No. 3 — January 21, 2000


Weekly Review

--- by Jon Choy

The Clinton administration continues to press Tokyo to give American and other foreign firms more opportunities to win a bigger share of its mammoth market for architectural, engineering and construction services. As part of its recent efforts to get the economy moving, the government has been pumping record amounts of money into public works. However, foreign companies, especially American ones, have not benefited from this expanding business. As a matter of fact, U.S. architectural, engineering and construction companies, although among the world leaders in their fields, won just $50 million worth of Japanese government contracts in 1998 and 1999, a minuscule 0.02 percent market share, according to the Department of Commerce. Its negotiators have turned up the heat on Tokyo, threatening trade sanctions by March if bilateral talks do not yield sufficient progress.

The White House hopes that its tough talk will get negotiations out of the rut in which they have been stuck for the past several years. Progress on the long-running issue of foreign access to Japan's public works market has come in spurts, starting with the 1988 Major Projects Agreement, which explicitly gave offshore competitors special treatment to help them break into the clubby government contracting world. The next step forward took another six years of talks and resulted in an enhanced and improved MPA, which was renamed the 1994 Public Works Agreement. It makes the bidding process for public works more transparent, opens specific projects to bids from foreign firms and allows non-Japanese companies to use overseas project experience to prove their qualifications.

Despite these procedural changes, foreign firms have not been able to capture and keep a significant share of Japan's building market. After hitting a high of around $300 million in 1989, overseas construction services firms have generated less money year after year in Japan. Some observers have asserted that the drop reflects the economy's decade-long troubles. U.S. officials point out, however, that the value of contracts won by foreign firms should have increased because the volume of construction orders placed by the central and local governments has risen as Tokyo has pursued a stimulative fiscal policy.

This shrinking share of a growing market has led U.S. officials to increase the importance of the negotiations on their Japan market access agenda. Moreover, armed again with the power to retaliate unilaterally against discriminatory foreign government procurement practices thanks to President Clinton's early 1999 reactivation of Title VII of the 1988 Omnibus Trade and Competitiveness Act (see JEI Report No. 5B, February 5, 1999), Under Secretary of Commerce for International Trade David Aaron has warned that the White House is considering sanctions against Japan. At the same time, he has called several recent developments small steps forward:

Mr. Aaron urged Tokyo to move on the long-standing U.S. complaint about the rule that limits to three the number of firms that can form a joint venture to bid on a public works project. The United States argues that foreign competitors have a much better chance of winning part of a job if there are no restrictions on the number of participants in a joint bid. While making no commitment on this issue, Mr. Oshima did agree to review bidding criteria that Americans say discriminate against outsiders.

Despite the surge in public works orders from Tokyo, Japan's construction industry continues to struggle. That, no doubt, is a fundamental reason for the failure of world-class American rivals to win more business. Many first- and second-tier contractors still are groaning under the weight of loans taken out during the "bubble economy" heyday of the late 1980s and subsequently extended to subcontractors and affiliates (see JEI Report No. 34A, September 4, 1998).

Contractors have asked their banks for eased loan terms or outright debt forgiveness. Even with the latter concession, some firms' balance sheets are dripping red ink. Aoki Corp., for example, still has a debt/sales ratio of 145.8 percent after creditors agreed to forgive some loans. Of Japan's major contractors, Obayashi Corp. is the healthiest with a 31.2 percent debt/sales ratio (see Table).

Debt Burdens of Japan's Major General Contractors, March 31, 1999

(in millions of yen)





Kumagai Gumi Co., Ltd.




Shimizu Corp.




Taisei Corp.




Kajima Corp.




Fujita Corp.*




Haseko Corp.**




Obayashi Corp.




Tokyu Construction Co., Ltd.




Hazama Corp.




Mitsui Construction Co., Ltd.




Sato Kogyo Co., Ltd.*




Aoki Corp.*




*Some portion of debts forgiven by creditors.
**Received debt forgiveness but will not report it until the end of FY 1999.

Source: Teikoku Databank, Ltd., as reported in The Japan Times, August 23, 1999.

Some observers wonder if the merger mania that is reshaping a number of industries in Japan will spread to the construction business. Their main question is whether some well-heeled foreign firm might offer itself as a white knight to a debt-ridden local contractor. Recent moves by foreign companies to use acquisitions to gain an instant market presence in Japan are powering the construction industry rumor mill. However, despite the political clout wielded by contractors, Tokyo apparently does not consider the industry's problems severe enough to go beyond the already extensive help it provides in the form of higher public works spending, credit guarantees and the like. In short, some kind of bailout program, which has been a consideration in foreign bids for certain ailing Japanese financial institutions, is not in the works for contractors.

Without a bigger helping hand, observers say, an industry shakeout most likely is just around the corner. Contractors are rapidly segregating into two groups: those that can cope with their debt burdens and remain internationally competitive and those that cannot. Since the acquisition of a weaker competitor does not automatically benefit a stronger concern and, in fact, may add to its problems, analysts expect struggling firms to be forced sooner rather than later to close their doors. That could be just the start of a period of major adjustments for Japan's huge construction industry. The not-so-distant future might bring increased foreign competition and non-Japanese equity ownership as well as fewer domestic firms.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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