693.001 Manchuria/21
The Consul General at Mukden (Myers) to the Secretary of State
[Received April 26.]
Sir: I have the honor to refer to my confidential despatch No. 463, of April 26, 1932,15 in regard to the “Open Door” as affected by the Japanese domination of Manchuria and to state that the situation described therein has developed along the lines indicated. As is well known, the Japanese position in Manchuria since the writing of that report has been consolidated and Japan’s control now extends throughout the economic structure of the new state as well as the political. Even Chambers of Commerce, it may be mentioned, have [Page 99] their Japanese advisers. As Japanese industry has made great progress in recent years and has reached a point where it can supply many of the products required by the markets of Eastern Asia at prices considerably below those of producers in occidental countries, thanks to a low wage scale and a depreciated currency, it is not surprising that Japanese manufactures now dominate this market to an extent never before attained. That these conditions have greatly affected the trade of the United States and other foreign countries with Manchuria is not to be wondered at. In view of these realities, a pre-“Incident” (1931) conception of the “Open Door” is misleading and to no purpose. It is the purpose, therefore, of this despatch briefly to point out some of the changes which have taken place more particularly in their relation to the “Open Door” and to show the trend toward Japanese monopolization of the trade of Manchuria. As having a direct bearing on this subject, reference is made to Japan’s essentially colonial policy for economic construction in Manchuria consisting of, as unofficially defined by the military, (1) “the unification and rationalization of the economic systems” of the two countries, (2) the consolidation of their positions and (3) the “utilization of the economic resources of the two countries for improving their economic positions in the world” (my despatch No. 661, of March 27, 1934,16 entitled “Economic Construction in Manchuria”).
Foreign Firms
As foreign trade activities in South Manchuria have been centered at Mukden, brief reference to the change in the number and condition of foreign firms may be of interest. The following table gives part of the picture:
| 1931 | 1934 | ||
| American | 16 | 11 | |
| British | 12 | 9 | |
| French | 11 | 2 | |
| German | 19* | 9† | |
| Total | 58 | 31 | —Decrease 46.55% |
It may be explained that a number of German firms including contractors were engaged chiefly in supplying equipment to the Arsenal or doing contracting work for it. Several other firms which were in this category, notably Bohler & Company Steel Works (Austrian), and Gran & Company (Norwegian), have also been closed as has been Skoda Works (Czechoslovakian), a large supplier of railway equipment in recent years. In line with the general trend, it may be mentioned [Page 100] that the local business of a large German firm, Siemens China Company, has been taken over by its affiliated company in Japan, the Fusi Denki. It was felt, it is understood, that this market may now be more advantageously reached in cooperation with Japanese interests as is the market in Japan.
The business of the majority of the remaining firms is poor and it is only a matter of time until a number of others will close their branches. At least two American firms—probably a third one—will be closed this year. With a few notable exceptions it may be safely said that except for distributors of highly specialized products, such as petroleum, motor cars, dyes, sewing machines, et cetera, the business of foreign importers is no longer profitable.
Favorable Position of Japanese Firms
From the above it will be seen that Japanese firms are in an extremely favorable position in regard to the trade of Manchuria. Not only are economic factors generally in their favor but Japanese direction of the general economic policy of the state as well as Japanese control of all public utilities including transportation and other means of communication and of the major industries assures the routing of trade in the desired channels. It is stated on good authority that orders have been given, presumably by the military, to at least some controlled enterprises which formerly were purchasers of foreign equipment to buy only Japanese products unless not procurable. As far as is known, no major railway or electrical equipment has been sold by local foreign firms in Manchuria since the “Incident”, lines in which they were formerly very active. According to available information, the only contracts of any importance awarded local firms have been the following: (1) a contract in 1933 for the construction of a concrete railway bridge on the Taonan-Tsitsihar Railway to Lothar Marcks, a German contracting firm, which amounted to about Yuan 130,000; (2) a recent contract to a German firm for supplying twenty “Büssing” Diesel motor driven railway trucks for the State Railways for short run passenger traffic—six were sold in 1933.
As showing the marked difference between Japanese and foreign prices of some products, a few competitive prices quoted last year may be of interest. The Swedish Government, presumably through a German firm, offered reconditioned 75 ton locomotives, built in 1910, for Yen 75,000 each to the State Railways. The South Manchuria Railway Company’s price for 100 ton second-hand locomotives, built in 1920, was about half that amount. It was learned that new Japanese locomotives, both Mikado and Pacific types, were supplied at Yen 78,000 each. According to reliable information a British firm quoted a price of Yen 0.57 per kilogram for stay bolt iron while the Japanese quotation was Yen 0.15 per kilogram. The Japanese product stood the better test. Present prices of ordinary Japanese roofing paper, it [Page 101] may be added, are only about half of those of corresponding American brands.
It is alleged that Japanese firms generally operate on a much smaller margin of profit than do foreign firms. As an instance, one firm reported having quoted prices for certain material, for which it holds the agency, to a Japanese firm which in turn submitted quotations based on a gross profit of one and a half per cent. It has also been learned that Japanese firms last autumn were importing loose skinned Japanese oranges on a net profit basis of approximately two sen per box of about 40 oranges.
Some Cases of Discrimination
The principal cases of discrimination affecting American interests, which relate to the preferential duty treatment given Japanese light oil and to the distribution of fire insurance on Government property, have been treated in detail in various despatches from this office, notably my despatch No. 881, of January 12, 1934 to the Legation entitled “Complaints against ‘Manchukuo’ Customs Policy” and my confidential despatches numbered 841 and 891 of October 6, 1933 and January 31, 1934, to the Legation17 concerning fire insurance business. These cases are fair examples of the obvious purpose of the authorities to further Japanese interests whenever it is deemed expedient to do so.
It will be realized that under existing conditions in Manchuria discrimination in favor of Japanese trade may be accomplished in many ways which are impossible to detect. When cases of discrimination are discovered, it is frequently impossible to secure proof of them. A few cases in point may be mentioned. Chinese living in the interior have on several occasions made the statement to an American firm that they are unable to buy American motors as the light and power company, Japanese controlled, would refuse to connect them. This, it may be added, has not occurred at Mukden. One merchant made the statement that he imported goods from Japan, valued at over Yen 100 with invoice attached, through a prominent Japanese forwarding agent and that the duty assessed was only Yen 1.50 instead of over Yen 10.00 as provided for in the tariff. The merchant in question made the observation that the Customs staff (at Antung) seems to be more preoccupied with advancing Japanese trade than collecting duty. It is asserted that many Japanese shippers grossly undervalue their imports and that their valuations are accepted by the Customs for duty assessment purposes while valuations of foreign shippers are much more closely scrutinized (my despatch No. 652, of February 21, 1934,18 regarding alleged duty-free [Page 102] entry accorded Japanese playing cards by “Manchukuo” Customs).
The opinion prevails that cases of discrimination in respect to the purchase of goods are rare; the ability of the Japanese to underquote all competitors would seem to render discrimination unnecessary. My inquiries have uncovered only one case falling within this category and this occurred in April 1932. It related to the purchase of a circuit breaker for a boring mill by the Huangkutun Workshops. The order was given to a Japanese firm for a Japanese manufactured product although British goods were quoted at a lower figure. In this regard the British firm commented that Japanese merchants can almost always offer quicker delivery than foreign firms and further that as has been a common practice such a short time may be allowed for submitting prices that Japanese firms are almost certain to secure the order.
Trend Toward Japanese Engrossment of Market
As illustrating the marked tendency of the Japanese to give their business to Japanese firms, a foreign firm reported that it went to considerable expense to submit to the Showa Steel Works one bid each for American, British and German ball mill equipment because it had learned on good authority that such equipment was not made in Japan and that although American equipment was admittedly preferred American prices were too high. The tender for British equipment was the lowest of the three but later information was obtained that the order had been given to a Japanese manufacturer at a ridiculously low price, so low, in fact, that it was thought the figure was incorrectly given. At any rate the business went to a Japanese firm. This engineering firm stated that it is not selling any products of the types that are produced in Japan. Last year a Czechoslovakian firm had a similar experience in regard to supplying equipment for the new sulphate of ammonia plant.
Another firm engaged in marketing railway specialties which formerly did considerable business in Manchuria recently made the statement to me that it was given no opportunity of putting in bids for the requirements of the State Railways and that small Japanese firms are treated in a similar manner—as far as is known, no foreign firms are notified of their requirements. It is understood that the Direction General keeps a list of firms which have formally applied for the listing of their names and that when supplies or equipment are to be ordered only the firms that it considers qualified are notified. The manager of this firm expressed the opinion that local foreign companies have no opportunity of selling merchandise which is competitive with Japanese and that goods not procurable in Japan will usually be ordered through Japanese firms. Except railway ties sold through [Page 103] a large Japanese firm, I know of no American materials supplied in the past two years for the use of the State Railways.
The manager of another foreign firm handling lines of American and British merchandise, chiefly hardware and office supplies and equipment, recently stated that although the firm is doing a good business now, he is convinced that within a few years all their lines will be marketed through agents in Japan, some of whom have already extended their sales operations in this territory. It is only natural that the manufacturer is not particularly interested in this development so long as he receives orders.
In order to obtain a more realistic picture of market conditions, brief reference is made to several other factors. A practice that is not infrequent is to allow only a short period for the filing of tenders, the notice given foreign firms in regard to a recent tender for transformers, for instance, being two weeks. This period is adequate for Japanese merchants as mail matter may be delivered in the principal centers of Japan within four or five days. For the agents of occidental manufacturers it is extremely short as telegraphing is scarcely ever warranted especially under existing conditions. Another factor favoring the purchase of Japanese railway equipment, for instance, is the fact that the personnel of the State Railways, executives, superintendents, foremen, in fact every one in authority, are Japanese, very few of whom have knowledge of any equipment other than Japanese.
It will be recalled that the British-American Tobacco Company on January 30, 1934, opened a small factory—the Keystone Tobacco Company—at Liaoyang, 40 miles south of Mukden, for the purpose of manufacturing cigarettes for sale in the railway zone. This step was found necessary because the output of Japanese factories which are located in the railway zone are assessed the consolidated tobacco tax only on goods shipped out of the zone while the British Cigarette Company, in the Commercial Settlement at Mukden, is obliged to pay this tax on its whole output wherever marketed. Permission to erect the new factory was secured with great difficulty and only after a considerable lapse of time. Subsequently the negotiations for a suitable site were protracted for over six months. In this connection it may be mentioned that the company obtained assurances that although the eventual establishment of a tobacco monopoly is planned its realization in the near future is not contemplated.
Concerning the company’s tax arrangements with the “Manchukuo” Government it has been learned that they are being carried out with less friction than under the previous regime.
Conclusions
It will be seen from the above that the business of foreign firms in Manchuria is disappearing in the same way it did in Japan and Korea. Undoubtedly in marketing highly specialized products [Page 104] foreign firms may profitably continue their Manchurian business but according to all indications those engaged in general business will be obliged to close down in the face of Japanese competition. Japanese goods in so far as they are procurable will supply the market; for the marketing of foreign goods Japanese importers will, in most cases at least, occupy a more favorable position than foreign firms. Furthermore, wherever possible, indications are that large enterprises will endeavor to purchase foreign goods direct from the manufacturer rather than through foreign middlemen. The few foreign interests which may continue to operate successfully in Manchuria will find it profitable either to associate themselves with Japanese as copartners or to secure the services of high-class Japanese employees. This development is already noticeable. Parenthetically, the Manchurian adventure has been expensive for Japan and strenuous efforts will be made to seek compensation in one way or another.
It is probably true, as some business men observe, that many Chinese prefer to do business with foreign firms rather than Japanese and that lines which are marketed mainly among the Chinese will still be advantageously handled by foreign firms but that where the demand emanates from the Government or Government controlled enterprises Japanese firms afford the better representation. However, indications are that the Chinese market is susceptible to influence in so many ways that Chinese merchants will only rarely have an opportunity safely of giving expression to their preferences.
A re-orientation of foreign business in Manchuria is now taking place. Not only have some American products, such as for instance railway and electrical equipment, telephone installation equipment, et cetera, been supplanted by Japanese manufactures but others are being distributed in a gradually increasing degree by Japanese agents. Even such strongholds of American trade as petroleum products and motor vehicles are to be invaded by Japanese concerns now in course of organization under “Manchukuo” charter, e. g., The Manchuria Petroleum Company and the T’ungho Motor Company (an assembly plant for heavy duty trucks in which Japanese motor car manufacturers are interested;—it will be reported upon in the near future). It is clear that the Japanese are not only aiming at the engrossment of this market but in so far as possible at the attainment of self-sufficiency, particularly in industries connected with national defence. A trade weapon that seems likely to be used in furthering Japanese–“Manchukuo” economic unity to the detriment of foreign trade is the import tariff, comprehensive studies of which are now being made. Economic progress in Manchuria, however, is bound to occur and it is reasonable to expect that it will bring about increased world trade in which American interests, directly or indirectly, should benefit.
Respectfully yours,