OCTOBER 1983 - VOLUME 4 - NUMBER 10
Kudos for Japan
An American business consultant in Tokyo comments on U.S. - Japanese trade
James Abegglen is vice president of the Boston Consulting Group and a professor of business administration at Sophia University in Tokyo.
In numerous articles, Abegglen has described how Japanese economic involvement in Asia is leading towards what he calls "the hazards of regionalism"-the domination of the Asia-Pacific region by Japan. Abegglen believes that, by ignoring opportunities in Asia and fostering policies that protect U.S. manufacturing, the U.S. has lost its competitive edge to Japan. He also warns that, by pressing Japan too strongly on trade and investment policies, American businessmen could force Japan to seek other options to its current reliance on the U.S. for trade.
Abegglen's Boston Consulting Corporation is one of the leading proponents of the "new managerialism " of the 1970s and 1980s. Described by authors Barry Bluestone and Ben Harrison as emphasizing "cash management over a commitment to any particular product line, " the group's strategies have been adopted by many U.S. conglomerates and have played a major role in what Bluestone and Harrison refer to as "the deindustrialization of America. "
In Tokyo, the Boston Consulting Group does about 70 percent of its business with Japanese firms. Most of Abbegglen's time is spent working with European and American multinationals. He is a frequent contributor to business publications.
Multinational Monitor: Do you agree with the criticism that Japan is a closed market?
James Abegglin: I would say that Japan is about as open to goods from abroad as any other country in the world.
What you have is a problem in perceptions. The United States sees itself as being very open as a market. We seem not to take account of the fact that the American market now has quotas - import quotas - on textiles, shoes, consumer electronics, automobiles. That's a pretty broad range of products. And in addition we have all the agricultural restrictions that most countries have. The Japanese can't ship citrus to the West Coast, the Australians have a beef quota in the U.S. So part of the problem I think is our own, if you will, sanctimonious attitude and policies, where we perceive ourselves to be such an open market - which I think causes problems in negotiating.
Multinational Monitor: As a business consultant, do you see basic differences between how capitalists operate in Japan and how they operate in the U.S.? American and Japanese steel corporations, for example, have followed very different strategies in the postwar period.
James Abegglin: Well I think we should back up, and get this in perspective.
The sectors in which Japan was investing heavily during the 1950s and 60s - chemical fertilizers and non-ferrous metals, paper and pulp, petrochemicals, steel - many of those sectors now are in deep, deep trouble, and Japan is really quite uncompetitive. You know the Japanese aluminum industry has been devastated; Japan is importing on the order of 400,000 tons of aluminum ingots from North America now. Imports now far exceed domestic production. And only a few years ago Japan was exporting ingots...
The point I'm making here is when we talk about Japan we must appreciate that Japan has areas that are extraordinarily dynamic and competitive, and also has industries that are in very, very deep trouble. So we should be a little bit careful. Now I think that's a terribly important point that people fail to appreciate - you win some and you lose some.
Right now Japanese steel is in the beginning of a decline. That is, there has been no major investment in new steel facilities in Japan since the mid-70s. It's inconceivable that there would be a major new facility established.
This is a real life cycle. I'm assuming, in other words, that as the Japanese economy continues to grow, continues to move to more sophisticated products, it loses in the process its competitive position in less-sophisticated products. That's a cycle that the Japanese have managed quite well. It's a natural cycle provided you don't interfere with the marketplace. As the economy continues to invest, educational levels go up, skill levels go up, [products] go up in value added - provided you don't protect the bottom.
You see, we've got a trade policy barrier. The U.S. trade policy tends to interfere with that cycle. We use our trade negotiating position to defend dying industries. The Japanese tend not to, they tend to defend their growing industries. In ten years, the Japanese auto industry will mature, their competitive position will drift away from them, to Brazil, Korea, Spain...
Multinational Monitor: But doesn't this "natural cycle" benefit Japan more than the rest of Asia? Japan has been able to shift its labor intensive industries to places like South Korea and Taiwan, but has been able to sell those countries machinery, machine tools, and so forth.
James Abegglin: That's right. Those countries become large markets for Japanese machine tools, Japanese components. I think you can argue that one of the things that Japan has going for it is Japan's political, psychological, and sociological inability to import cheap labor. If you think of Western Europe and the U.S. in the boom period of the 1960s, you had this flood of labor from Yugoslavia, southern Italy, Turkey, into the north of Europe, which meant you could substitute labor for capital and keep industries going in the north even though the local labor wage level would have dictated closing those factories down. I think the Hispanic migration into the U.S. has some of the same impact. But in the Japanese case, given a rising wage level in Japan which made certain industries uneconomical, you had to move them abroad, to where the labor was, rather than bringing the labor into Japan.
Multinational Monitor: In an article you wrote a few years ago, you referred to the Japanese economic domination of Asia as one of the "hazards of regionalism." Can you explain what you mean by this term?
James Abegglin: Japan has to import - not export, but import. It's a requirement for Japan, and people tend to get this idea wrong. Import is the compulsion, because if Japan's imports stopped, Japan's standard of living would drop back to the standard of living of about 1850. For example, if the oil stops flowing, the lights go out in Japan in three months. And it's all over. You have to import 50 or 60 percent of the food supply, all of the iron ore, all of the coking coal, most of the steam coal, etc., etc. Now you have to export to pay for that, and to pay for the technology you're buying, and to pay for the capital for overseas investment. So Japan is going to export.
But if markets close in Europe and the United States, Japan has to find an option. And an option might include at some point the Soviet Union. But that's certainly not a current option when you consider Japan's policies or the Soviet Union's policy towards Japan. But certainly Southeast Asia is an option.
Multinational Monitor: As a market?
James Abegglin: As a source [for imports] and a market. Now remember, Japan is importing substantially more from East and Southeast Asia than it is from North America. So already on the import side you can see a shift from the earlier dependence on North America. On the export side it's about even. That is, East and Southeast Asia are about the same size or percentage of Japan's exports as is North America.
Now to the extent that East and Southeast Asia, including the People's Republic of China, grow faster over the next decade - presuming they become an even more proportionally important market - and to the extent that the West is closing, Japan it seems to me, is likely to do what is necessary to accelerate the growth of this area. And in fact, I think this is what the Japanese are doing. Japanese aid, for example, is very much focused on Asia. Eighty percent of .Japan's official loans go to Asia. Not very much spills over to Africa or Latin America. In bucks the greatest proportion of Japan's manufacturing investment is in Asia. We think of Japan as making manufacturing investments in North America, but it's hardly any. The big manufacturing investments are in this part of the world. And the Japanese government over the last couple of years has been stepping up its focus on East and Southeast Asia. The Korean national issue was settled by Nakasone earlier in the year. Aid to China has been increased, and they've doubled the amount of oil investment. In Malaysia the aid was quadrupled recently. All of that tends to accelerate development in the area. And the hazard is regionalism.
Multinational Monitor: Under Japanese hegemony?
James Abegglin: Japan has to have an option.
Multinational Monitor: But many U. S. policymakers view this option as something the U.S. should try to control. Some of the Democratic candidates for president, for example, take a hard line towards Japan. John Glenn says things like, "We've got to establish American leadership in the Pacific-Asia area. " In contrast, the thrust of the
James Abegglin: Japanese policies is cooperation. Do you think that conflicts between the U.S. and Japan over Asia could accelerate?
On the whole, we still have a rather imperialistic view of our role in the world. You know, the Malaysian Prime Minister [Datuk Seri Mahathir] who talks about the so-called "look east" policy [towards Japan and South Korea] is pretty outspoken. He looked around the world and decided he could see where the winners are. The security of Japan and South Korea cover his flank. That is not an acceptance of an imperial presence.
We don't have the economic presence in Asia. We have it in Japan, and we still have in the Philippines and Taiwan a relatively strong presence. But certainly in Indonesia, Malaysia, Singapore, and Korea, Japan is the dominant economic presence.
Multinational Monitor: Do you think that the current mood in the U.S. and recent actions of the Reagan administration directed at Japan reflect a growing competition between the two countries?
James Abegglin: Well, look at the Harley-Davidson motorcycle thing. [The Reagan administration recently raised tariffs to protect this U.S. company from Japanese imports.] The Japanese just think that's Micky Mouse. Here's this lousy company; it lost money. My God, we're going to change our trade policy to support an inept maker of these hogs?
The specialty steel thing was aimed at Japan; the local content law in autos is obviously aimed at Japan. This is building.
Now I'll offer a speculation: with the Democratic candidates having preempted the protectionist position, the Reagan administration, through the next election is likely to stay on the free trade side, a) to show consistency, and b) to separate themselves ideologically from Mondale and the rest of these clowns.
With all this anti-Japanese feeling, what would worry me is what would happen after an election. It seems to me we might find an effort by the administration to preempt the protectionists. And then things could get a lot worse. I don't see any relief from this trade situation. And it's worsening steadily. It's moved out of being product-specific - that is, we complained about the textiles, we complained about the steel, we complained about the TVs, we complained about the autos - the Japanese could deal with that.
But now we're complaining about Japanese industrial policy. Now how do you negotiate about how a country runs its business? In the first place, it's none of our business. We don't even complain to the Russians about how they run their economy, for Christ's sake. And we presume to tell the Japanese that their industrial policy is wrong. You can't negotiate that. If the confrontation gets to those kinds of issues, then it's pure confrontation, there's no room there.
Do you think that could accelerate the movement in Japan towards a more independent policy economically and militarily?
I don't want to exaggerate this. Let's be quite clear. The Japanese have made a very considerable effort to stay linked to the United States. Any other option is less attractive to them. We're not talking about a crisis. Nothing is going to happen over the next 12 or 18 months, assuming the Soviets don't do something absolutely stupid that would cause an absolute break.
Let's assume that Japan does in fact increasingly rearm as it has been for some time. You can see Japan now disassociated from the alliance, abrogating the security treaty, which would play hell with our strategic position, or moving towards a more neutral role. MacArthur, you know, used to talk about how Japan could be the Switzerland of Asia. Not because it wants to, but because we'll drive them that way.
Multinational Monitor: In the U. S. we have tremendous unemployment problems. What's going to happen to all these laid off workers in the industrial heartland, or in California? Should the U.S. follow the path of Japan and ship its labor intensive industries abroad?
James Abegglin: Well, the footwear and textile industries left New England a long time ago, and it took about a generation, but New England's in pretty good shape now. That's the kind of process that has to go on. The danger is that we spend a lot of money trying to rebuild industries that we should no longer maintain.
Multinational Monitor: What about the steel industry? It's running at about 60 percent capacity, and most of the laid off steel workers will never get their jobs back, according to most analysts.
James Abegglin: We're going to have a steel industry, but we shouldn't have one the size we had, we shouldn't have hundred-year-old plants still producing steel. Open hearth furnaces still in the United States! Japan hasn't had an open hearth furnace operating since the 1960s. They're obsolete. Close them down! Get them out of there! Don't defend them.