The Multinational Monitor


P A C I F I C   R I M

Japan's MNCs

The New Power in
Southeast Asia

by Rob Steven

As Americans react with dismay to what they view as Japan's efforts to buy the United States, few people are aware that Japanese corporations are expanding in other areas of the world as well. The highly valued yen is driving Japanese companies to invest their capital worldwide. The effect that this is having in Asia is at least as significant as in the United States. And as currency values fluctuate in Southeast Asia, Japan's transnational corporations are shifting their investments within the region from the Newly Industrialized Countries (NlCs) of South Korea, Taiwan, Singapore and Hong Kong to the countries in the Association of the Southeast Asian Nations (ASEAN), Thailand, Malaysia, Indonesia and the Philippines.

Much of the competitive power of Japanese companies has stemmed from the long tradition of low-cost production in that country. Even today,the average real wages of Japanese workers are only about 65 percent of U.S. real wages, and Japanese workers put in many more hours a week and have far fewer paid holidays a year than North American workers. But with the yen almost doubling in value versus the dollar from 1985 to 1988, Japanese companies have been forced to seek other labor pools to maintain their hold on low-cost labor.

Labor costs are now even higher in Japan than in the United States. The rise of the yen from around 230 per dollar in 1985 to 140 in September 1989, without affecting real wages in Japan, almost doubled money wages. As a result, Japanese capital in the manufacturing industry, particularly manufacturers of components for cars and electronics, has been pouring into Southeast Asia.

At first Japanese corporations were able to find cheap labor in the Asian NICs. The revaluation of the South Korean won and the new Taiwan dollar, however, raised money wages in these countries and Japanese companies are again fleeing rising labor costs. Now they are moving to the countries in the ASEAN. Since around mid-1987, the companies have made a clear switch from the NICs, where wages average a fifth of those in Japan, to ASEAN, where wages are only one-tenth of those in Japan.

Japanese companies are also turning to Southeast Asia as a platform from which they can grapple with the effects of the United States's huge trade deficit. The rise of the yen made exports from Japan to the United States very expensive. The revaluation of the NICs' currencies made export from these countries to the United States a difficult proposition as well. Japanese companies have increasingly turned to the ASEAN countries, which offer safer and cheaper production sites for export to the United States, Europe and Japan.

By virtue of their recent investments, Japanese manufacturers have completed their shift from import substituting investments in ASEAN to ones primarily intended for export. Japan's first wave of investment in Asia in the 1960s was spearheaded by textile and electrical companies which were keen to capture local markets, and their main targets were the countries which were to become the NICs. The second wave in the 1970s was, by contrast, for export back to Japan, but the companies were mainly chasing raw materials and energy, following oil and other commodity price rises worldwide. Their targets were predominantly ASEAN countries.

The geographic distribution of the current wave of Japanese direct foreign investment is carefully tuned to the labor intensity of the projects and to the cost of labor. The more labor-intensive branches of the machinery industries have found their way to ASEAN, while the ones involving the highest technology are located in the technologically advanced European countries and in the United States. Projects requiring intermediate technology are located in the NICs. While ventures like NUMMI (between Toyota and GM) consolidate an alliance between the advanced industrial powers, unequal joint ventures between Japanese and ASEAN companies serve only to preserve the inequality of the industrialized nations' technological dominance over the Third World.

Making cars in Southeast Asia

The primary appeal of the ASEAN countries lies in their ability to provide cheap components and low-cost assembly. Honda discovered the game of "internationalism" through its motorcycle investments in the 1960s; Nissan, with its keen eye for human misery, set up major engine production bases in such places as the Mexican maquiladoras at about the same time. Nissan is currently establishing a production network among six affiliates spread out among Thailand, Indonesia, the Philippines and Malaysia. Mitsubishi is taking full advantage of the global production process with its "Asian car," which combines cylinder heads and aluminum parts from Australia with door panels and steering systems from its joint venture with the Malaysian government (Proton Saga), a variety of relatively sophisticated parts (including engines and transmission gears) from its offshoot in South Korea (Hyundai), transmissions from the Philippines, bumpers from Thailand, engine assembly in Indonesia, car radios in Singapore and assembly almost everywhere, including Taiwan.

Toyota was a late-comer, but once it started, it set itself up for low cost component-making in ASEAN with unequalled speed. As of mid-1988, Toyota Motor Company had 52 overseas subsidiaries, 10 in Thailand alone, three in Indonesia and one each in Malaysia and the Philippines.

According to the Far Eastern Economic Review, Toyota is currently planning "what looks like the boldest scheme yet to integrate components manufacture in ASEAN." The ASEAN car parts complementation agreement of October 1988 slashed tariffs on inter-regional trade in components between subsidiaries of the same company. Toyota plans to take advantage of the agreement by substituting shipments from Japan with regionally made parts as well as by exporting about 20 percent of ASEAN production back to Japan. Announced in September, 1989, Toyota's ASEAN car will comprise diesel engines, stamped parts and electrical equipment from Thailand, petrol engines and stamped parts from Indonesia, transmissions from the Philippines, and steering gears and electrical equipment from Malaysia. Toyota is investing 30 billion yen in the ASEAN countries for the plan, says Hiroshi Hashimoto of Toyota's public affairs division.

In addition to expanding their investments in Southeast Asia, the Japanese auto companies are employing local companies to produce cheap components. Because the Japanese car makers rely more heavily than U.S. companies on subcontractors, competitive pressures have been especially strong to cut costs by using ASEAN's low cost parts manufacturers.

The auto companies' shift into ASEAN also reflects their collective effort to cement an alliance between the Japanese and the local business elites. Throughout ASEAN, local businesses are dominated by a number of conglomerates based either on colonial-style commodity trade or on favors from the post- colonial state. For example, Toyota's Thai partners include Bangkok Bank, the country's largest business group, dominated by the Sophonpanitch family, and Siam Cement, Thailand's largest manufacturing company, is dominated by the royal family. Nissan's partner in Thailand is the country's third largest conglomerate, Siam Motors, the core company of the Phornprapha family empire. The joint venture partners of Japan's car companies elsewhere in ASEAN are similar, although the strategy is most fully developed in Thailand, which has been Japan's number one target for low-cost manufacturing since the rise of the yen.

ASEAN's top tier

By the end of 1989, the number of Japanese manufacturers in Thailand is expected to top 1,000. Over a quarter of those entering the country in the past few years have been makers of electrical and electronic appliances and parts. Some of these companies have relocated the bulk of their production in ASEAN. Minebeas has made Thailand its world production center, where it employs 12,000 workers compared to only 3,500 in Japan. A company-owned Boeing 727 connects Japan, Thailand and Singapore twice a week. Sharp has even made Thailand its largest offshore production base in the world, with 80 percent of output for export to Europe and the United States.

But apart from a share of the profits for the joint-venture partners, it seems that the local economies receive few developmental benefits from Japanese investments. Technology transfer is almost non-existent. Staporn Kavitanon, the deputy secretary-general of Thailand's Board of Investment, told Japan Economic Journal that "Local production is impossible unless foreign firms give Thai workers technological training. But in the case of designing and development technology, Japanese companies are quite hesitant to transfer such know-how to Thailand, as Western firms do. The Japanese seem to regard Thailand as only an export base and not as a development base."

Malaysia is also very attractive to Japanese electronic companies looking for cheap offshore production sites. "Malaysia provides an investment environment that is conducive to the needs of the foreign electronics manufacturers," explains M. Suppiah, director of the Malaysian Industrial Development Authority in New York. The key components of this environment are low wages and a workforce which is only permitted to organize in in-house unions. A few Japanese electronics manufacturers, like Matsushita with its six large subsidiaries, have been there for some time. But the more recent investors, particularly in the Free Trade Zones of Kuala Lumpur and Penang, have been U.S. and Japanese (such as NEC, Fujitsu and Hitachi) chip makers. Following the fall of Ferdinand Marcos, these companies moved the main base of their labor-intensive assembly process from the Philippines to Malaysia. They have since made chips Malaysia's largest export item, exceeding even oil.

A growing number of small and medium sized component makers have also been gravitating toward Malaysia, partly because "electrical goods and electronics companies that have moved to Thailand and Malaysia urged their suppliers to come and join them," according to Japan Economic Journal. But another reason for the move is Malaysia's proximity to Singapore, which is being used by a growing number of Japanese transnationals as a distribution center for the region.

The Singapore government has offered special incentives to companies that establish operational headquarters on the island. Sony was one of the first to take advantage of this welcome in November 1987, and it now has a design center (Sony Precision Engineering), a distribution center (an International Procurement Office, or IPO) and produces a wide range of precision components for video cassette recorders and compact disks there. Aiwa, a subsidiary of Sony, has made Singapore its worldwide production center, which will account for over half its total output.

The routine assembly tasks which used to occur in Singapore are being shifted to ASEAN, particularly Malaysia and Thailand. Singapore is developing in other directions. "The last few years have seen a growing number of world-scale manufacturers, including Japanese ones, distribute their manufacturing and related activities between Singapore and its neighbors, with Singapore operations handling such activities as product design and development, manufacture of newly-developed and high value- added products and production of critical high-precision components for manufacturing plants elsewhere in the region," says Masaki Watanabe of the Singapore Economic Development Board. Thirteen Japanese companies, including Matsushita (which operates six wholly-owned subsidiaries), have IPOs in Singapore, and many cut labor costs by using nearby Malaysia as a production base or employing Malaysian migrant workers in their Singapore factories.

The prospects for continued mobility

The main attraction for Japanese companies in Southeast Asia today is unquestionably low wages. As these economies and wages rise, however, Japanese firms may again shift production, in search of even lower labor costs . Some companies have already started to move to China, Indonesia and the Philippines.

In the 1970s, following the oil shocks, Indonesia and the Philippines were the chief targets of Japan's raw material scramble. But they also saw a gradual increase in machinery investments during this time. In some cases, these investments actually led to the establishment of a number of major local conglomerates. For example, in Indonesia, the Gobel group is essentially an offshoot of Matsushita; the Rodamas group is an outpost of Asahi Glass; and the Astra group is not much more than an assembly of Japanese car and component makers, chiefly in the Toyota group (Toyota, Daihatsu, Nippondenso, Kayaba and Japan Storage Battery). Six of Astra's seven core companies are linked to Japanese transnationals.

Most of the interest in Indonesia today comes from Japanese car makers who are aiming to procure parts for their Asian cars as well as to capture the growing local market. But more attention is also being paid to Indonesia by such well established giants as Asahi Glass, which has become the dominant force in the industry in both Thailand and Indonesia and is enlarging its operations in the latter.

Even in the Philippines, the only remaining Asian country where U.S. foreign investment still exceeds that of Japan, a few major business groups have arisen on the coat-tails of Japanese transnationals. The empire of ex-Marcos crony Ricardo Silverio is largely a product of his alliance with Toyota, while Matsushita has spawned the fortunes of the del Rosario clan. Although Japanese interest in the Philippines all but disintegrated after the fall of Marcos, in part because the high incidence of corruption between the two governments was disclosed, the lure of low wages is pulling the labor-intensive Japanese companies back. In the forefront of the turnaround are Matsushita, Toyota, NEC and Uniden. Uniden is in the process of withdrawing from "costly" Taiwan, where it pays workers three times what its Filipino employees get.

Current Japanese multinational activity complements earlier onslaughts on the region. It is expressed in changing patterns of trade, such as growing Japanese imports from Asian subsidiaries. Southeast Asia is now also being crowned as a full-fledged Japanese sphere of influence by the arrival of the major Japanese banks in Indonesia, Malaysia and Thailand. ASEAN is being transformed into JASEAN.

Rob Steven is a professor of political science at the University of Canterbury in New Zealand.

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