Here Comes The Sun — page 2

Many major Japanese companies are also completing comprehensive restructuring programs that are leaving them leaner than ever before. After much resistance, they are finally firing unnecessary workers, outsourcing noncore operations, cleaning up their balance sheets and scrapping excess capacity. According to Merrill Lynch, big Japanese companies disposed of nearly $50 billion in inefficient tangible assets in 2003, or just over 1% of GDP. Such streamlining helped Japan's largest companies report operating profits last year that were almost 20% higher than the previous peak year of 1990. And according to a survey by newspaper Nihon Keizei Shimbun, corporate Japan expects to report new record profits for the fiscal year that ended on March 31.

To regain profitability, Hajime Sawabe, CEO of electronic-components manufacturer TDK, says in the past two years he has closed 10 factories worldwide, laid off 8,000 workers and reduced inventory almost by half. "We realized we could not return to the break-even point the way we were headed," he explains. "We did what needed to be done." Over the past three years, Matsushita president Kunio Nakamura has shuttered dozens of factories and cut the company's domestic work force by 20%. Similar programs are under way at a variety of Japan's other well-known companies such as Sony, Toshiba, Fujitsu, Komatsu and Nippon Steel. With TDK now back in the black, generating $100 million in profits last year, Sawabe says he is ready to invest in new product lines and more R. and D. And he is not alone. Corporate capital investment accounted for approximately half of Japan's GDP growth last quarter as its companies retooled to meet increased international competition. The business community's complacency of the 1990s has gone, says Sawabe: "We all realize now that reform and restructuring is a continuous process."

	[Before,] I thought I'd have to hang myself. It's is nothing like the bubble years, but things are improving. —DAI TAJIMA,  Tokyo construction worker

Positive as these developments are, they pale in comparison to the impact on Japan of China's epic economic rise. Japanese vendors can barely keep pace with the mainland's insatiable appetite for basic materials, construction equipment and commodities. In recent years, exports have supplied half of Japan's total GDP growth—and 80% of Japan's export growth over the past 12 months came from China alone. Just two years ago, Japan exported nearly twice as much to the U.S. as it did to China, Taiwan and Hong Kong combined. Last year, exports to greater China exceeded those to the U.S., traditionally Japan's largest trading partner. Masahiro Sakane, CEO of heavy-construction-equipment maker Komatsu, says his company's annual growth in exports to China has ranged between 50% and 100% over the past three years. He expects Komatsu's sales to the mainland to continue growing by at least 20% a year, topping $1 billion—12% of total sales—by 2005. "And that's the conservative estimate," he says with a gleeful chuckle.

Indeed, 2003 may well go down as "The Year Japan Learned to Stop Worrying and Love China." A few years ago, fear of the dragon dominated Japanese business discourse: a sense of resentment and persecution accompanied talk of the "hollowing out" of Japan's industrial base as many of its manufacturing jobs left for the mainland and a flood of cheap Chinese exports contributed to Japanese deflation. Now, the downsides of China's ascendance seem outweighed by the lure of its 1.3 billion people as a major new export market—especially since long-term growth in Japanese domestic consumption is likely to be relatively sedate.

Combi, a Tokyo-based maker of baby clothing, children's toys and adult exercise equipment, has successfully operated factories in China since 1992. "Chinese factories have become so proficient that we are now considering moving our most complex products like car seats and exercise bikes to China as well," says Shoji Shibata, vice president in charge of international operations at Combi. But the real prize, he maintains, is not the continued exploitation of China as a low-cost source of labor and raw materials—Combi could set up more factories in Indonesia and Vietnam if that were the bottom line. No, the true allure of China lies in its fast-rising standard of living, especially in coastal cities like Shanghai. "There are only 1.1 million babies born in Japan every year, and even that number is declining. But there are 17 million babies born in China," Shibata says. "We are prepared to wait many years, but when a critical percentage of new Chinese parents have a high enough income to afford our upscale products, this will be a huge market for us."

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