Title: Future Business in Japan: Opportunities or Threats? By: Stanley P. Krueger Date: April 1998 Abstract: Describes the current state of Japan with an eye on the signs that show where the country is going, and how it may affect foreign businesses. Examines one established industry, aerospace, and one new industry, environmental, and identifies opportunities for American companies. Keywords: aerospace; environmental industry; threats and opportunities; Japan IC² Institute Working Paper WP-1998-04-01 © IC² Institute, The University of Texas at Austin http://ic2.utexas.edu (KY)

Future Business in Japan: Opportunities or Threats?

by

Stanley P. Krueger President

U.S.-Japan Business Associates

IC2 Institute-JIMT Series Working Paper April 1998

Japan Industry and Management of Technology (JIMT) ProgramIC2 Institute

The University of Texas at Austin 2815 San Gabriel Austin, TX 78705

Working paper # 98-04-01

Portions of this paper may be reproduced as long as full acknowledgment of the source is made.t a

This paper may not be reproduced in its entirety without the written permission of the IC Institute and the author. This publication was supported by AFOSR grant F49620-95-I-0529.

FUTURE BUSINESS IN JAPAN....OPPORTUNITIES OR THREATS?

1. INTRODUCTION

After more than 30 years in international business development & management, much of it spent in Japan matters, it comes as no surprise to me that I remain a basic student of the country. Having focused on Asia over the last 13 years and having lived & worked in Tokyo for three of those years, I still observe that we can depend on only a small bit of advantage from past history. Japan's business development and economic initiatives in the year 2000 won’t be a clone of its past activities.

This presentation intends to look at Japan today, with an eye to the signs that tell us where the country is going, and how it may effect foreign businesses. A good milestone for any business reference is when Japan's "bubble economy" burst in the ’91 -'92 time frame. Since that event, Japan's economy has been limping just above recession level and may in fact be in that depressed condition now. That overall economic collapse of Japan’s economy has been aggravated by bank and other private & government financial institution scandals. And most recently, the Asian economic meltdown has levied yet one more burden on the country's stressed business and government sectors.

Despite all this turmoil, Japan remains incredibly important to the United States and to the state of Texas. The country is still the world's #2 economic power, and ranks as the #3 export customer for Texas. And there are additional things that we need to review about this country, since we are likely to meet them on the global playing field as either partner or competitor. A snapshot of Japan today finds the country...

• still extremely resource limited... 1 24 million people on California-sized real estate• home to a 60 million labor force that is talented and enjoys 99% literacy• the fastest aging population in the world• still the 2nd largest economy, over $3 trillion GNP• home of the world's most wealthy consumer market• the largest importer of U.S. Agricultural goods• the world's largest source of investment capital• the bellwether for Asian markets, in terms of technology & quality standards

2. TURBULENT T IMES......JAPAN SHIFTING GEARS.

A most recent visit to Japan gave plenty of evidence that the country's companies & government are actively globalizing to create wealth. But while that is happening, there is serious economic impact at home that accompanies the hollowing out of traditional industries. Most apparent is the collapse of the medium and small business community, especially the "Mom & Pop" businesses that have been prominent since WWII. Other traumatic changes include the visible demise to lifetime employment and promotion via seniority in large companies. To accomplish these changes, deemed necessary for survival, is an emerging new breed of Japanese business executives.

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Additionally in evidence is the fact that telecommunications causing traditional trading companies to restructure. Japan's big trading companies are forced to diversify as clients can go via Internet and e-mail for business. Additionally, multi­national companies & banks are forced to decentralize operations in an effort to manage the impact of world currency fluctuations.

3. CONSENSUS

All in all, you can bet that the boom of the 1980's won't be repeated anytime soon. And if you ask the Japanese bureaucrat or businessman for a forecast, you will find a consensus that the next century will be the "China Century." Japan's government and business strategies are geared to live with and take advantage of that reality.

4. BUSINESS DEVELOPMENT PRIORITIES

As business types, we naturally ask ourselves, "What will be important to foreign companies doing business in Japan or doing business anywhere with Japanese partners, or in competition with Japanese companies?" We'll investigate that with a look at those areas of business that are popular in Tokyo today. First, a recent report by our Commercial Officers in the American Embassy there. This is a listing of what they see as the top 19 business opportunities for U.S. companies between now and 2000.

Rank°A

Industrial Sector Market Size f$B) U.S. Import

1 Computers & peripherals 41.1 10.72 Electronic components 40.4 19.53 Automobiles 122.2 5.44 Medical equipment 16.0 20.65 Computer software 6.3 10.36 Architecture/Engr services 91.1 0.27 Building products 91.2 3.88 Paper & paperboard 50.2 1.99 Telecommunications equipment 22.1 4.910 Pet food, supplies 2.5 18.411 Auto parts & accessories 142.9 0.812 Lab & scientific instruments 4.0 19.013 Pumps, valves/compressors 5.3 8.514 Household consumer goods 18.3 1.215 Apparel 49.6 1.816 Air conditioning/refridge eqpt. 23.6 0.717 Furniture 30.8 1.018 Pollution equipment 16.7 0.119 Electric power systems 29.9 3.7

As a counterpoint, the Ministry of international Trade & Industry (MITI) has always been a reliable source for forecasting Japan's initiatives and growth industries. The following is MITI's view of 15 new and growth fields for the 21st century:

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1 Medical Care & Welfare2 Quality Of Life & Culture3 Information Systems & Telecommu4 New Manufacturing Technology5 Distribution & Logistics6 En vironm ent7 Business Support8 Ocean9 Biotechnology10 Improvement Of Urban Living11 Aviation & Space12 New Energy & Energy Conservation13 Human Resources14 Economic Globalization1 5 Housing

5. A LOOK AT TWO OF JAPAN’S PRIORITIES

The listings depict both traditional as well as rather new industries for Japan. The Aerospace industry of my experience falls into the category of being rather traditional. It has been a national priority that was interrupted by defeat in WWII.

Others, such as the medical care & welfare industry, are new and primarily driven by a shift in demographics and economics. Likewise, the environmentai industry is new. Today I would like to take a brief look at one established, but dynamic industry and one new industry, to identify opportunities for American companies.

6. JAPAN 'S AVIATION & SPACE INDUSTRY

At the conclusion of WWII, Japan's aerospace industry was systematically reduced to zero. In the years of U.S. occupation, it remained that way until Japan was allowed to participate in limited licensed production of U.S. fighters and trainers. This activity tended to nourish the Japanese industry with updated technology that was unavailable in Japan. It also gave the Japanese the courage to get back into the aircraft design and manufacturing business. Several commercial projects were attempted, such as small air liners and business aircraft, but the results were fairly dismal.

Then the government of Japan sponsored a consortium tie-up with Boeing. And Boeing, seeing Japan as either a future competitor or partner, chose the latter. That partnership has been a good one for both Boeing and the Japanese companies involved and in recent years, there have been many other partnerships between Japanese companies and foreign manufacturers. All of these partnerships have created a vibrant aerospace industry. Here is a snapshot of what that industry includes today.

Japan's Aircraft & Space industry - 1996• Industry size = $12 Billion. Space 30% of total• Airframe Mfg.. = 57%, Engines = 20 %, Eqpt. = 23%• Employed 26,500 In aircraft mfg.. 9200 in Space• . Defense Agency bought 74%, Exports were 16% for A/C• Aero industry is small, compared to auto, electronics. 1/10 size of U.S.

Same size as UK or France• Industry has grown 50% in last decade

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• Problem: Cold War over & defense sales down Solution: Diversify, tie up with foreign manufacturers

1997• Defense sales down 7.9%. Exports up 78.7%• Total industry sales up 8%

As a segment of Japan's aerospace industry, space development is big business and will get bigger. There was nearly $4 billion in space business in 1996. Of that amount, 25% was exported goods, mostly used for launching rockets.

Japan's space development initiatives began shortly after WWII and in 1955, the University of Tokyo began rocket and space vehicle programs under the guidance of the Ministry of Education. The first experimental satellite from this program was launched into orbit in 1970. Not to be outdone, MITI went to work and NASDA was formed as a separate entity in 1969, launching their first satellite in 1975. Today, Japan is fourth in satellite launching countries, after the U.S., Russia and France. As of a year ago, there has been a total of 27 scientific and experimental satellites launched by the Ministry of Education and at the end of 1997, NASDA had launched a total of 37 application satellites. The latter are used primarily for meteorology, communications, broadcasting, marine observation, resource exploration and technological experiments.

It should be obvious that Japan is committed to both the aerospace and space industries. In this regard, the country has been rather disappointed with its on- again, off-again relationship with the U.S. for development of the International Space Station. The following is a quick look at Japan's overall strategy and some of the major, ongoing programs in Japan:

Overall Strategy

• International Cooperation For...- Risk Sharing- Enhancing Capabilities Through Cooperation- Participation In Development & Market Entry- Mutual Profit Taking

• Develop Successful Programs For Japan's Companies- B767 Production (Since 1970)- B777 Development & Production (Since 1991)- V2500 Commercial Engine - IAE (MHI.KHI, IHI) & (RR & P&W)- HYPER Engine (GE, RR, P&W) & JAEC (MHI, IHI, KHI)- FSX Fighter With Lockheed Martin- H-1 & H-60 Helicopters (Bell & Sikorsky)- OHX Light Observation Helicopter & Engine (KHI & MHI)- M2000 Commercial Helicopter (MHI)- Space Station Experimental Module (Launch 2001)

Reality• Japan will continue to partner for market access & technology• Japan seeks & is investing for autonomy in aerospace

Future Programs• YSX Small Civil Transport (Indigenous Air frame & Engine)• Asian Community Airplane (ACAP) (International Cooperation For

Airframe & Engine)• AH-X Attack Helicopter Development• Supersonic Commercial Transport (International Cooperation For

Airframe & Engine)• Boeing 747-X (600-800 Seats)• Commercial Communications Satellites Via Min./Ed. (Hughes Partner)• Scientific Satellites Via NASDA (Lunar & Planetary)• Space Station Development• H-2 Rocket And HOPE Shuttle Development

7. JAPAN’S ENVIRONMENTAL INITIATIVES

In its industrialization, Japan has been one of the world's worst polluting countries. One can remember post-war Japan's air thick with smog and its rivers clogged with industrial waste. Much of that has changed and will continue to change as the country seeks to be a leader in environmental clean-up and in environmental technologies and products. Global warming is one of the areas where Japan is investing time and yen.

The COP3 (conference of the parties) meeting in Kyoto in December, 1997 formally announced to the world that Japanese initiatives and leadership would be a key component to the environmental industry. That meeting followed the 1995 Berlin Mandate for international cooperation and established objectives to reduce C02 & other greenhouse gases beginning 2000. As a response to just why global warming is a Japanese concern, one should realize that:

- there will be a 5% increase in emissions in 10 years if nothing done- the phenomenon is global, not localized- an expected 2 deg. C temp rise will cause 50 cm ocean level rise by 2100

For an archipelago nation, with its population and industries located near the sea, the arresting of global warming is a critical matter of survival. Initially, Japan will employ these measures:

- increased energy conservation- development of cleaner energy sources- shifts from coal & petroleum to nuclear, solar, hydroelectric- development of biological C02 fixation using bacteria & micro-algae- development of chemical fixation of C02 & convert to methanol- ocean sequestration , .

It is important to remember that Japan's government views global warming as energy & economic, as well as an environmental problems. Consequently, you may look for Japan’s government, educational institutions and industries to turn this initiative into a fully exportable, global business Government policy & initiatives today tend to be broken down into domestic and international categories. MITI's latest policy is outlined as follows:

Domestic measures• Demand-side energy conservation has been legislated as guidelines for

Keidanren programs for industrial cooperation. This legislation is currently known as the "Law Concerning the Rational Use of Energy”

• Supplv-side energy conservation is likewise legislated as the "Law Concerning the Promotion of the Use of New Energy." This law calls for:

- more nuclear power plants- oil-alternatives for energy supply- emission reduction & limitations for GHGs (C02, Methane, Nitrous Oxide)- collection, recycling & destruction of HFC, PFC & SF6- R&D promotion for substitutes of HFC, PHC, SH6- R&D promotion of innovative technologies

International measures• New rules on emission trading, joint implementation & clean development• Promotion in developing countries

Mid-to-lona-term actions• Transfer of technologies to developing countries

- ocean sequestration, solar cells

All this activity provides enough potential for a semester's course and credits. But to sum it up, Japan's environmental initiatives mean goodness and big business. Here is a final look at how the country's government and industry partnerships are investing their resources.

• The Environmental Agency & MIT1 are working separately on "Green Laws”

• New bills target factories, auto & power plants. They bypass households and offices for now, but that will be next.

• Japanese companies are visibly developing and implementing new technologies and practices to meet domestic and ISO 14001 standards

• Examples:- Asahi Breweries....Fuel cells & non-polluting refrigerants- NEC...Cogeneration technologies to cut energy spending in

semiconductor plants.- Kawasaki Heavy Industries....Developing and manufacturing

cogeneration systems- joint venture consortiums to pool resources and develop new

technologies (ex: JR & MHI for Excimer UV lamps)- Ebara....High technology incinerators for elimination of toxic dioxin- Toyota & Honda...Hybrid autos using battery/fuel cell technologies

8 SU M M A R Y

Japan is currently struggling with domestic and regional economics, operating at a near-recession level. Nevertheless, the country and its citizens represent a deep wealth that will keep it as the #2 economic power for the near future.

The country's policies and initiatives are focused on the reality of the "China Century" and on key industries which are being developed and nourished. This presents both opportunities and threats to foreign companies that will find the necessity to accommodate Japan as either a partner or as a competitor in the new millennium.

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Presentation Charts

JAPAN.......A SNAPSHOT

124 MILLION PEOPLE ON CALIFORNIA-SIZE REAL ESTATE

60M LABOR FORCE. TALENTED. 99% LITERACY

FASTEST AGING POPULATION

2ND LARGEST ECONOMY, OVER $3 TRILLION GNP

WORLD'S MOST WEALTHY CONSUMER MARKET

LARGEST IMPORTER OF U.S. AGRICULTURAL GOODS

WORLD'S LARGEST SOURCE OF INVESTMENT CAPITAL

BELLWETHER FOR ASIAN MARKETS, TECHNOLOGY & QUALITY

EITHER A PARTNER OR COMPETITOR

U.S. DEPARTMENT OF COMMERCE VIEWS 2

RA NK INDUSTRIAL SECTOR MARKET SIZE (SB^ US IMPORT

1 COMPUTERS & PERIPHEALS 41.1 1 0.7

2 ELECTRONIC COMPONENTS 40.4 19.5

3 A U T O M O B IL E S 122.2 5.4

4 MEDICAL EQUIPMENT 16.0 20.6

5 COMPUTER SOFTW ARE 6.3 10.3

6 ARCHITECTURE/ENGR SE R V IC E S 91.1 0.2

7 BUILDING PRODUCTS 91.2 3.8

8 PAPER & PAPERBOARD 50.2 1.9

1 0 PET FOOD, SUPPLIES 2.5 18.4

1 1 AUTO PARTS & A CCESSO R IES 142.9 0.8

1 2 LAB & SCIENTIFIC INSTRUMENTS 4.0 19.0

1 3 PUMPS. V A L V E S /C O M P R E SS O R S 5.3 8.5

1 4 HOUSEHOLD CONSUMER GOODS 18.3 1.2

1 5 A P P A R E L 49.6 1.8

1 6 AIR CONDITIONING/REFRIDGE EQPT. 23.6 0.7

1 7 FURN ITURE 30.8 1.0

1 8 POLLUTION EQUIPMENT 16.7 0.1

1 9 ELECTRIC POWER SYSTEMS 29 .9 3.7

MITI'S 15 NEW & GROWTH FIELDS

1 MEDICAL CARE & WELFARE

2 QUALITY OF LIFE & CULTURE

3 INFORMATION SYSTEMS & TELECOMMUNICATIONS

4 NEW MANUFACTURING TECHNOLOGY

5 DISTRIBUTION & LOGISTICS

6 ENVIRONMENT

7 BUSINESS SUPPORT

8 OCEAN

9 BIOTECHNOLOGY

10 IMPROVEMENT OF URBAN LIVING

1 1 AVIATION & SPACE

1 2 NEW ENERGY & ENERGY CONSERVATION

1 3 HUMAN RESOURCES

14 ECONOMIC GLOBALIZATION

15 HOUSING

JAPAN'S AIRCRAFT & SPACE INDUSTRY

1996

• INDUSTRY SIZE = $12 BILLION. SPACE 30% OF TOTAL

• AIRFRAME MFGR. = 57%, ENGINES = 20 %, EQPT. = 23%

• EMPLOYED 26,500 IN AIRCRAFT MFGR. 9200 IN SPACE

• DEFENSE AGENCY BOUGHT 74%, EXPORTS WERE 16% FOR A/C

• AERO INDUSTRY SMALL, COMPARED TO AUTO, ELECTRONICS. 1/10 SIZE OF U.S. SAME SIZE UK OR FRANCE

• INDUSTRY HAS GROWN 50% IN LAST DECADE

• PROBLEM: COLD WAR OVER & DEFENSE SALES DOWN

• SOLUTION: DIVERSIFY, TIE UP WITH FOREIGN MANUFACTURERS

1997

• DEFENSE SALES DOWN 7.9%. EXPORTS UP 78.7%

• TOTAL INDUSTRY SALES UP 8%

JAPAN’S ONGOING AEROSPACE PROGRAMS

OVERALL STRATEGY

• INTERNATIONAL COOPERATION FOR.....

- RISK SHARING- ENHANCING CAPABILITIES THROUGH COOPERATION- PARTICIPATION IN DEVELOPMENT & MARKET ENTRY- MUTUAL PROFIT TAKING

• DEVELOP SUCESSFUL PROGRAMS FOR JAPAN'S COMPANIES

- B767 PRODUCTION (SINCE 1970)- B777 DEVELOPMENT & PRODUCTION (SINCE 1991)- V2500 COMMERCIAL ENGINE W/IAE (MHI,KHI, IHI) & (RR&P&W)- HYPER ENGINE (GE,RR,P&W) & JAEC (MHI,IHI,KHI)

, - FSX FIGHTER WITH LOCKHEED MARTIN- H-1 & H-60 HELICOPTERS (BELL & SIKORSKY)- OHX LIGHT OBSERVATION HELICOPTER & ENGINE (KHI & MHI)- M2000 COMMERCIAL HELICOPTER (MHI)- SPACE STATION EXPERIMENTAL MODULE (LAUNCH 2001)

REALITY

• JAPAN WILL CONTINUE TO PARTNER FOR MARKET ACCESS & TECHNOLOGY• JAPAN SEEKS & IS INVESTING FOR AUTONOMY IN AEROSPACE

JAPAN’S FUTURE AEROSPACE PROGRAMS 6

YSX SMALL CIVIL TRANSPORT (INDIGENEOUS AIRFRAME & ENGINE)

ASIAN COMMUNITY AIRPLANE (ACAP) (INTERNATIONAL COOPERATION FOR AIRFRAME & ENGINE)

AH-X ATTACK HELICOPTER DEVELOPMENT

SUPERSONIC COMMERCIAL TRANSPORT (INTERNATIONAL COOPERATION FOR AIRFRAME & ENGINE)

BOEING 747-X (600-800 SEATS)

COMMERCIAL COMMUNICATIONS SATELLITES VIA MIN/ED (HUGHES PARTNER)

SCIENTIFIC SATELLITES VIA NASDA (LUNAR & PLANETARY)

SPACE STATION DEVELOPMENT

H-2 ROCKET AND HOPE SHUTTLE DEVELOPMENT

C0P3 & GLOBAL WARMING 7

C0P3 (CONFERENCE OF THE PARTIES)

- FOLLOWS 1995 BERLIN MANDATE- DECIDES OBJECTIVES TO REDUCE C02 & OTHER GREENHOUSE GASES

BEGINNING 2000

WHY GLOBAL WARMING AS A JAPANESE INITIATIVE?

- 5% INCREASE IN EMISSIONS IN 10 YEARS IF NOTHING DONE- IT'S GLOBAL, NOT LOCALIZED- 2 DEG.C TEMP RISE & 50 CM OCEAN LEVEL RISE BY 2100

WHAT MEASURES WILL JAPAN EMPLOY?

- INCREASED ENERGY CONSERVATION- CLEANER ENERGY SOURCES- SHIFT FROM COAL & PETROLEUM TO NUCLEAR, SOLAR, HYDROELECTRIC- DEVELOP BIOLOGICAL C02 FIXATION USING BACTERIA & MICRO-ALGAE- DEVELOP CHEMICAL FIXATION OF C02 & CONVERT TO METHANOL- OCEAN SEQUESTRATION

JAPAN'S GOVERNMENT VIEWS GLOBAL WARMING AS AN ENERGY & ECONOMIC, AS WELL AS AN ENVIRONMENTAL PROBLEM.

JAPAN'S GOVERNMENT, EDUCATIONAL INSTITUTIONS AND INDUSTRIES WILL TURN THIS INITIATIVE INTO A GLOBAL BUSINESS

GOVERNMENT POLICY & INITIATIVES 8

DOMESTIC MEASURES

• DEMAND-SIDE ENERGY CONSERVATION- KEIDANREN PROGRAMS- "LAW CONCERNING THE RATIONAL USE OF ENERGY"

• SUPPLY-SIDE ENERGY CONSERVATION- MORE NUCLEAR POWER PLANTS- "LAW CONCERNING THE PROMOTION OF THE USE OF NEW ENERGY- OIL-ALTERNATIVES FOR ENERGY SUPPLY- EMISSION REDUCTION & LIMITATIONS FOR GHGs (C02, METHANE, NITROUS

OXIDE- COLLECTION, RECYCLING & DESTRUCTION OF HFC, PFC & SF6- R&D PROMOTION FOR SUBSTITUTES OF HFC, PHC, SH6- R&D PROMOTION OF INNOVATIVE TECHNOLOGIES

INTERNATIONAL MEASURES

• NEW RULES ON EMISSION TRADING, JOINT IMPLEMENTATION & CLEAN DEVELOPMENT

• PROMOTION IN DEVELOPING COUNTRIES

MID-TO-LONG-TERM ACTIONS

• TRANSFER OF TECHNOLOGIES TO DEVELOPING COUNTRIES- OCEAN SEQUESTRATION, SOLAR CELL

ENVIRONMENTAL SUMMARY

ENVIRONMENTAL AGENCY & MITI ARE WORKING SEPARATELY ON "GREEN LAWS"

NEW BILLS TARGET FACTORIES, AUTO & POWER PLANTS. THEY MISS HOUSEHOLDS AND OFFICES FOR NOW.

JAPANESE COMPANIES ARE DEVELOPING AND IMPLEMENTING NEW TECHNOLOGIES AND PRACTICES TO MEET DOMESTIC AND ISO 14001 STANDARDS

EXAMPLES

- ASAHI BREWERIES....FUEL CELLS & NON-POLLUTING REFRIGERANTS

- NEC. ...COGENERATION TECHNOLOGIES TO CUT ENERGY SPENDING IN SEMICONDUCTOR PLANTS.

- KAWASAKI HEAVY INDUSTRIES....DEVELOPING AND MANUFACTURING COGENERATION SYSTEMS

- JOINT VENTURE CONSORTIUMS TO POOL RESOURCES AND DEVELOP NEW TECHNOLOGIES (EX: JR & MHI FOR EXCIMER UV LAMPS)

- EBARA....HIGH TECHNOLOGY INCINERATORS FOR ELIMINATION OF TOXIC DIOXIN

- TOYOTA & HONDA..... HYBRID AUTOS USING BATTERY/FUEL CELL TECHNOLOGIES

THREATS & OPPORTUNITIES FOR FOREIGN FIRMS