Partners In Change

There is a constant refrain in India that the Japanese do not realise how much things here have changed in the nineties and hence are basing investment decisions on subjective mindsets, which no amount of recent studies have been able to change. This has a logical corollary. Indians need to know how Japan itself is changing to understand the logic of the latest Japanese approaches and compulsions.

Just as the Japanese find less material change than is projected by the reform hype saturating the Indian media and government communication, more is happening beneath the surface than is readily captured in the apparent continuity in the way the Japanese go about their business and deal with their foreign partners. A look at some of the more important changes taking place in Japan.

 

The eighties were, in many ways, the Japanese decade. The world was looking forward to the next century as a Pacific one, in which Japan would be the leader of the Pacific economic forces. The decade was also one of severe American doubt about its creeping loss of momentum in productivity growth. Popular writers and populist politicians in America were writing a horror story of how Japan, the rising sun, was out to conquer the commanding heights of corporate America. This was matched by a confident self-assertion in Japan, which came out in the form of books that spoke of a new Japan that can say no and stand up to American trade pressure.

Simply to recall this is to realise how the roles have been reversed. A new self-confidence is sweeping America that goes far beyond the end of the Cold War and the emergence of a unipolar world. The American economy and industry are fighting fit and fighting back in more ways than one. US manufacturing has staged a comeback, most dramatically highlighted by the restructured resurgence of its automobile sector. Even more important, all agree that in the knowledge-based areas which are the industries of today and tomorrow, the American lead is unquestioned. So, not only are the Americans bounding ahead in microprocessors and software, they are also becoming much more competitive in making cars, steel and even textiles.

On the other hand, Japan is going through a great internal churning. The fall from the dizzying heights of the eighties came in 1990 with the bursting of the stock market and land price bubbles (see accompanying charts). But it did not end there. An economic recession followed and brought in its wake a massive crisis in the financial sector, with banks getting into serious trouble.

This crisis in banking, insurance and securities revealed that Japan was woefully behind in carrying out the kind of financial deregulation that the British and the Americans had been doing in the eighties. This whole process of discovering excessive regulation in one sector after another was accompanied by one public scandal after another. At the end, it became clear to the Japanese that what needed changing at the roots was the very way they governed themselves. It culminated in the defeat in 1993 of the Liberal Democratic Party (LDP) after four decades of uninterrupted rule.

Today, after a period of shaky coalition rule, the LDP is back in power with a mandate and a national consensus that empowers Prime Minister Ryutaro Hashimoto to carry out a long list of reforms. The six-point reform agenda that he has announced for first world Japan is surprisingly similar in parts to that of third world India.

First comes administrative reform, getting the government off the back of private companies and reducing the size of government. Second is fiscal reform, which aims to bring the gross fiscal deficit from the present seven per cent to three per cent by 2005. Third is educational reform, which will lay stress on creativity. Fourth is social security reform, which takes care of the special needs of Japan's ageing population. Fifth is structural reform to enable the economy to respond faster to changes and remain competitive. And last comes financial reform, which takes away financial supervision from the all-powerful finance ministry and puts it in the hands of an independent board that reports directly to the prime minister.

All these changes are promised after political reforms take place. They will provide direct representation for three-fifths of the seats in the lower house of parliament and abolish private funding of election candiates in favour of state aid for them.

Significantly, and this is where Japan differs from India, once the need for reform has dawned, there has been little debate over its necessity. Instead, a consensus to carry it through has been achieved. That is why the overt reforms are underpinned by a deeper lifestyle change reflected in the Japanese taking more time off for leisure, expecting less job security and embracing imported consumer goods with open arms to beat the stagnation in earnings that has persisted for several years. This means a big change in Japan's economic relations with the rest of the world. The domestic Japanese market is not exactly up for grabs but those who are serious can get in and are doing so successfully.

The first major truth that must dawn on Indian businessmen is that the domestic Japanese market is no longer unassailable. Those with quality and consistency on their side have a future there. Newspapers have just reported that the first regular agreement to ship cut flowers to Japan has been concluded with the monopoly Japanese buying agency, Flora Intl Co.

The other major change that has affected the Japanese economy after its years of stagnation is a sharp fall in the value of the yen against the US dollar in recent months. This came after the steep rise in the value of the yen from the latter half of the eighties following the Plaza agreement of 1985, whereby the G-7 countries decided to let the yen float up against the US dollar.

The earlier rise laid the foundations of massive capital exports, high profile Japanese acquisitions in the US and the rise of jingoistic fears there. The recent fall in the yen, coming after the corporate slowdown that went with the recession, means less surplus cash to invest abroad. So Japanese foreign acquisitions will be much more carefully planned and probably not the high-profile sort of the eighties like United Studios and Rockefeller Centre.

On the other hand, the cheaper yen will not choke off the new surge of consumer goods imports. As deregulation of the Japanese domestic market quickens, imported goods will continue to be price competitive since domestic prices are extremely high in Japan. For example, imported rice can never be costlier than domestic rice as the latter has traditionally been about six times costlier than rice available elsewhere.

One Japanese executive in Delhi predicted that Japanese companies would more carefully consider the decision to build a new factory overseas. But this does not really affect India, where very few factories have so far been relocated. More relevant is his other assertion that the inexorable logic of globalisation will continue the trend of relocating factories */outside Japan in view of the high cost of making things in Japan. (The accompanying chart on the basis of calculations done by a leading Japanese company, Sharp, gives a measure of this.)

It is here that Indain businessmen can spot a window of opportunity. There is a considerable cost advantage in making automotive parts and consumer electronic goods of the simpler kind in India. So those who can entice the Japanese to make them partners, have a winning proposition in their hands.

The Japanese still prefer long-term relationships with local partners and companies like Sony, which wants to go it alone, are an exception. To enable the Japanese to relocate factories in India, not only must Indian tariffs fall substantially further so as to make imports of inputs cost-effective but the Indian customs regime and culture must undergo a sea change so as to make quick imports and exports after value addition hassle free.

A deeper understanding of what is troubling the Japanese now can open another window for Indians. As the Japanese realise that the system

that produced their economic miracle has outlived its utility, all minds are concentrated on what are the intrinsic strengths of the Japanese, which will carry them through into the 21st century. What can be the USP of a nation whose strength has been manufacturing in an age where knowledge-based skills will be at a premium, in an era where data processing hardware prices will have touched rock bottom and all premium will be in better and more sophisticted software?

Sekimoto Tadahiro, chairman of the Japanese computer giant, NEC, has a theory. His solution is to upgrade manufacturing and reposition it midway between the conventional manufacturing and tertiary industries like software, finance and professional services. His pet phrase to describe this is the 2.5 sector in which the manufacturer has made high software and information capabilities an integral part of his process and thus upgraded it. His latest ideas are to go even higher and aim for the 2.7 sector, in which multimedia capabilities are used effectively.

A fascinating opportunity opens up here for India. It is mostly a third world country with a few first world characteristics. So it can partner Japan in two ways. One is to become a good host for Japanese plants that have to be shifted overseas because of high domestic costs. The second is to partner the Japanese by providing them with cheap software and other professional skills. The familiarity of the Indian educated classes with the English language and the high standards of top professionals at home and abroad will be an advantage for India.

The best Japanese brains have naturally been the first to spot this. Kenichi Ohmae, the Japanese futurologist, last year brought a delegation of Japanese businessmen directly to Bangalore and then took them back, pointedly not bothering to take them to Delhi or even Mumbai. Indians can partner the Japanese in many many ways. But before that they will have to take the trouble to get to know them well.