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Besting Japan


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BESTING JAPAN

It happened so suddenly. Detroit's Big Three, which spent most of the 1980s being hammered by Japan, saw their fortunes rally last year. Thanks to heavy investment, savvy market research, and a dose of government protection, Yankee carmakers are winning back market share for the first time in nearly a decade. There's a kicker, too. This year, a soaring yen has made Japanese cars more expensive, boosting the Big Three's share of the U.S. auto and light-truck market in the first quarter to 74.9%--2.7% more than in 1992.

Detroit isn't celebrating alone. From sea to shining sea, U.S. companies that Japanese rivals had on the ropes during the 1980s are now duking it out and winning. Take computers. Two years ago, Compaq and IBM were neck-and-neck with Japanese competitors Sharp, NEC, and Toshiba for control of the U.S. laptop market. Today, the Americans hold 62% of total sales, vs. 20% for Japan (page 2834). Similar success stories are shaping up in everything from semiconductor-fabrication equipment, where the Americans last year picked up market share for the first time since 1988, to earthmovers and auto parts. It's happening in service industries, too: U.S. banks are grabbing back corporate-loan clients they once thought Japan had permanently stolen.

HONDA HURTING. How are the Yanks doing it? Certainly, years of restructuring have made U.S. companies stronger. But Corporate America is also benefiting from weaknesses that have sapped the drive of many Japanese companies. A feeble home economy has eaten profits, forcing Japan Inc. to retrench and shelve overseas expansion plans. Meanwhile, political pressures, including U.S. tariffs, are compelling Japanese companies to export less and buy American. On top of that, the yen has soared 12%, to 110 to the dollar, since late January--its highest level ever.

Further intervention is in the offing from Uncle Sam, too. President Clinton is about to announce a new strategy for trade relations with Japan aimed at getting the Japanese to increase their imports by 33% over the next three years. The proposal focuses on opening markets such as autos and auto parts, financial services and insurance, and electronics. Clinton also hopes to persuade Japan to increase its procurement of foreign goods and to eliminate structural impediments to foreign companies built into its economy.

Add it all up, and U.S. companies are getting a sudden--and surprising--boost over their Japanese rivals. When pressed, NEC Corp. executives admit that financial problems at home have crimped their ability to expand in the U.S. laptop market. The company estimates that it lost more than $390 million in the fiscal year ended last March. Honda Motor Co., which saw its net income fall 41%, to $344 million, on sales of $37.6 billion in the year ended Mar. 31, is also hurting. One effect: Last year, 16% of the 393,477 Accords that Honda sold in the U.S. were made in Japan. Now, the company is considering shutting off Accord exports to the U.S. altogether. Notes Tenneco Automotive President John P. Reilly: "Increasingly, the pure economics are on the side of U.S. producers."

For now, anyway. Japan surely isn't down for long. "Japanese companies remain fierce competitors," cautions James C. Morgan, chief executive of Applied Materials Inc., a manufacturer of chipmaking equipment. Indeed, some Japanese analysts predict that an improved economy and cost-cutting by companies will spark a revival in Japanese corporate earnings as early as this year. And it's no accident that the U.S. trade deficit with Japan jumped by 23%, to $4 billion, in April. That's partly because the stronger American economy sucked in imports while a slow-growth economy curbed Japan's appetite for imports. But the numbers are also a testament to the continued strength of Japanese export industries in the face of weak markets all around the world.

In the longer haul, though, the strong yen is likely to make Japanese exports increasingly uncompetitive. Indeed, the full effects of the runaway yen are likely to take two years to be felt, says Massachusetts Institute of Technology economist Paul R. Krugman. Meanwhile, political pressure for gentler Japanese trade practices will grow.

Hardball politics is a major factor behind U.S. gains. U.S. chip companies, for instance, have gotten a big hand from the U.S. government, which has been pushing Japanese electronics companies to buy 20% of their chips from foreigners. And back in 1991, when President George Bush visited Tokyo, he extracted a commitment from Japanese carmakers to increase their purchases of U.S.-made auto parts to $19 billion- worth in the year ending in March, 1995. By last Mar. 31, Japanese spending had hit $13 billion, up 44% since 1990. "We're seeing our sales and order book increase because of those commitments," says TRW Inc. Chairman Joseph T. Gorman.

The soaring yen is accelerating the Buy American trend. Tenneco's Reilly says that with the yen at 110, American auto parts producers have a 21% cost advantage over their Japanese rivals. The currency shift "makes American parts easier and cheaper to purchase," says Iwao Okijima, senior managing director of Toyota Motor Corp.

And in some cases, U.S. companies have simply positioned themselves better than Japan--at least for now. U.S. manufacturers of semiconductor-making equipment, for instance, picked up almost four points of market share in the U.S. last year and more than two points in Japan. Japanese semiconductor manufacturers helped by holding back on capital spending, which cut the market share for Japanese equipment suppliers. But key U.S. rivals also brought the right products to market at the right time. Applied Materials, for one, builds the machines needed to fabricate the latest sophisticated multilayer semiconductors--a critical skill that few rivals have yet mastered. Japanese companies dominate older, more competitive markets.

Japan's lagging economy is making things even easier on U.S. companies. Japanese banks were major players in the market for big corporate loans before they began retrenching in 1991. During the first quarter of 1993, according to Loan Pricing Corp., a New York research company, Industrial Bank of Japan was the only one of Japan's banks among the top 20 syndicators of dollar loans. But it ranked just No.15 and only did seven deals. The leader, Chemical Bank, did 61 big syndications. Nine other U.S. banks made the list, too.

SECOND CHANCE. The Japanese banks also made some errors that are hurting them now. During boom times, for instance, many of them helped fund big, splashy resort and hotel projects. Says James Montanari, an executive with Cushman & Wakefield Inc., the big real-estate services company: "There's no one who invested in those kinds of upscale properties in the 1980s who isn't losing money now." Or take construction equipment. Komatsu Ltd., and its U.S. partner Indresco Inc., determined to stanch the red ink hemorrhaging at their joint venture, last year raised prices and ceded market share on some product lines, such as crawler loader machines, to archrival Caterpillar Inc.

The question now: Can the American gains be sustained? U.S. companies

have muffed similar opportunities in the past. Back in the mid-1980s, when the yen strengthened, many companies opted to match Japan's price hikes, choosing profits over market share. This time, there's evidence that American companies may have learned from their mistakes. Wertheim Schroder & Co. auto analyst John A. Casesa expects Ford, Chrysler, and General Motors to limit their price increases to about 4% this year, vs. 8% for Japan's auto makers.

There's other evidence that U.S. companies are serious about leveraging their short-term advantage. The Business Council predicts that U.S. companies will increase spending on new equipment 11% this year and an additional 10% in 1994. "American companies are becoming more competitive," says John McDevitt, an economist with 3M Corp. "We will win back markets and retain them." Maybe, but no U.S. company--even one that's speeding ahead of Japanese rivals today--can afford to be complacent. After all, a weakened Japan and a strong yen won't last forever.Kevin Kelly in Chicago, with Neil Gross in Tokyo, James B. Treece in Detroit, and bureau reports


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