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US-Japan Auto Talks May Yield Little

Lower-cost markets in Southeast Asia could be beneficiary

THE auto talks between the United States and Japan have sounded thunder and fury recently. But what happens if Japan gives in to US demands to buy more US cars and car parts?

The answer may be: not much. America has watered down its goals so much since talks began in July 1993 that results may not be better than previous pacts, which produced little change in Japanese market behavior.

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US negotiators, critics here charge, have lost sight of market economics and US business interests in well-intentioned attacks on the Japanese regulatory system. The costly yen is driving Japanese carmakers to move manufacturing to major markets and buy more parts overseas. In the case of parts, the advantage likely will go to imports from low-labor-cost manufacturers in China and Southeast Asia. In March, when Delco Electronics, a subsidiary of General Motors Corporation, announced plans to beef up auto-parts sales in Japan, it said components would come from Mexico and Singapore.

At the low end of the auto-parts market in Japan, 50 years of protection has created an oversaturated industry that leaves little room for outside competition, especially when Japanese auto partsmakers are importing many wares from Asia. Keisuke Takebe, a general manager at Nissan Motor Company, says half of Nissan's partsmakers have moved to Taiwan and Southeast Asia. "[A]ll the labor-intensive parts ... are moving out," he says. Parts made in Indonesia, for example, are 35 percent cheaper than those from Japan. Both Nissan and Toyota Motor Corporation are considering importing sports vehicles from their Southeast Asian factories as well.

Japanese and US carmakers are agog at the potential for markets other than Japan, where sales have been stalled for four years and where cars are used more for leisure and showing off.

Nissan predicts the Asian car market in 2000 will total 8.3 million units, be larger than Japan's, and have increased 68 percent from 1993. US manufacturers work with similar projections that make the foreign-car niche in Japan - 332,952 in fiscal 1994 - seem like small potatoes. Only 35,634 were shipped from the US by the Big Three automakers.

Even after three years of political fireworks over the Japanese auto market, the Big Three have made little more than token efforts. While there are 59 cars in the Japanese market originating in the US, only two have right-hand drive - the Jeep Cherokee and Ford Probe. The Big Three have dismissed the idea of retooling cars for the Japanese market on the grounds that the foreign-car niche was too small to justify the cost. Peter Boardman, senior auto analyst with UBS Securities in Tokyo, says the small number of independent Japanese auto dealers signed up by US automakers so far "shows how little investment the Big Three have made as opposed to how closed the market is."

The $52 billion Japanese market for auto parts is another matter. A 1992 pact helped US firms make inroads selling parts to Japanese transplant factories in the US. But there's room for foreign partsmakers to expand: Last year, Nissan bought only 3 percent of its parts from foreign makers, while Mitsubishi Motors bought 1 percent. Most new orders are likely to come from Japanese factories abroad, rather than the domestic Japanese market.

For some US partsmakers, the logic of maintaining an office in Japan is to develop ties with Japanese car companies as they expand elsewhere in Asia. "I don't think you can bypass Japan in the Asian region," says Veigh Nielson, Asia Pacific managing director of the automotive-systems division of Johnson Controls.

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PARTLY because the Japanese have managed to shift the focus in the auto negotiations toward market ideology, the US has backed off its first stance. In 1992, US officials admit, they were considering pressing the Japanese to accept specific market-share targets for auto parts and demanding the opening of Japanese dealerships to US cars.

Japanese negotiators rejected hints of specific market shares and waged a campaign over the last three years that painted the US as a "managed trader" and wrecker of the multilateral trading system. In recent weeks, the campaign has produced successes: European Union Commissioner Leon Brittan has chastised the US for endangering the World Trade Organization by ordering sanctions against Japanese luxury-car imports.

The US long ago relinquished market-share targets in auto negotiations. Instead, negotiators, led by US Ambassador Walter Mondale, have pushed into market ideology, reacting defensively to Japanese charges of managed trade and attempting to restore balance by adding deregulation to the list of negotiating targets.

The deregulation issue leads the US into Japanese auto inspection. Since 1951, the "shaken" system, which requires costly, intensive inspections as often as every six months, has been an industry mainstay. Most of the nation's 83,000 repair shops are linked to manufacturers and politicians. Journalist Taro Yayama estimates that in June 1993, before the Liberal Democratic Party split, 195 members received contributions from the "auto family," including repair businesses.

Mr. Yayama points out the system has made it a luxury to buy foreign cars, since buyers will spend up to four times as much for inspections - already 80,000 yen (US$940) to 150,000 yen for mid-sized Japanese-made cars.

While the system is a burden for consumers, there's little evidence simpler procedures will benefit US partsmakers. They would need to invest heavily in local distribution and sales networks to make an impact.

US officials admit their objectives are thin. The US wants a statement from the Japanese government "encouraging" automakers to open dealerships to foreign cars, buy more foreign parts, and change the shaken system.

But some observers argue that the problem with the US position is lack of ambition. "Two-and-a- half years ago ... it would have been possible to reach an agreement like the semiconductor agreement," argues a US businessman in Tokyo. "Unfortunately, the administration has squandered its credibility."

The US-Japan semiconductor pact of 1986 was a success: Foreign semiconductor sales rose from 6 percent of the Japanese market in 1986 to about 24 percent today.

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