How Japan Keeps The Tigers In A CageTed Holden
Taiwan's electric-appliance maker Sampo Corp. turns out everything from refrigerators to washers. With 3,500 employees and $420 million in sales, Sampo executives dream of one day becoming globally competitive. But they have been held back, in part because of Sampo's inability to crack Japan, by far Asia's largest market. Nor have they been able to break free of dependence on Japanese technology to make such products as TVs and VCRs. "There's no way for our people to understand the special technology of the integrated circuits and semiconductors," says Sampo Vice-General Manager Chu Tseng-hsiung.
A few years ago, many experts expected Taiwan and South Korea to give the Japanese a run for their money. Copying Japan's economic blueprint, powerful bureaucrats in both countries targeted key industries for development. They supplied companies with cheap capital and shut out competing products from abroad. Exports grew quickly. Before long, analysts were predicting that hardworking Taiwan and Korea would bring the competition to Japan's own shores, unloading boatloads of cheap, high-quality TVs and cars and forcing Japanese companies to retreat. In effect, they would out-Japan Japan.
Japan hasn't let that happen. Some groups, such as Korea's Samsung, are challenging the Japanese in semiconductors, while some Taiwanese companies, such as Twinhead International Corp., are making strides in such markets as notebook PCs. But in the broader arena, Japan is turning the battle to its advantage. Of the original "Four Tigers," Hong Kong and Singapore have made even less headway in competing with the Japanese.
Japan is putting the squeeze on Taiwan and Korea by gearing up production at low-cost manufacturing facilities in Southeast Asia. And though major Japanese companies have offered some technology to Korea and Taiwan, they have blunted the competitive challenge from these more powerful Tigers by holding back most state-of-the-art developments. At the same time, the Koreans and the Taiwanese have become hooked on Japanese capital goods and industrial components while Japan's market remains relatively closed. The result has been huge, growing trade surpluses in Japan's favor.
Last year alone, Korea sucked in from Japan high-tech gadgetry worth $21.1 billion. These industrial goods account for 93% of Korea's import bill. That drove their deficit with Japan to $8.8 billion in 1991, up 49% since 1990 (chart, page 98G). Likewise, Taiwan's appetite for Japanese goods fattened its deficit with Japan to $9.7 billion, up 26% from 1990. Measured per person, Taiwan even runs a higher deficit with Japan than the U.S. does--$480, vs. $156. "It will take 20 years to lower our deficit," says C. C. Wang, assistant secretary general of Taiwan's Machinery Industry Assn.
The need for Japanese goods will keep the Tigers in Tokyo's economic orbit and diminish the likelihood of a direct challenge. "They know they can't break away from Japan if they're going to continue their economic development," saysTan Hashida, senior researcher at Nomura Research Institute Ltd. "It's a love-hate relationship."
HOLDING BACK. Taiwan and Korea approach the situation from different angles. Although the Japanese military occupied both countries, the Taiwanese aren't as reflexively anti-Japanese as the Koreans. Taiwan and Korea also have markedly different industrial structures and business cultures. An important difference is that the vast majority of Taiwanese companies are small mom-and-pop outfits, compared with Korea's vast chaebol, or industrial groups.
But both are feeling new heat from Japanese companies, particularly those that set up shop in Southeast Asia in the late 1980s. While Taiwan and Korea held back, the Japanese began rushing into such low-labor-cost countries as Thailand, Malaysia, and Indonesia. Meanwhile, soaring currencies and labor demands drove up production costs in Korea and Taiwan. Today, the average manufacturing worker in Korea and Taiwan earns approximately $800 a month, vs. $120 in Malaysia. "What the Japanese have done is combine superior Japanese technology with low-cost Asian labor," says Linda Y. C. Lim, research director at the Southeast Asian Business Program at the University of Michigan. "That puts the squeeze on the Tigers."
To reverse the deteriorating competitive picture, government officials in Taiwan and Korea are quietly pursuing a three-pronged strategy:
-- Technology transfer. To pry vital technology from the tightfisted Japanese, Korea has presented Tokyo with a wish list, including designs for high-definition TV chips and notebook PCs. The Koreans say Japan owes it some technological goodies because of its military occupation in World War II. Specifically, Korea is pressing Japan to pump $200 million into a new organization to help finance technology exchange.
Taiwan's Ministry of Economic Affairs is currently drafting a five-year plan aimed at making the country self-sufficient in 66 products and components now imported from Japan. It is also seeking sophisticated technology, such as liquid-crystal displays for use in TVs and computers.
-- Access to the Japanese market. While some Korean-made electronics products can be found amid the bright lights of Tokyo's Akihabara electronics district, the Japanese tend to associate their own brands with superior quality. Korean companies that score greater success are those co-opted by the Japanese. In consumer electronics, Samsung and Goldstar together exported a meager $50 million each to Japan, while Daewoo alone sold $110 million in 1991. The reason: Daewoo's wares were sold under the NEC and Maruman brands.
Taiwan set up a trade center in Osaka last November, where 20 companies, such as computer maker Acer Inc., are pushing their products. It is also urging Japan to import more Taiwanese machine tools, home appliances, and electronics. At the same time, Korean officials insist that Japan should wipe out tariffs on Korean products such as shoes and sweaters. "Japan must change its way of thinking," says a senior member of a Korean trade organization in Tokyo. "It needs to see itself as a leader in Asia and recognize its duty to help the rest of Asia develop."
-- Easing dependence on Japanese parts. Both countries are urging their companies to search for non-Japanese suppliers. "Korean industrialists have to recognize that we should stop buying from Japan," says Daewoo Corp. President Yoon Young-Suk, who slashed Daewoo's reliance on Japanese technology from 85% of total procurement in the mid-1980s to 15% by relying on Western companies as much as possible. Moreover, Korea bans 258 Japanese products, including such popular playthings as camcorders and the Sony Walkman. "The ban violates GATT General Agreement on Tariffs & Trade, but so what?" says a senior official at Seoul's Trade & Industry Ministry. "We need to cut the Japanese deficit to improve our trade picture." Although it is less restrictive, Taiwan bans Japanese car imports.
So far, Japan has taken no concrete action despite these governmental pleas. In January, during a summit in Seoul, Prime Minister Kiichi Miyazawa and President Roh Tae Woo agreed to hammer out an action plan on trade. During the talks, Korean officials pressed Japan to reduce tariffs in 16 areas, "but our request fell on deaf ears," complains Chang Sokan, director general for international trade promotion at Trade & Industry.
In some cases, the Japanese are even upping the ante, especially in areas where the Tigers are coming on strong. In mid-April, Fujitsu Ltd. confirmed a licensing deal in which it will collect an estimated $30 million in royalties from Samsung for use of its dynamic random-access memory chip technology. Analysts say the Fujitsu move is designed to raise production costs for the Koreans, not to spread new technology.
EVERY PIE. Being hooked on Japan's technology isn't necessarily a disaster for the Tigers. Thanks to Japan's industrial goods and components, Taiwan runs a $13.3 billion surplus with the rest of the world, and Korea is near trade balance. A large portion of the liquid-crystal displays, electronic controllers, and other Japanese parts the Tigers buy are ferried to the U.S. and Europe inside PCs, TVs, and cars.
The Tigers know this state of affairs can't continue, and they have been busy narrowing their surpluses with the U.S. Under U.S. pressure, Taiwan reduced the proportion of its exports headed to the U.S. from 44% to 29% from 1987 to 1991. At the moment, Korea has a trade deficit with the U.S., while Taiwan is running an $8.2 billion surplus.
Crucial is whether Taiwan and Korea can continue to tap new markets in Eastern Europe, Asia, and Latin America. At the same time, pressures are growing for them to locate more manufacturing in even lower-cost Asian countries. But almost wherever they turn, they're one step behind. "Again, they're playing catch-up," says Joseph J. Kim, a partner at KIMBACO Ltd., a Korean investment company.
At the same time, Taiwan and Korea must move up the technology curve faster than they have in the past two or three years. For that, ironically, they still need a helping hand from their chief competitor, Japan. Add it all up, and it means that ultimately, the Tigers could slip further into a pattern of riding on Japan's coattails, confounding experts who predicted great rivalries. Recession or no, Japan's competitive machine is teaching Korea and Taiwan some very painful lessons.