What The Strong Yen Is Breeding: Japanese Multinationalsby
As the mighty yen shatters one plateau after another, Japanese chieftains howl, Tokyo share prices swoon, and cheap-dollar mavens in Washington smugly predict that Japan's colossal trade surplus will finally be cut down to size. Today's turmoil in Tokyo, right? Try late 1985, just weeks after finance ministers, meeting at Manhattan's Plaza Hotel, agreed to devalue the dollar against major world currencies. So began the endaka, or strong yen, era.
Now, a new bout of yen appreciation has driven the yen to a postwar high of around 88 to the dollar. Once again, a ritual is being played out. "We are not ready for 90 yen to the dollar," laments Yoshikazu Hanawa, Nissan Motor Co.'s executive vice-president for product planning and development.
But despite the complaints, manufacturers have grown adept at surviving yen shock and even benefiting from it. They are using the yen's strength to quickly and cheaply set up integrated manufacturing bases in dollar-linked Asia. And as a result of investments in the U.S., Mexico, and Europe, many Japanese companies are emerging as true multinationals. That allows them to play both sides of yen-dollar swings, using cheaper dollar-denominated parts and materials to offset higher yen-related costs.
"CUSHIONED." Indeed, the era in which Japan simply made finished products at home and shipped them out to the world is over. The most innovative companies are parting with stay-at-home Japanese suppliers and ceding more decision-making authority to overseas subsidiaries, particularly in the U.S. Their geographic diversification is such that "the losses and dislocations from the most recent yen evaluations won't be as high as they might have been," says Mark Mason, a Japan watcher and associate professor at Yale University School of Management. "To a very great extent, they've been cushioned."
That partly explains why the theory that currency movements will eventually solve trade imbalances isn't working as many U.S.-based economists predicted. Endaka--which should theoretically make Japanese products less price-competitive abroad--hasn't reduced Japan's record $121 billion global trade surplus, at least not yet. Export volume, up 9.6% in 1994, have increased steadily during the 1990s. Although a flood of cheap imports should lower the Japanese trade surplus by about 5% in 1995, Japanese bureaucrats' half-hearted efforts to remove import barriers will keep the surplus, and by extension the yen's value, high.
There's no denying the soaring yen means plenty of pain for Japan. The 18% decline this year in the Nikkei 225 average owes much to worries that the high yen will clobber corporate earnings. Salomon Brothers Inc. says endaka will keep economic growth below 1% in 1995. Worse, an exodus of manufacturing jobs overseas threatens Japan's lifetime job-security compact. "The best manufacturers, like auto makers, will leave, while we keep the less efficient ones," frets Nomura Research Institute analyst Richard Koo, author of Good Endaka, Bad Endaka.
True, some choice jobs will leave. Yet so will plenty of low-end manufacturing companies that would probably go under in high-cost Japan unless they move offshore. And the future flows of profits from Japan's growing offshore operations will continue as big companies become increasingly sophisticated. Take electronics powerhouse Hitachi Ltd., which has set up eight manufacturing operations in the U.S. since 1985. Its line of projection televisions, assembled in Mexico, is very much a global effort (chart). The small tubes that project information come from a Hitachi subsidiary in Greenville, S.C., while its chassis and circuitry are made by its affiliate in Malaysia.
From Japan? Computer chips and lenses, or only about 30% of the value of the parts being used. Hitachi executives are quietly pleased that their decade-long efforts to ride out trade friction with the U.S. have given them such flexibility. They've been able to avoid any price increases for the projection TVs, which retail in a range from $2,800 to $4,400.
Of course, the recent yen appreciation is keeping the heat on Japanese manufacturers in the U.S. to make further moves to cope. Mitsubishi Electric Corp. is attempting to "Americanize" its production of big-screen televisions in Cypress, Calif. Tachi Kiuchi, chairman of Mitsubishi Electric America Inc., is turning his subsidiary into much more of a self-managing entity. It has taken control of Mexican assembly plants away from headquarters in Japan. Purchasing, now done out of Kyoto and Singapore, is moving to the U.S.
PLEASE PAY MORE. The result? The yen-based content in Mitsubishi's TVs is shrinking dramatically. "A year ago, all of our 35-inch picture tubes were coming from Kyoto," says Jack L. Osborn, president of Mitsubishi Consumer Electronics in Norcross, Ga. "By next year, they'll all be coming from North American manufacturers." Overall, Mitsubishi Electric estimates that Japanese content is only 20% to 25% of the value of the goods it sells.
While holding the line on the prices of such consumer goods, Japanese companies are able to pass along currency-related costs in technologies where they don't face real competition. With about 45% of the world's liquid-crystal-display market, Sharp is considering export price hikes that analysts say will be about 5%. Assemblers of computers in the U.S. may have little choice but to accept such increases. Likewise, Kyocera Corp. will "ask" customers to pay 10% more for computer-chip packaging and electronic components later this year.
While they maintain their U.S. markets, the big Japanese companies also are using the strong yen to buy cheaper components from around the world and ship them home for assembly. That provides a competitive edge in Japan itself. Sanyo recently signed a deal with Mexican appliance maker Mabe to produce compressors for assembly into refrigerators in Japan. Similar strategies in China and Vietnam have contributed to an earnings turnaround at Sanyo.
This "reverse export" trend has been showing up even within Japan's flagship auto industry. Toyota Motor Corp. this year will make 348,000 engines in the U.S., up from 233,000 in 1994. Not only does that reduce the number of costly yen-priced engines in U.S.-assembled cars but any extras--an expected 26,000 this year--will be exported back to Toyota plants in Japan and elsewhere to lower costs. Japanese auto-parts makers with U.S. plants are beginning to ship other components back home.
What impact will such a world-girding system have on Japan's trade surpluses? The betting is that Japan's global surplus will fall by about 5% in dollar terms this year. But the Japanese trade surpluses will still be painfully large, especially as sales to the rest of Asia continue to soar. And a high yen won't do much to shrink those surpluses as giants like Hitachi and Mitsubishi go global.