From: fester@etorofu.island.COM ()
Subject: Re: Please give your opinions...
Originator: fester@etorofu
Organization: Island Graphics, Marin County, California
Date: Mon, 16 Nov 1992 19:59:12 GMT

In regard to the recent discussions about this article, I WILL give my
point by point opinions on it. I have only the "1/2" part of the article,
so if someone would email me, or repost 2/2, I'll get to that. As the 
article is extremely long, I will not comment on the whole thing at once.
One thing to get out of the way immediately: most of the valid points in
this article were presented first and better, as well as thoroughly 
documented, in Karel van Wolferen's _The Enigma of Japanese Power_. I find
the lack of attribution of the original author of this post to be guilty of
intellectual dishonesty by virtue of taking passages out of that book without
giving that author credit.

> THE BUSINESS CARTEL, KEIRETSU:

>      Let us go now to a primer on Japanese business organization. Almost
> all the significant companies in Japan are aligned into one of about 6
> keiretsu or business 'groupings'. These are loosely linked 'super-
> corporations' for lack of a better term. Most of the Japanese companies
> whose brands we know and love here in North America are in these keiretsu.
> These keiretsu have been around a very long time (before WWII) dating back
> o feudal-like family run trading houses. Mitsubishi and Mitsui are two of
> the more famous ones. Famous companies like Nissan, Toshiba, Sumitomo Bank
> are all in keiretsus.

Common knowledge. However, other more modern companies are still considered
outsiders in the Japanese system (Honda, SONY, etc). There does exist an
heirarchy of companies, and outsiders to this system, even within Japan.

>      Here is why this is so important. Each of these keiretsu have under
> them, member companies who operate in each of the major critical business
> areas. These are: banking, distribution, steel making, heavy manufacturing
> and electronics. Mitsubishi Bank, Mitsubishi Electric Corp, Mitsubishi
> Heavy Industries and a wide array of other Mitsubishi companies making all
> kinds of other things are in a keiretsu. (Mitsubishi is unusual as most of
> > their operations have the same name). Each of the companies in the
> keiretsu are independent and very specialized in what they do in all
> senses of the word except for loyalty. Imagine a keiretsu is something
> like a college fraternity. Their individual independence is what keeps
> things from getting too big and out of control, yet they can make a united
> front for issues important to the national or keiretsu effort. 

Mitsubishii is not so unusual in that regard. Fuji and Mitsui also have a 
large number of operations with the same name.

>      To make the point, a car company and electronics company in the same
> keiretsu have a long term relationship to help each other, for example to
> make a really fancy computer control systems for cars, or to make special
> lift-loaders for the computer company's factory. If you walk into a
> Japanese transplant auto assembly plant in the United States, you will
> find that the equipment from the stamping presses to the forklifts are
> Japanese brands, even if it is more expensive (in the short run) to do
> this. This is national and keiretsu loyalty at work.

This does not really sound much different, as presented, from the way GM does
business with its subsidiaries, such as Delco.

 >     Every Keiretsu has a bank. This is the heart of the keiretsu. The
> bank is like a national central bank, but for the keiretsu. The bank takes
> money from winning operations and gives it to new ventures in the keiretsu
> without the red tape that a bank would usually give before lending to a
> new start up venture. Having a bank who is in fact a part of your company
> means they will be fiercely loyal, understand your business and not call
> your loans for silly reasons like US banks do. This is much more efficient
> than the way America does banking and lets companies join forces to use
> their capital much more effectively than the US can. 

This explanation, while correct to a large extent, negates itself as an
argument for closure. If the bank is part of the system of companies, then 
how could it be otherwise that the bank would strive for the good of that 
system? In essence, don't all subsidiaries have the eventual good of the 
parent company somewhere in mind? If not, then surely the parent company is
at fault.

 >     This is also why buying a Japanese product may put buyers of that
> product out of a job, even if they work in a different industry. They take
> the profits from the product that person bought, shift it through the
> keiretsu bank to develop, invest in and dump products into the industry or
> market that person now works in, and put them out of a job. See the
> telecommunications example at the bottom of this paper for how this works
> in practice.

Again, while true, how is this different from other non-Japanese examples?
For example, suppose you work for Lockheed. Should you now avoid buying a 
GM automobile because GM owns Hughes which is a competitor in many fields
of your company?

> COMMAND AND CONTROL:

>      Japan's business effort is directed by the powerful Ministry of
> International Technology and Industry (MITI). It decides national
> strategic industrial policy and determines with the corporations, which
> industries to target, enter, exit, take over...etc. This is where Japan's
> 'united front' when entering a market is co-ordinated from. This is also
> why you often see several Japanese companies entering a particular market
> at the same time (ie. TVs, and more recently, luxury cars). By acting in
> unison, the companies, banks and government can attack and overrun a
> foreign industry with a real punch. It also enables strategic moves which
> countries like America cannot do as American business efforts are not co-
> ordinated in any kind of way. 

True, but there is tremendous factionalism within MITI. Also, with very few
exceptions, they attack VULNERABLE industries. Ie, they did not get a large
market share in the US because US manufacturers made autos considered wonderful:
the US manufacturers had long since stopped listening to its customers (or 
indeed, its foreign subsidiaries who did quite well).

>      In fact such moves are illegal for US companies under antitrust laws
> > from the 1930s. This puts us at an enormous disadvantage again US Japanese
> rivals as it is legal for example for Ford and Mazda to join forces, but
> not for Ford and GM to do so. The US antitrust laws were written at a time
> when US companies were the most powerful in the world. This is not true
> anymore and hurts America greatly as US firms struggle in the world
> marketplace again large foreign firms who are able to join their forces to
> defeat America's companies.

Doesn't this contradict something said before, where it was stated that the 
ONLY way for US companies to enter Japan was by cooperating with Japanese
companies? (a claim which I hope to have presented sufficient evidence to 
show false). And how is the Toyota-GM tie-up reconciled here (ie, the GEO
series of cars)?

> THE PROTECTED HOME MARKET...JAPAN'S LAUNCH PAD TO THE WORLD:

>      Japan has a protected home market which serves a very important
> purpose to the country and the national business effort. The home market
> is for trying out new products, copying and improving foreign designs,
> getting capital (through price gouging) with out fear of foreign companies
> entering and ruining the game.  

More or less true, until real competition DOES get in. 

>      An unwritten rule is that there is no real competition in the
> Japanese home market between Japanese companies which are also strategic
> exporters. Real competition occurs in foreign markets outside Japan. The
> home market is a 'safe' market where these companies can experiment with
> their products, improve upon them, and fix problems with out fear of any
> real foreign competition capitalizing on their blunders (a luxury our own
> companies do not have in America). For example, SONY and Mazda did or had
> done this frequently within Japan. The scheme works as follows and is the
> critical reason why a Japanese company can enter almost any world market
> or industry from scratch and overrun it so quickly:

Exceptions abound, and US companies are not bound by this restriction. Eg,
van Wolferen gives the example of the Honda-Yamaha price war. Also, Pampers
has almost completely taken over the Japanese disposable diaper market 
(about 50% share).

>      Imagine Sony comes out with a new type cassette player which is very
> small. It breaks often because the small plastic gears inside are of low
> quality and wear out (this was true, actually). This machine though, is
> only sold within Japan. Only in the future when it is perfected will it be
> sold to the outside world. Now lets imagine GE is the dominant
> manufacturer in this market worldwide. They want to sell their player in
> Japan (which is better than SONY's) but can't because they are forbidden
> for all the reasons mentioned in this article. Sony fixes their gear
> problems, tests it in the home market (this is one reason why the latest
> Japanese products hit the Japanese market at least 6 months before
> anywhere else) and later exports it abroad. Sony maintains its good
> reputation in America as their player works well (the US customer never
> got a machine with the defective gears). Sony sells this player at 3/4's
> the cost to make it in order to increase their market share and drive GE
> out of the cassette player business. Sony doesn't go bankrupt doing this
> because they can sell players in Japan at twice the cost to make them and
> hence cover their losses in America. Because GE is forbidden to sell in
> Japan, and can't make money at home in America because Japanese players
> sold there are too cheap, they surrender and lose market share. GE asks
> the US government for help but is refused. Later when this is exposed, GE
> is accused of 'whining' and 'not trying hard enough to enter the Japanese
> market' by the Japanese Prime Minister. 

This is nonsense. Harley-Davidson asked for, and got, protectionist tariffs
on Japanese large motorcycles for 5 years. They spent that five years 
remodleing their manufacturing facilities, modernizing, improving quality
control, etc. They ASKED the *US* government to take OFF the tariffs ONE
YEAR EARLIER than they had gotten in the promise. This was granted. HD is
now the largest seller of large-displacement motorcycles in the 1) the US
and 2) Japan. They are/were so effective at selling bikes in Japan that the
Japanese government had to relax its restrictions on domestic large-displace-
ment bikes.

>      Now, imagine the reverse situation. GE also makes a machine that is
> poor quality in its home market of America (this was also true). The
> Japanese then enter unimpeded, dump their perfected goods here and drive
> GE out of the market. As you can see, whenever a US company makes a
> mistake in the home market, it suffers greatly, but when a Japanese
> company does in their home market, they don't suffer so much. Hence, even
> if the American company is more efficient and generally of higher quality,
> the Japanese companies will ultimately defeat the US competition. This is
> true even if the US companies make fewer and smaller mistakes over the
> same period of time because the US company gets hurt for a mistake in the
> home market, but the Japanese one doesn't. This is an other reason the
> Japanese protected/non competitive home market is so important to their
> > success.

See the HD example above.

> The non-competitive home market serves an other important function to
> Japanese industry. Smaller/weaker Japanese companies are allowed to
> survive because it is possible they may some day have a 'winner' which
> would be good for Japan (this actually happened to Mazda with the Miata
> and other recent offerings in their foreign markets). If the company were
> bankrupt though, they could not come up with 'winners' sometime in the
> future. Its better to let the weak competitors survive in Japanese market
> in the hopes they become strong someday. Because of laws restricting
> foreign ownership as well as 'cross-holding' agreements between the
> Japanese companies, there is very little risk a non-Japanese company could
> take over these weaker players and enter the Japanese market.
> Unfortunately, the same protection is not bestowed among America's
> promising small companies who are easily taken over up by major Japanese
> players who want their technology.

It should be noted that the Miata (marketted as the Eunos in Japan), is an
American design. It was designed at Mazda's LA engineering facility. BTW, 
smaller companies are not 'allowed' to survive: quite frequently, they are 
driven out of business, or, if they get big very fast, they suddenly find 
themselves subject to scandals (see the recent Recruit scandal for example).

>      The no-home-competition point is ironic, because some newspaper
> reporters who don't understand the Japanese economy write quotes like
> "there are 7 car companies in Japan (a country with 1/2 the population of
> America) therefore the car industry must be extremely competitive in
> Japan". The truth is that there are 7 car companies in Japan because there
> is almost *NO* competition in the home market. This is why their market
> shares in Japan are stable. They are basically fixed. If there were
> competition, the strong players like Toyota and Nissan would have absorbed
> or bankrupted their less powerful rivals like Mazda and Daihatsu long ago.

However, the writer would not be wrong. While there is very little competition
for PRICE, there is considerable competition for new models. Cars, stereos,
motorcycles, etc, have their competition in the area of new features. This is
rather unprofitable, in that separate production equipment must be maintained
for each model. Note that this has hurt Japanese companies, both in Japan
and in the US, profits-wise. Note II: Honda announced 2 or 3 weeks ago that
they have succeeded in designing a new car, using roughly 45% parts (including
most engine parts) from an existing model.

> WHAT IS DUMPING AND WHY IS IT BAD:
> 
     A New York Times writer last year wrote in his commentary that
> Japanese companies are foolish because they practice 'dumping' (selling
> their products here for a price lower than it costs to make them), and
> hat he hopes they continue as it benefits the American consumer. His
> article is misguided and shows why it is so difficult to understand why
> Japanese business practices are so dangerous to America.

>      Some Americans think buying dumped products is good. This happens
> because they don't see the real costs to themselves which are not on the
> ow sticker price. These cost turns out to be higher to the buyer than the
> savings on the product price (otherwise the Japanese would not be
> dumping... ...there's no such thing as the deal that's too good to be
> true). The key is that this cost is indirect but very real never the less.
> > It turns up somewhere else than at the checkout counter and is how Japan
> benefits by 'dumping'.

>      The cost to America (and the benefit to Japan) turns up in the long
> term. This is why it is not seen so easily. It turns up in America as
> unemployment, closed factories and reduced national strength as US
> companies cannot compete against this practice. Japan's factories run,
> their people get jobs and later on Japan makes much more profit than it
> originally cost to do the dumping. Japan can do dumping by raising prices
> in the home Japanese market to pay for dumping in America. US companies
> don't have this luxury as the US market is open to the outside world and
> prices cannot be artificially raised to pay for dumping elsewhere.

How is this strategy good for Japan 'in the long run'? Such massive unemploy-
ment would surely trigger a decline in demand for manufactured goods. Now, I 
SUPPOSE that it could be argued that declining demand for dumped goods would
HELP the Japanese, since they would no longer be selling there wares at a 
loss, but wouldn't this also put Japanese workers out of a job? Given that 
there is no other market of nearly comparable size for Japanese goods (the 
Europeans have very clearly restricted Japanese products when they felt the
need), this would seem incredibly short-sighted. AND, given that such a strategy
would then devalue the dollar vs the yen, and that all sales contracts are in 
dollars, not yen, wouldn't this FURTHER decrease the Japanese companies' 
profits? They would have to a) raise their prices, and thus risk reducing
demand or b) take even greater losses on their dumping. To make this up, they
would have to raise prices in their domestic market, thus causing inflation, 
thus raising THEIR costs or reducing their domestic demand, or reduce their
costs by moving their production facilities OUT of Japan, resulting in fewer
jobs in the manufacturing sector (ie, closed factories and potential unemploy-
ment).

In short, it leaves a lot to be desired. They only appear to make money if
the US economy is in decent shape, and their domestic market is in comparable
shape.

Mike

-- 
Disclaimer - I'm only doing what the little voices tell me to do. 
Xref: sparky soc.culture.japan:11204 talk.politics.guns:24360