reduce their dependence on commodity memory chips. They want to realign their product offerings on more custom chips and microprocessors--the stronghold of such U. S. industrial leaders as Intel Corp.
Still, the pressure on Japanese companies to ease off competitively, even temporarily, is immense--and growing. Much of it is plainly political. Nissan Executive Vice-President Yoshikazu Hanawa worries that if Japan's share of the U.S. car market rises much above its current 30%, "bashing will increase, and America will stop free trade." Similar concerns have led Toyota to drop its "Global 10" promotional campaign among dealers. The goal: to grab 10% of the world car market. "We have to be a little bit careful not to be interpreted as a sort of steamroller," says director Motosuke Tominaga.
But the more compelling pressure is financial. "Our key challenge is how to achieve solid profitability in this new environment of slower growth," says Honda Motor Co. President Nobuhiko Kawamoto. That won't be easy, given Japan's debt hangover from the torrid expansion of the late 1980s.
In those days, when the Nikkei seemed buoyed by helium, companies issued huge amounts of convertible bonds at rates as low as 1% or 2%. Now, the market is stuck in its most serious slump since 1965, and some $80 billion worth of those bonds must be redeemed over the next two years--$6 billion in just the auto industry. To redeem them, most bond issuers will have to borrow at current interest rates of 6% to 7%. Nissan alone has a $1.5 billion convertible bond due in 1993, issued when the company's share price was at $13. The stock now trades around $5.
There's also social pressure on Japanese companies to change the way they do business. Opinion leaders such as Gaishi Hiraiwa, chairman of the Keidanren, Japan's powerful federation of economic organizations, are calling for improving Japan's quality of life by cutting the workday. In Japan, the movement is called jitan, and it's the battle cry of this year's spring wage negotiations. The average Japanese still clocks 2,159 work hours per year, some 200 more than Americans and 500 more than Germans. Japan's Labor Ministry is pushing companies to slash that to 1,800 by 1993. Toyota, for one, figures this cut will be equal to reducing its annual production by 500,000 cars. Nissan is worried, too. "We're going to lose some of our competitiveness," says Hanawa.
SLIMMER LINE. To deal with all these pressures on their profit margins, Japan's manufacturers are considering such moves as keeping products on the market for longer periods. The Ministry of International Trade & Industry is currently discussing a push to lengthen product life cycles for autos and electronics with the Labor Ministry and Fair Trade Commission. Nissan is already testing this strategy: Hanawa says new versions of Nissan's Bluebird, called the Stanza in the U.S., and its British-built Primera, likely won't be revamped for five or six years, vs. four now.
Matsushita Electric Industrial Co. has another strategy for dealing with the downturn. Starting in April, it will begin streamlining its 50,000-odd consumer-product offerings by as much as 30%, dropping low-end audio goods and adding sophisticated new stereo systems that buyers can program to individual taste. Of the company's current 40-model TV lineup, for instance, only large-screen sets and models with advanced features, such as built-in VCRs, are sure to make the cut. "We want to see a smaller number of products selling for a longer period of time," says Matsushita Managing Director Keiichi Takahata. "If we market a product properly, we can make it a hit."
SACRED R&D. Companies are getting stingy in a lot of other ways, too. To offset soaring product-development costs for up-market electronics goods, Hitachi Ltd. is teaming up with Minolta Camera Co. to design high-resolution 8mm camcorders. Most companies are also slashing capital expenditures. Fujitsu Ltd.'s planned $1.76 billion budget for the fiscal year ending March, 1992, was cut 9%. And as inventories balloon, companies are paring back production. Honda pared 55,000 cars in February and March, and Mazda cut 30,000. Toshiba's total PC output this year will be 20% less than originally slated.
Despite profit worries, most Japanese companies continue to invest in the future. Many, for instance, are increasing spending on production automation to help offset the nation's acute labor shortage. And research budgets remain sacred. Honda, for example, is cutting domestic capital spending this year by 11%, to $640 million, while beefing up research to more than $1.5 billion.
That level of investment means Japan is likely to roar out of this slump the way it emerged from the 1970s oil crisis and the mid-1980s yen runup. "It's not likely we'll be able to raise market share in the short term," says Toyota's Tominaga. "But that doesn't mean we won't grow again." Translation: Japanese companies are moderating for now. But when the recession lifts, Tokyo's financial markets stabilize, and political pressures ease, they'll probably be back to the old grow, grow, grow.
HOW JAPAN'S CORPORATE GIANTS PLAN TO REBUILD PROFITS Raising prices Higher prices can mean higher profits. Toyota plans to hike list prices on 1992 models by 3.2% Trimming product lines Fewer products lead to lower overhead. That's why Matsushita will streamline its 50,000-product line by up to 30% Lengthening product cycles By keeping products on the market longer, Japanese companies have time to maximize returns. Many Japanese television makers are considering this option Concentrating on super-sophisticated products To build sales in competitive industries, Japanese manufacturers are trying to produce state-of-the-art products, which yield high margins. That's Toshiba's strategy in laptops Moving offshore Offshore manufacturing cuts overhead. That's why Hitachi plans to transfer all TV production to Mexico Giving up Some Japanese companies are simply giving up on unprofitable markets. That's why auto maker Daihatsu is pulling out of the U.S. DATA: BW