How Japan Does It
By Christopher Byron. Reported by S. Chang and Edwin M. Reingold/Tokyo
COVER STORY
The world's toughest competitor stirs a U.S. trade storm
Like a dazed and bleeding prizefighter trying to call time out in the middle of a round, America's automakers have been pleading for months for relief from the pummeling they have been taking from Japan. While sales of American-made cars have been slumping, Japanese-made Datsuns and Toyotas, Mazdas and Hondas have been streaming through U.S. ports at the rate of some 6,000 vehicles a day. The import flood has given Japan 23% of the entire U.S. car market. General Motors Chairman Roger Smith last week urged a "short-term voluntary" cutback in imports and warned that the alternative was a trade war with Japan. In Washington and Tokyo the Reagan Administration and the government of Prime Minister Zenko Suzuki worked determinedly to settle the most festering trade issue the two countries have faced since World War II.
During the 1980 presidential campaign, Reagan assured autoworkers that he would give relief from the onslaught. But the Administration is now deeply split over the question. Free traders, including Budget Director David Stockman, have argued with a protectionist-minded group headed by Transportation Secretary Drew Lewis over whether to press Japan to restrain imports "voluntarily." Attorney General William French Smith added to the confusion last week by releasing a memo arguing that any such deal would violate U.S. antitrust rules. The Cabinet last Thursday discussed a report that presented options ranging from legal limits on Japanese auto imports to no action at all, but it reached no decision.
Meanwhile in Japan, the Suzuki government tried to pressure its auto companies to restrain exports. Foreign Minister Masayoshi Ito said that he was "determined" to keep the issue from developing into a more serious political one. The Japanese fear that the auto confrontation will upset Prime Minister Suzuki's visit to Washington in early May. As an advance man for that visit and a conciliator on the auto problem, former Prime Minister Takeo Fukuda traveled to Washington last week and met with President Reagan.
The Japanese car companies so far have been resisting all government pressure to hold down exports to the U.S. But Katsuji Kawamata, chairman of Nissan Motor Co., maker of Datsuns, hinted that they might accept some compromise in order to head off even tougher U.S. action. Said he: "We cannot continue to act as if we couldn't care less what is happening over there."
What is happening, of course, is the rapid deterioration of a major American industry. Detroit's automakers last year lost more than $4 billion, and during the past three years, U.S. annual auto production has slumped by 30%, to 6 million vehicles. Today almost 200,000 American autoworkers are unemployed, and many of them have little hope of ever returning to work in their industry. To them and to most U.S. auto executives, the problem is Japanese imports. Since 1975, annual sales of Japanese cars in the U.S. have jumped from 800,000 to 1.9 million.
The trade issue has taken on such importance because of the auto industry's key role in the economy. One out of five American workers is employed either directly or indirectly in making, servicing or selling cars; and industries like steel, glass and rubber are heavily dependent upon automobile sales to keep their own plants operating. In addition, Detroit is of strategic significance, since General Motors, Ford and Chrysler also make war materiel for the Defense Department.
Detroit's problems have come to symbolize the ills of U.S. business in general. The saga of American cars in the past three years resembles the story of too many industries during the past decade. Television, textiles, steel, calculators, ship-building--American companies once dominated all those markets. But then U.S. executives watched almost helplessly as their customers were snatched away by industrious Japanese competitors selling better products at lower prices.
The arguments of those who favor trade restrictions have varied little since 1791, when Alexander Hamilton, the first Secretary of the Treasury, wrote his Report on Manufactures. Hamilton advocated high tariffs as the way to protect new American industries. Reagan Cabinet members such as Drew Lewis and Commerce Secretary Malcolm Baldrige and the heads of American auto companies now argue that the domestic auto industry has been thrown into a temporary upheaval because of consumer demand for fuel-efficient cars. They maintain that if Japanese imports were reduced for a three-year "breathing spell," the U.S. firms would be able to rebuild and begin producing the kind of cars that consumers obviously demand.
The case for free trade is by far the more compelling. It has also changed little since it was set forth in 1776 by Adam Smith in The Wealth of Nations. Treasury Secretary Donald Regan, David Stockman and Chief Economist Murray Weidenbaum argue today that import restrictions would, among other things, penalize consumers by enabling U.S. automakers to raise prices without fear of being undercut by competition from Japan. Protection in the U.S. could also lead to a dangerous escalating trade war around the world. Such a war would have serious consequences for U.S. foreign and defense policy.
Both the advocates and the opponents of import restrictions admit that the ultimate solution for the troubles of the auto industry is for Detroit to build products that are better and cheaper than anything Japan has to offer. The question, in a word, is how.
Searching for answers to that query has become a growth industry. From Harvard Sociologist Ezra F. Vogel's 1979 treatise Japan as Number One: Lessons for America, to U.C.L.A. Management Professor William Ouchi's new Theory Z: How American Business Can Meet the Japanese Challenge, academics are telling the U.S. that the most dutiful student of its management practices is now the teacher.
Businessmen are getting the message. After years of smiling while armies of Japanese executives trooped through their offices to learn the secrets of U.S. industry, Americans are seeking a tip or two for themselves. Like pilgrims to the temple of success, they are traveling to an ancient land they can scarcely understand to learn how Japan does it. With a mixture of curiosity and envy they are asking: How has an overpopulated island country with less land than California leaped in only three decades from wartime defeat and the status of industrial sweatshop to that of high-technology dynamo? How has a country that imports 100% of its aluminum, 99.8% of its oil, 98.4% of its iron ore and 66.4% of its wood and lumber become a world economic power?
Gone are the days when Japan's achievements could be explained away by the litany of complaints that Western businessmen have been echoing since the early 1960s. No longer is Japan enjoying a competitive advantage from "modern" factories built in the early postwar years. True, new industrial facilities constructed on the ashes of bombed-out buildings gave Japan an advantage during the 1950s and early 1960s. But that was nearly 30 years ago. Japanese businesses in recent years have updated and improved their plants and factories and thus maintained their competitive advantage.
No longer does Japan win markets simply by holding down wages and exporting cheap products. Until the early 1960s, the country did have a low wage base, but today in Japan salaries are on a level with those of other leading industrial nations.
Critics are equally wrong when they charge that Japan succeeds only because it systematically blocks all competing foreign products from entering its domestic market. Such charges were undoubtedly true for at least a quarter century after World War II. The Japanese had a host of official and unofficial ways of holding down imports and promoting exports. Foreign businessmen faced high tariffs and found it difficult to market their goods through the country's very complicated distribution system. "Buy Japanese" was a strong, if unspoken, practice. American businessmen also accused the Japanese of "dumping," or selling their products at a loss just to expand their market shares. In 1979 the U.S. Treasury found that Japanese companies were, in fact, dumping color television sets. But the Japanese, under heavy pressure from the U.S., have generally ceased such practices, and reduced their tariffs and import quotas.
Nor is there much to the argument that Japan is getting a "free ride" on the coattails of U.S. defense spending. For many years that was true. By relying on the U.S. to provide for its protection Japan kept its armed forces small and saved billions of dollars annually in defense expenditures. The savings were spent on bolstering the growth of industry. But in the past decade, Japan's defense establishment has grown to the eighth largest on earth. Indeed, U.S. arms manufacturers and aerospace firms are beginning to worry that Japan could eventually emerge as a major competitor in export markets that the U.S. has so far had almost to itself.
As scholars of Japan's business and economic triumphs are now learning, much of that country's success traces back to cultural traits as old as Japan itself. They have helped it survive through a history marked at every turn by the need to function in a world of scarce resources. Those key national traits:
EMULATION. Few nations have so sought out and used the best from other societies as Japan. In a sense Japan has become "the best of all possible worlds." Examples abound of the copycat-Japan theme. In 1543 shipwrecked Portuguese mariners went ashore on the Japanese island of Tanegashima and traded a few firearms in return for food and water from the locals, who had never before encountered either Westerners or their weapons. Thirty years later one of the sailors returned to the island, and this time found the populace armed with 20,000 guns, each an exact replica of that original weapon.
In Japan's early postwar rush to rebuild its economy, the nation's businessmen searched the globe for patents and industrial technologies. In 1953 the Sony Corp. paid Western Electric a mere $25,000 for the nonexclusive rights to manufacture the transistor, and thereafter built the investment into an entire microelectronics industry.
Japanese businessmen today still descend on foreign executives to learn, often in the most excruciating detail, exactly how they conduct business. The nation has an insatiable hunger for foreign technical and scientific manuals. Universities and corporations stockpile them and refer to them assiduously, and businessmen and engineers eagerly use their best ideas.
CONSENSUS. For all their cross-cultural borrowing, the Japanese have remained astonishingly unchanged. One of the most important of their native characteristics is a willingness to achieve consensus by compromising. Asian Scholar Edwin Lee of Hamilton College suggests that a clue to this might be found in the Japanese word ie, a concept that can be interchangeably applied to everything from self to home to family. A person is an extension of his immediate family members, his company, his community and his nation as a whole. All are bound together in an encompassing common purpose.
Japan feels itself to be a "family" because in a real sense nearly everyone has at least some voice in running society. No matter what the group--from the smallest upstart enterprise to the largest multibillion-dollar multinational--nothing gets done until the people involved agree. The Japanese call this nemawashi (root binding). Just as a gardener carefully wraps all the roots of a tree together before he attempts to transplant it, Japanese leaders bring all members of society together before an important decision is made.
The result is an often tedious, and sometimes interminable, process of compromise in the pursuit of consensus. But in the end the group as a whole benefits because all members are aligned behind the same goal.
FUTURISM. Japanese society is forward looking in a manner that is difficult for Westerners to understand. Individuals are seen to benefit only through the elevation of the group as a whole; corporations are not after the quick payoff or big quarterly jumps in shareholder dividends, but a solid market position that will be rewarded over the longer term. Businesses and government look five, ten, even 20 years ahead and try to build a prosperity that can last. Says Eishiro Saito, president of Nippon Steel: "Executives in Japan must constantly do their utmost to provide employees and their families with a stable life and hope for the future."
One reason that the companies are not under constant pressure for fast profits is that much of Japanese industry is owned by banks and not by individual shareholders. Major holdings of many of the country's biggest and best-known companies, such as Toshiba, Fujitsu and Nippon Steel, rest with banks that are less interested in short-range dividend increases than in seeing their firms' profits reinvested to ensure future growth.
This long-haul mentality is reflected in Japan's dedication to savings. Nothing has given more momentum to the Japanese economic juggernaut than the propensity of its citizens, no matter how wealthy or modest their means, to save their money. Their deposits have given the nation's industry the capital it has needed to keep Japanese plants modern and productive. Says James Abegglen of the Boston Consulting Group, which has conducted numerous studies on Japanese business: "The thing that has enabled Japan to get to the top and stay there is savings. Savings of all kinds--government, corporate, personal." During 1980, Japanese workers saved an estimated 20% of their individual and family incomes, more than three times as much as the Americans.
QUALITY. Two decades ago the words Made in Japan were synonymous with shoddy workmanship, and Japanese products were marketed mainly in 5-c- and 10-c- stores. Yet today firms like Sony and Datsun sell their products principally on the basis of high standards. Says Masao Kanamori, president of Mitsubishi Heavy Industries: "The existence of our company would be impossible if we failed to reassess our performance in quality, production and cost."
This change is a result of the country's preoccupation with quality control, a management concept that until quite recently had been insufficiently considered in the U.S. Yet it was American academics who helped the Japanese improve their products and change their image. One proposed device was quality-control circles, where workers and their supervisors discuss ways to improve output and standards on the job. Statistician W. Edwards Deming gave a proselytizing speech in Tokyo in 1950 on the virtues of quality control as a manufacturing technique. Since that time, Deming has been elevated in Japan to the status of industrial folk hero. The Deming quality-control award is now one of the most sought-after prizes among Japanese firms.
In Japanese plants and factories, workers are not only encouraged, but actually expected, to make quality control their top priority. At Matsushita Electric, the country's second largest electrical company (1980 sales: $13.7 billion), workers are instilled with the notion that each one of them is a quality-control inspector. If they spot a faulty item in the production process, they are encouraged to shut down the whole assembly line to fix it. Pressure to improve quality reaches beyond the shop floor and often pits entire plants of competing companies like Hitachi and Sony in furious statistical battles to produce the lowest defect rates for products.
The Japanese today look down on what they regard as the poor quality of American products. Kenichi Odawara, professor of economics at Sophia University in Tokyo, recently published a book on the problems of the U.S. economy and workmanship entitled The Great American Disease. One example of that disease is familiar to any Japanese car dealer attempting to sell an American-built automobile in Japan: the cars have to be given an additional coat of paint before they can satisfy the demanding Japanese.
COMPETITION. While Western businessmen often regard Japan as a giant cartel, competition is actually fierce. Japan's thriving domestic market is the principal battleground for most Japanese companies. The products shipped abroad have such high quality and low price in large part because they have already survived the domestic Japanese market. In 1955, for example, the leading motorcycle company in Japan was Tohatsu, while Honda was a distant No. 2. By 1964 the more competitive Honda dominated the local market and Tohatsu had begun moving into other fields. Today the company is principally a manufacturer of small engines and snowmobiles. Says one American economist living in Japan: "Their idea of competition is different from ours, yet they compete furiously. It is all done within the context of being very Japanese --orderly."
New products hit the domestic Japanese market with dizzying frequency. In the electronics industry alone, eight major and a dozen minor semiconductor firms are battling for a lead in the manufacture of microprocessors and so-called computers on a chip. American firms pioneered this technology in the late 1960s, but Japanese companies have already captured 30% of the world market for computer memory chips.
The rush to use the chips has propelled the nation's automakers into headlong competition to come up with new applications. When Toyota last year introduced the world's first chip-operated voice synthesizer to warn drivers of low fuel and fluid levels in their cars, Nissan Motor hustled out its competing versions within weeks.
Taken together, these five qualities have furthered a national spirit of compromise and cooperation and a willingness to endure short-term setbacks for the long-term good of the nation, company or family as a whole. Says Shiro Miyamoto, an official of the powerful Ministry of International Trade and Industry: "Our system is born of the traditions and history of this country, a small nation with few resources. Without our way of doing things, there would be continual conflict and nothing would ever get done."
When these Japanese characteristics are brought into the modern factory, the result is a smoothly functioning enterprise that produces quality goods. This is most clearly seen in the easy working relationship of management and labor. Japan has fewer strikes and less labor unrest than any other major industrial power. In 1978 Japan lost 1.4 million workdays because of strikes, while the U.S. lost 39 million.
To a Japanese worker, his company is not an oppressor but rather the source of his income and the expression of his place in society. Says Ryutaro Nohmura, 57, who owns a tentmaking firm in Osaka: "Employees in Japan view their company as an extension of their family life. Indeed many of them equate the importance of their company with that of their own life."
The workers trust their bosses to make the right decisions because there is a pervasive sense that both labor and management are working together. In Japanese companies, as a general rule, managers rise from within the corporate ranks, adding to the feeling of camaraderie and shared experience. Says Yoichi Takahashi, head of Hitachi's 70,000-strong labor union: "Everything depends on dialogue and trust. What is good for the company is good for the union. The workers know that their labor is what makes the company prosperous." Adds Noboru Yoshii, a senior adviser of Sony Corp.: "There is little opposition between management and workers because every manager comes up the ladder from employee. We do not call our employees workers or laborers, but associates instead. One reason everyone at Sony wears the same blue-gray jacket is that we are saying Sony is a working company, a blue-collar company all the way from the top to the bottom."
The close relationship between worker and company is intimately connected with the country's system of lifetime employment, which covers 35% of the country's labor force, nearly all of whom are employees of Japan's largest and most powerful companies. In Japan a worker typically joins a firm directly out of trade school or university and expects to stay there until he retires. Says Akio Morita, chairman of Sony: "In Japan, once we hire people we cannot lay them off."
Retirement at such lifetime firms normally comes at the early age of 55, but does not automatically swell the ranks of the nation's unemployed. Not only do corporations give their retiring workers lump-sum retirement payments, but upwards of 75% of the workers are rehired immediately, at lower salaries, by smaller companies that in many cases have been supplying parts or subcontracting services to the larger firms all along. For those who do not find jobs, and for the unemployed elderly, the government and many private employers have launched extensive retraining programs to give the jobless workers new skills.
Since those workers covered by lifetime employment know that they have a guaranteed job, and that their future is tied up with that firm, they are willing to be more flexible at work than employees in many Western countries. New machinery is not a threat to a worker's job but a useful tool that may help improve company profits. As Fujio Mitarai, head of Canon U.S.A., told TIME'S Robert Grieves: "In order to automate production, we had to divert workers into altogether new fields. We moved them from cameras to copiers to calculators, but we kept everyone employed in the process."
For many Japanese employees, and especially those of the nation's larger companies, life at the plant stresses the virtues of self-discipline and diligence. They seem to embody the Datsun slogan: "We are driven." At many firms, work begins with a chorus or two of the company song so that employees can get in the properly productive frame of mind. At Nissan Motor, every shift begins with a warm-up period of calisthenics on the shop floor.
At other Japanese firms, such as Japan Airlines and Mitsui Trust Bank, new employees eagerly submit to unusual initiations. One Tokyo retailing firm dispatched its group of newcomers for a midwinter swim on the northern island of Hokkaido to tone up their selfdiscipline. Matsushita workers, by contrast, are sent to a Zen Buddhist temple for three-day retreats. In most Japanese companies the new workers, their parents and other relatives attend a ceremony at which the president welcomes the newcomers to the firm.
The working environment of Japanese plants is not fancy. Though they are kept immaculately clean, the buildings are spare and functional, and the machinery is always the most up-to-date. Occasionally workers will try to add some local color. At Nissan's body assembly plant in Zama, near Yokohama, workers have pasted pictures of movie stars like Sayuri Yoshinaga and Kaori Momoi on the new robots that make the cars.
Japanese companies also provide extensive social services for their employees. New workers are often housed in company-built dormitories. The employees remain in this housing for as long as five years, vacating in many cases to get married and move into their own homes, which the company helps finance.
Much of the employee life outside work is spent in company social clubs, where courses are available in flower arranging and the tea ceremony. Weddings are also conducted in the social clubs; and the company helps pay the costs, including as much as $500 to rent the traditional bridal gown.
The attitudes of the bosses of Japanese companies are also different from those of their Western counterparts. This can be seen particularly with regard to investment for research and development. In the U.S., corporations spend an average of about 1 % of total sales on research and development. In Japan the figure is closer to 6%.
Investment is also directed at constantly modernizing on-line manufacturing techniques. The results are obvious: at Nissan's highly automated assembly plant, 35 workers now aided by industrial robots produce 350 Datsun car bodies every eight hours, seven times the productivity rate of competing U.S. automakers.
Though they are willing to invest heavily in automation and productivity, Japanese managers are tightfisted when it comes to spending on actual buildings, which they view as little more than shells required to keep out the rain while the work goes on inside. Japanese plants are constructed so that they can be expanded or redesigned with ease to accommodate new production techniques or additional assembly lines. After a few years the factories can be razed if necessary.
Unlike many American bosses, Japanese managers go to great lengths to involve their employees in the life of the company. For example, although General Motors actively recruits productivity suggestions from employees and offers up to $10,000 for a proposal that is adopted, the company receives an average of less than one suggestion per employee per year and adopts one-third of the ideas. At Toyota's main plant near Nagoya, on the other hand, officials receive more than nine suggestions per worker per year and adopt the vast majority of them.
One of the most complex aspects of Japanese business is the relationship between managers and the government. Tokyo ministries that set national economic priorities can exert substantial pressure on companies, but their influence is much less than is believed outside Japan. Says Takeshi Sakurada, chairman of the Toho Rayon manufacturing company and honorary president of the Japan Federation of Employers: "The amount of government interference or the role of government in private business is very small as compared with the U.S. or the European Community." Adds one Western economist in Tokyo: "There is no Japan Inc.--if there ever was one."
Japanese businessmen do not have to bear the heavy burden of government regulation that American industrialists do. For example, antitrust rules barely exist. This permitted the Japanese auto companies to get together with government officials and agree on a common design for antipollution equipment. That would have been against the law in the U.S., where each auto company worked independently to develop its own system. Japanese carmakers today are at least two years ahead of the U.S. in emission-control technology. In a similar way, government and business usually work out mutually acceptable agreements for solving the considerable problems of health and environment.
The hand of the government's tax man in business is approximately the same as in the U.S. The corporate tax rate on business profits ranges from 22% to 40%, which is similar to the 17% to 46% rate that applies to American business. Both countries have a range of exemptions and deductions that are virtually impossible to compare.
The most important factor in the business-government relationship is that, as in all other areas of Japanese society, agreement is reached only after long discussions. If talk fails, the government can turn to "administrative guidance," a procedure rather akin to American-style jawboning. Even then the private companies can simply refuse to accept the government's recommendations. In the late 1950s, for example, the Japanese government suggested that the nation's automakers join forces to produce a low-cost "people's car" modeled after the Volkswagen in order to crack the U.S. market. The automakers refused and launched their own separate products.
Despite Japan's enviable economic progress in the past quarter-century, the nation is hardly without its social and economic problems. Many of its shortcomings are side effects of the same qualities that have helped it to achieve so much. The sense of national unity and consensus has resulted in a society that tends to reject anyone who is different. One example: the burakumin--descendants of pre-17th century social outcasts, are still not considered full members of society. Some 600,000 Koreans, many of whose families have lived in Japan for generations, are likewise not integrated into the mainstream of Japanese life.
Power in Japan is concentrated within the upper echelons of business, banking and the pro-business Liberal Democratic party, which has ruled continuously since 1955. Relations are much cozier than would be accepted in the U.S. or Western Europe. Members of the nation's power elite, whatever their profession, often have known each other closely for a half-century. When executives retire, they frequently become corporate advisers, honorary chairmen and industrial counselors. Likewise, when senior civil servants leave government they may become top advisers in the very corporations they once regulated; the custom is called amakudari or, literally, "descent from heaven."
In Japan's pell-mell rush to grow, so much of the nation's wealth has been invested in industry that little has been left over for anything else. Even such basic amenities as sewers and housing remain inadequate by Western standards. Housing space is so cramped that building plots cost up to nine times as much as they do in the U.S. and room occupancy rates are 50% higher.
Japan is already finding its resources strained even before it begins to tackle those public services. To keep the economy expanding and at the same time boost government social spending, the Liberal Democrats since 1975 have relied increasingly on debt financing. Deficit spending for the current fiscal year is now projected to top $71 billion, or 33% of the nation's $213 billion budget. By comparison, the 1980 fiscal deficit in the U.S., though $59 billion, was only about 10% of total federal spending.
Yet even with its budget difficulties, Japan this year should have the best overall economic record of any major industrial nation. Growth is expected to be 5.3%, and the inflation rate should be no more than 5.5%. Though Japan has run a trade deficit for the past two years, largely because of oil imports, the nation's balance of payments deficit has been improving. As a result, the yen will no doubt continue to remain one of the world's strongest currencies.
As a postwar business dynamo, Japan shows that a large and complex society can function smoothly in a tumultuous world environment if people are willing to make some compromises in order to obtain larger objectives. Though the way Japan manages its affairs is, in many respects, the unique outgrowth of the country's historical experience, certain of its lessons can be applied in industrial economies everywhere, and particularly in the U.S.
Americans are reared with a commitment to individual liberty and freedom. But the U.S. was forged in a frontier spirit of cooperation and collective enterprise that was as simple and forthright as a barn-raising. Western thinkers from John Locke to Oliver Wendell Holmes believe that individuality at some point has to give ground to group needs. It has taken a successful country on the rim of Asia to remind the U.S. that teamwork, however it is organized, is still the prerequisite for a prosperous society. --By Christopher Byron. Reported by S. Chang and Edwin M. Reingold/Tokyo
With reporting by S. Chang and Edwin M. Reingold/Tokyo
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