Doing The Unthinkable

A visit to the western shores of Tokyo Bay is all it takes to see the depth of Japan's recession. This is Ohta Ward, home to hundreds of small companies that machine parts or process raw materials for Japanese industry. Meet Atsushi Miura, a 47-year-old workshop owner who turns out everything from bearing mounts to spigots on his lathes. Business is down 40% from prerecession peaks, says Miura. Its machinery now dusty, a neighboring workshop went bust in 1993. And down the street, Miura pauses by an operation that was seized by its yakuza, or mob, creditors in July. "The owner fled inthe night with his family," Miura says.

This is life at the bottom of Japan's corporate food chain. Small operators traditionally bear the brunt of recessions as blue-chip companies press suppliers for bone-crunching price cuts, and those suppliers in turn press subsuppliers. But this recession is different: Its magnitude is severing some long-term supplier relationships at the core of Japanese industrial prowess. It's also pressuring the economy as a whole, forcing up unemployment, slicing into consumer demand, and piling up bankruptcies (chart). But the good news is that the cracks in Japan's edifice are opening opportunities for foreigners. From Toyota to Toshiba, Japanese giants are turning more and more to lower-cost American and other foreign parts makers.

In recent months, Sony, NEC, Casio, Ricoh, and Minolta have all reached out to American chip partners for key devices. Ricoh Co. is using a customized Motorola Inc. microcontroller that allows a digital office copier to double as a high-quality printer or fax machine. Taiwanese plastics maker Chisei is bypassing all of Japan's 100-plus plastics wholesalers to sell plastic resins directly to giants such as Matsushita Electric and Hitachi. It is even making resins under contract to such major Japanese producers as Asahi Chemical Industry Co.

DETROIT IRON. And General Motors Corp.'s Automotive Components Group will sell $75 million worth of antilock brake systems to Toyota, Isuzu, and Suzuki. Most will be installed in the U.S., but Suzuki Motor Corp. will use 60,000 of them for cars made and sold in Japan. Motohiko Hirayama, a senior manager in GM's components group, says that before the recession, the strong yen, and political pressure came along, "very likely those contracts would have gone to the Japanese." The GM group expects total sales to Japanese makers to double from $1 billion to $2 billion by 1998.

To be sure, it isn't the end of the keiretsu, the huge, integrated collections of banks and companies. Indeed, by pooling resources and merging, some keiretsu members appear to be girding themselves for the long haul--and may emerge stronger than ever. But other keiretsu relationships are fraying. In electronics, for example, where supplier-buyer links were never as tight as in autos, nearly every major company is forging new partnerships--and not just for parts.

Not only are American-made chips going into Japanese electronics but more Japanese companies are selling finished American goods under their own labels. Mitsubishi Electric Corp. resells IBM mainframes in Japan. Hitachi Ltd. does the same with Big Blue's notebook computers. A dozen Japanese companies resell workstations made by Sun Microsystems Inc. And rather than spend millions developing its own line of cellular telephones, Pioneer Electronic Corp. recently struck a resale deal with market leader Motorola. This rash of original-equipment manufacturing deals is a remarkable reversal of business practices. It signifies how deeply the recession is revolutionizing the way Japanese companies operate.

NEW LAB. The same pressures even bear down on the auto industry, once the bastion of keiretsu ties. While they still rarely use foreign suppliers in Japan, auto makers are redrawing traditional supply patterns to slash costs. When Nissan sought a supplier of automatic transmissions last June, for example, it went outside its keiretsu and hired Toyota affiliate Tokai Rika. Nissan has also hired Toyota affiliate Aisan Industries for vacuum pumps. Nissan posted a loss of $260 million in 1993's first half, compared with a $128 million loss in the first half of the previous year, and there is no sign of demand picking up. "This is the time to reconsider the way we purchase parts," says Masaru Ohta, a Nissan purchasing manager.

Suppliers, meanwhile, no longer wait for the orders to flow in. Hidaka Seiki, a maker of precision auto parts for Honda Motor Co., wanted to sell to other customers, but it knew Honda would balk at the idea of a rival's research being conducted in the same facility. Hidaka Seiki couldn't stand pat, either, so before even finding new business, it went ahead and built a second research lab, in Tochigi. "We are trying to seek out other orders from companies besides Honda. It will be very, very difficult if we stick to one main company," says President Sadahiko Hidaka.

Over the long haul, the newfound sourcing flexibility may make Japan more competitive. George Ohgaki, a researcher at Yano Research Institute, points out that Japan's chemical industry houses a welter of smallish companies, most lacking the capital resources to compete with such U.S. giants as DuPont, which is expanding in Japan. But just when the new flexibility in sourcing will pay dividends isn't clear. And perhaps Japan will revert to form when the recession eventually ends. But don't bet on it. Indeed, the threat from cheap Southeast Asian parts makers has many in Japan fretting about an American-style hollowing out of the industrial base.

Listen to Kozaburo Shikata, chairman of Taiyo Manufacturing Co. in Osaka. Taiyo's 400 or so full-timers make a wide range of electronic components, from knobs and switches to printed circuit boards for televisions and VCRs. The 72-year-old Shikata survived all the oil and yen shocks of the 1970s and '80s and had scoffed all along at talk of Japan's lost manufacturing edge. But not now. "This time, the danger is real," says Shikata. "We can compete with Southeast Asian companies in any area of quality and service. But in some areas, Japanese subcontractors can no longer compete on cost."

Back at the machine shop, Miura and his friends sit around a kerosene heater and swap stories about the machinery accidents that gnarled their hands and about the neighborhood companies claimed by the downturn. "In past recessions, we had about three months of bad business. Now, it has been about a year and a half," moans Miura. His lean operation will survive, but for many other small companies like his, this recession may never end.