Japanese investment in the United States arguably the hot-button transpacific economic subject of the late 1980s has become a nonissue. The proximate cause of the U-turn in public opinion is the conspicuous post-1990 drop-off in the volume of money moving into the U.S. economy from Japan, particularly for the high-profile acquisitions that made "the buying of America" part of the everyday vocabulary. Periodic talk about corporate Japan's missteps in trying to operate as business insiders has contributed to the shift in sentiment, a movement helped along by a corollary development: disinvestment in the mid-1990s. More fundamentally, though, American perceptions of Japan as an economic juggernaut and the United States as an also-ran in international competition flip-flopped with the 1991 collapse of the bubble economy and Japan's subsequent failure to get back on an economic expansion track.
The new era in Japanese investment in this country is perhaps most visible in the manufacturing sector. Both Department of Commerce and Ministry of Finance foreign direct investment statistics for the period since 1990 document that spending by Japan-based firms to build or buy U.S. production facilities has been running at just a fraction of what it was during the boom years. A simple comparison drawn from the latest Japan Economic Institute survey of Japanese-affiliated manufacturing operations here highlights the magnitude of the slowdown. Not many more companies joined the ranks of production ventures owned wholly or in part by Japanese corporate investors over the four years through 1995 than in the record year of 1988 or runner-up 1989. Adding in the figure for 1991, a transitional time like 1990, does not alter the conclusion that Japanese investment in the American manufacturing sector has entered a different phase.
The second stage in Japan's U.S. production activities is defined by more than a cutback in spending growth, although those other dimensions are not necessarily captured by either the government direct investment data or the JEI study. A review of 1995 transactions indicates, for example, that acquisitions of any size have taken a back seat to plant construction. It also suggests that corporate Japan is putting almost as much money into the expansion of existing operations as it is setting aside for new production ventures. The former outlays are earmarked in part for capacity increases but, more often than not, they are designed to boost U.S. content. The value of many new company announcements likewise points to a shift from assembly operations to more integrated production at start-up. Trends like these should continue to sideline critics of Japan's manufacturing presence in the United States.
Readers of the Japanese business press, whether regulars or occasional browsers, can be excused if they conclude that whatever money Japan-based companies are investing offshore for production is going into Asia. The extensive, continuing coverage of new Japanese-financed plants in the People's Republic of China and elsewhere in the region reminiscent of the reports about the boom in corporate Japan's U.S. manufacturing investments in the late 1980s is not simply another case of a journalistic flavor-of-the-month fad. Japanese producers representing a cross section of industries have spent heavily in the last two years or so on Asian production bases, in large part to capitalize on the strong growth predicted for local economies but also to secure new home-market or third-country sources of supply for labor-intensive or low-technology products that no longer can be made profitably in Japan.
Equally true, Japanese direct investment in this country, both overall and in the manufacturing sector, has plunged from the heady levels associated with the economy's "bubble" years. Foreign direct investment figures collected by the Ministry of Finance, although more indicative than definitive, show that spending designated for U.S. production ventures fell from $9 billion or so in FY 1988 and FY 1989 alike to roughly $4.5 billion in the year through March 1995. The results of a Department of Commerce-conducted annual survey of outlays by foreign investors or their domestic affiliates to set up or acquire American business operations depict a far deeper contraction in fact, something close to a shutdown with Japan's manufacturing-related investments plummeting from $10.7 billion in 1988 to a mere $777 million in 1994.
Japanese investment in U.S. production facilities has not dried up, the Commerce Department's numbers and the public's perceptions notwithstanding although, as suggested, it also probably is not running as strongly as the Finance Ministry's data imply. That, at least, is the bottom line of a new review by the Japan Economic Institute of post-1990 manufacturing-sector transactions by Japanese corporate investors. Despite its different methodology, the in-house survey closely tracks the drop-off in activity reported by other sources. It indicates that the number of added Japanese majority-owned production companies peaked at a revised total of 174 in 1988 and tallied a near-record 165 on an adjusted basis the following year before dropping to 98 (also restated) in 1990 and an estimated 80 in 1991, the end of the transition from controversy-provoking growth to modest expansion. During each of the next three years additions to the list of manufacturing firms in which Japanese businesses have an interest of 50 percent or more were almost exactly half the 1991 figure, with the 1992 number just under the 40-company count and the 1994 total right above it. The tentative finding from this period that the slide in the establishment or the acquisition of production operations by Japanese investors reached bottom in 1992 is reinforced by the results for 1995 from the JEI study, which identified nearly 60 new Japanese majority-funded manufacturing ventures for the year.
The slowdown in the expansion of Japan's U.S. manufacturing presence, however measured, is all the more striking because it has played out in recent years against the backdrop of an appreciating yen and a strengthening American economy equally powerful investment incentives. Analysts who follow foreign direct investment in this country have standardized their explanation of why, despite the large push and the big pull, corporate Japan generally is the odd man out among its peers in other industrial countries in not boosting spending in the United States. In the stripped-down consensus view Japanese businesses lack the financial resources to invest much more here than they have since profits have taken a major hit from the economy's stumbling, if not recession-qualifying, performance over the last four years or so.
The financial explanation unquestionably targets the operative constraint of the mid-1990s on Japanese investment in the United States or, for that matter, elsewhere abroad. Other factors, though, also have held down outlays. Companies that rushed to buy or build U.S. manufacturing facilities during the second half of the 1980s often have spent much of the subsequent period integrating their acquisitions and shepherding greenfield plants through start-up and on to capacity operation. The recession stretching from the latter part of 1990 through the early months of 1992 threw a monkey wrench into this process. Some Japanese-affiliated production companies could not weather the economy's slump and ended up being closed, sold, downsized or otherwise reorganized. Others, while struggling through the recession, never recovered from their shaky start and eventually met a similar fate. This outcome, experienced by seasoned operators in the United States and market newcomers alike, is the key to the 10 percent-plus difference between the totals for 1988, 1989 and 1990 cited in the current JEI study and its 1990 predecessor. More important in the present context, the poor track record of a not-insignificant number of Japanese-affiliated production concerns during the 1990s no doubt has forced Japan-based manufacturers as a group to rethink their supply strategies for the United States. The onshore approach, whatever its many advantages, does not always pan out.
Part of the bigger picture behind the reduction in Japan's U.S. manufacturing investments is the seemingly reverse proposition that, by the end of the late 1980s' spending boom, major Japanese competitors generally were able to supply an important share of their American sales from local plants. Given this capability and the multiple demands on limited corporate plant and equipment budgets, a case can be made that many companies opted to shift more of their investment funds to Asian projects.
Evidence supporting the "critical mass" argument abounds. Top Japanese vehicle makers as well as the second tier were building volume sellers in the United States by 1990. Moreover, large numbers of automotive parts suppliers had production facilities in this country. Likewise, all of Japan's leading steelmakers had access by then to domestic capacity for major products, usually through partnerships with big American steel companies; the same manufacturers along with trading companies also had invested extensively in steel service centers. Large electronics producers similarly had a fairly broad U.S. production base at the start of the 1990s, enabling them to make locally a variety of consumer and industrial products. Additionally, manufacturers from numerous other industries already had shifted some production for the American market to domestic plants, including producers of machine tools, construction and materials-handling equipment, bearings, plastics, printing ink and cement.
Fragmentary information also suggests the possibility that available data sources overstate to some extent the slowdown in corporate Japan's production activities here. Neither government's foreign direct investment statistics pick up all manufacturing-sector transactions, particularly if they are financed from American sources. Similarly, investments make the JEI list only if they involve the formation of a new production firm, the acquisition of an American manufacturer or the construction of another plant in a location different from the parent company's main operation.
Expansions of existing manufacturing facilities both to raise capacity and, increasingly, to add value to current output through in-house production of more components and/or the performance of additional manufacturing steps are the activities most likely to be left out of investment tallies. A review of 1995 expansions covered in the Japan-U.S. Business Report, another JEI publication, indicates that this omission is not inconsequential. A handful of Japanese firms disclosed investments in their American production facilities valued at anywhere from several hundreds of millions of dollars up to $1 billion. Even if these transactions are excluded, the amount of money earmarked last year for increasing capacity or extending operations at existing plants was within range of the total that the Business Report indicated for new manufacturing investments and acquisitions.
The apparent dollar parity between expansions and start-ups/buyouts is just one characteristic of the new profile of Japanese investment in the U.S. manufacturing sector in the 1990s. The downgrade assigned acquisitions as a market-entry strategy or a growth avenue is another. Less than a quarter of the majority-owned production concerns identified in JEI's survey of 1995 transactions represented takeovers; during the 1988-90 period the ratio ran from a third to more than a half. A further change is a reduction in the number of Japanese minority-financed manufacturing companies. Such tie-ups dropped by roughly 50 percent between the late 1980s and the mid-1990s.
Japanese companies are not merely more comfortable producing in the United States on their own or in partnership with a fellow firm at a greenfield site. They also are allocating more funds for first-stage production. Investments of $10 million or less used to be typical for most start-ups. Now the norm is closer to $40 million or $50 million. This raised median implies that corporate Japan increasingly is prepared to move beyond the trial phase of U.S. manufacturing operations the assembly of parts largely imported from home to integrated production.
JEI's new survey of Japanese-affiliated manufacturing or assembly concerns in the United States counted approximately 1,200 majority-owned companies at yearend 1995 as well as 140-plus firms in which corporate investors from Japan had stakes ranging from 10 percent to 49.9 percent. At 1990's close the comparable numbers were 950 or so and 90. The limited five-year net additions aside, 1995's totals are impressive from at least two perspectives. First, Japanese corporate investors were latecomers to U.S. manufacturing relative to their European and Canadian counterparts. For example, just 400 of the currently operational majority-owned production companies were in place 10 year ago. In additional contrast Japan's present U.S. manufacturing presence was developed primarily through new investments rather than acquisitions. In fact, fully two-thirds of today's majority-owned concerns are the result of the greenfield entry mode. For both reasons, however, Japan ranks only fifth as an investor in the domestic manufacturing sector on a dollar-equivalent cumulative basis, trailing not only the pioneer, the United Kingdom, but Germany, France and the Netherlands as well.
Neither that low ranking by itself nor the combination of it with the slow growth in the mid-1990s of Japanese-affiliated production ventures here, the absence in recent years of any megadeals involving Japan-headquartered acquirers and the Japanese economy's broadly publicized woes have wiped out completely the criticism of Japan's U.S. manufacturing investments that raged at the start of this decade, although these and other factors have transformed the subject into a nonissue. The sheer number of automotive parts suppliers that have set up shop in this country some 225, according to the new JEI investment study is one cause of occasional rumblings. So is the related question of the parts sourcing practices of the seven vehicle manufacturers that build cars or trucks in this country (see JEI Report No. 15A, April 23, 1993). Then, too, Japanese investment in the manufacturing sector has not yet delivered all the benefits expected. For instance, the rapid production expansion in recent years has done little to cut the huge volume of U.S. imports from Japan. If anything, in fact, greater output by Japanese-affiliated manufacturing companies has raised purchases since many of these firms still bring in from home some key production components as well as certain types of manufacturing equipment.
The job-creation effects of the approximately 1,650 majority-owned plants in operation or under construction at yearend 1995 are another source of periodic dispute, at least at the national level. These factories already have produced or are in the process of generating employment for a minimum of 350,000 people. Whether these positions just displace others in American-controlled manufacturing firms or simply are the result of takeovers is of little interest to government officials at the local level. Many state economic development offices continue their active courtship of Japanese investors, even in the new era of slower investment growth. California, Ohio, Indiana, Tennessee, Oregon and Texas in that apparent order were the biggest greenfield plant winners over the 1991-95 time frame. These same states, positioned somewhat differently, also came out on top of the period's total addition list.
Notwithstanding the success of these six states relative to some others that traditionally have attracted considerable numbers of Japanese factories (Georgia, Kentucky, Michigan and Illinois, for example) as well as the differential local impact of plant closings, the roster of states with the largest concentrations of majority-owned facilities changed little between 1990 and 1995. California, the perennial leader in the state count, remained far ahead of its closest rival, Ohio, which, in turn, extended its lead on number-three Illinois. This trio was followed by Georgia and Indiana. Bunched together after them were Michigan, Kentucky, Texas and Tennessee. North Carolina rounded out the latest top 10 list. Missing the cutoff 60 plants were, in descending order, Washington, Oregon, New Jersey, Pennsylvania and New York.