Japan May Get Its Own Rust Belt

In the mid-1980s, Japan's steel industry was forecasting a steady, long-term drop in demand. But Nippon Steel Corp. wasn't going to let the decline stop its growth. "Our grand design is to diversify as soon as possible," said a Nippon Steel planner in 1988. And Japan's other four major steelmakers quickly followed suit. They would all spend millions to become theme-park operators, computer makers, software designers, semiconductor fabricators, direct marketers, and even pig farmers. In turn, those new ventures would easily absorb the workers no longer needed in the steel business.

In the midst of Japan's economic slump, however, the grand design isn't delivering. Nippon is giving employees two days off every month with pay, and in early November it announced plans to slash the work force by 7,000--a stunning 20%. Other steelmakers, such as Kawasaki Steel Corp. and NKK Corp., are trying similar schemes. As for the diversification plans, they have become a problem in themselves. "Very few of these new businesses were successful," says Hiromoto Toda, a managing director of the Japan Iron & Steel Federation.

It's a cautionary tale for any Japanese company looking to shore up employment. With piles of cash to tap, the Japanese steelmakers diversified more to create jobs than to turn a profit. But because they adopted a scattershot approach, they haven't done either one very well. "They were happy just to create something to do," says Shinichi Ueyama, a steel industry specialist at consultants McKinsey & Co. in Tokyo.

FALSE START. Some of these ventures are still operating, such as Nippon's Space World theme park, its semiconductor and silicon-wafer manufacturing operations, and its computer-software companies. Others have fizzled, such as Nippon's venture in laptop computers, which was liquidated last March.

Even the successes, though, have not provided the diversified sales base or the expanded employment the companies hoped for. Nippon says that some 3,000 workers have been transferred to new businesses since 1988. But the company once talked of reducing its reliance on steel from 80% of sales to 50% by 1995. After spending hundreds of millions on diversification, it still relies on steel for roughly 84% of sales.

For Japan's top five steelmakers, this dependence on steel ranges from 85% for Sumitomo Metal Industries Ltd. to 48% at Kobe Steel Ltd. A spokesman for Kawasaki warns that even the company's most promising new businesses may remain in the red until the next century. He says: "We invested a lot. But there just haven't been enough sales."

With diversification a disappointment, Nippon concedes that in its latest round of job cuts it plans to transfer workers to steel-related subsidiaries that make such items as nuts and bolts. That maneuver technically removes workers from the parent company's payroll, but it still drains the treasury: Nippon will continue to subsidize the wages of the transferred workers in their new jobs. And it's unclear how many more workers the old-line subsidiaries can absorb, since they already employ some 7,000 workers transferred during Nippon's first big restructurings after 1987.

Meanwhile, the domestic market for steel is still contracting, while the stronger yen makes Japanese steel uncompetitive on world markets. For the six months ended Sept. 30, Nippon Steel recorded a pretax loss of $156 million.

Nippon and others in the industry now say they will review their new businesses to see which ones have the most potential. But they also make it clear that, tough as the market is, they see steel as their principal business, now and in the future. The industry predicts China and Southeast Asia will be major growth markets and believes its high-quality products and talented engineers will prove competitive if costs come down. Analyst Minoru Odono of James Capel Pacific Ltd. estimates the Japanese must reduce the cost of producing a ton of steel as much as 20% if they're to compete globally.

The crucial question is how much more the steel companies will have to do to lower costs. Cutting wages and bonuses will help. Beyond those measures, however, Japan's steelmakers refuse to consider the final way out--massive firings and plant closings. In a business culture that stresses consensus and loyalty, big layoffs are practically taboo among the country's largest corporations. Forced to operate under these constraints, Japanese steelmakers may just be starting to feel the pain.

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