The Ambassador in Japan (Allison) to the Department of State
- Recent American Investment Problems in Japan
The recent experiences of representatives of three well-known American firms, Studebaker Corporation, Schaeffer Pen Company, and Coca-Cola Corporation, in attempting to make equity investments in Japan, underlines the Embassy’s long-standing belief (previously reported, most recently in Embassy Despatches 623 of October 9, 1953; 753 of November 5, 1953; and 919 of December 14, 1953),3 that responsible Japanese Government officials do not favor the introduction into Japan of equity capital. This attitude has been especially evident in those instances where private foreign capital, particularly American, desired to make investments involving majority ownership and control. However, it has also been applied in other cases. The chief difficulty, the Embassy believes, is the unwarranted fear that foreign capital will result in competition which will be detrimental to domestic producers. There is also reason to believe that this view is shared by a significant number (perhaps a majority) of business leaders. This attitude is adhered to adamantly despite the general admission that Japan is in need of foreign capital. Capital is desired but on Japanese terms. This is defined generally to mean in the form of loans or technological assistance agreements involving royalty arrangements for the transfer of patent and industrial know-how for a stipulated period. With only a few conspicuous exceptions, postwar investments have been almost entirely in these two categories. There is every indication that this trend will continue, as evidenced by the latest overt [Page 1624] display of hostility to the proposals made by Studebaker, Schaeffer, and Coca-Cola. Pertinent elements of the proposed investment plans of these three companies follow:
This company has concluded an agreement with the Daihatsu Company, a large manufacturer of three-wheel vehicles in Japan, under which the latter would produce Studebaker automobiles under a mutually satisfactory arrangement. In this case, Studebaker did not request either majority ownership or control. The extent of its participation was to supply knock-down assembly units, technical and managerial know-how, a limited amount of specialized machinery, and the facilities of its world-wide sales organization to market Japan-made Studebakers. It was agreed that as many parts as possible would be purchased locally, initially this was to include batteries, tires, upholstery, steering wheels, hardware, and accessories. Eventually, additional parts would be purchased in Japan. In this way, foreign exchange expenditures could be reduced to the very minimum and greater opportunities would be given to the utilization of local facilities, thereby providing employment, a new source of tax revenue and, perhaps most important, contribute foreign exchange to Japan. A lesser but by no means insignificant contribution envisaged was to make a high quality car (compared with domestic makes) available for domestic consumers at a price considerably below that currently quoted on Japanese cars. Moreover, the Studebaker would be suitable for the Japanese market because it is light, has a short wheel base and reputed economy in fuel consumption.
Several discussions were held between Mr. Dewey Smith, the Studebaker representative, who came to Japan to negotiate the agreement, and Japanese Government officials. He also sought the advice of Embassy officers. It was apparent that Mr. Smith was anxious to conclude the arrangement and was willing to make concessions to achieve his objective. He altered his proposal several times in the hope of satisfying Japanese Government officials but to no avail. He even went so far as to guarantee to the Japanese Government that the Japanese company would not ask for more foreign exchange than it earned, after a reasonable preparatory period. Furthermore, he obtained agreement from Studebaker dealers in Argentina that they would purchase 50 cars per month from Japan, if the price would not be more than $100 per unit higher than similar cars from the Studebaker plant in South Bend, Indiana. He also stressed that vigorous efforts would be made to expand the market in Southeast Asia for Japan-made Studebakers, and as a start, whenever possible, consideration would be given to [Page 1625] supplying the present market in certain Asian countries from Japan. In this connection, Mr. Smith indicated that during the year 1952 approximately 5,000 Studebaker cars had been exported from the United States to various Asian countries. He envisaged that Japan could secure 10 percent of this total.
The Schaeffer Pen Company has indicated interest in establishing a joint Japanese-American company to produce fountain pens for sale in Japan and abroad, primarily in the Far East. Under the proposed arrangement, the joint company would produce the pen cases and other parts, and only the fillers and points would be imported. A small allocation of dollars would be required, estimated at about $20,000 for a six-month period. The Schaeffer representative alleged that it had a market for such pens in PXs, Ship Stores and Far Eastern countries, and his company was willing to guarantee that the arrangement would generate more foreign exchange than requested for the importation of parts. In fact, he was reasonably certain that this would approximate half again as much as the dollar allocation required for such imports. He also sought to import ink concentrate for bottling in Japan, all other requirements, including bottles to be manufactured in that country.
This company indicated its willingness to guarantee the development of an export business in bottles, cases, advertising, ingredients, building supplies, coolers, and other allied products which, based on a conservative estimate, would exceed by 100 percent the dollar exchange required for syrup for domestic bottling and distribution. In support of this contention, the firm submitted a statement to the effect that, during the period July, 1952 through November, 1953, it had generated exports in these items of approximately $1,500,000 from Japan through sales to Guam, Okinawa, and Korea. Based on a recent market analysis, the company was convinced that it could expand this export business and make coca-cola available to the Japanese at a reasonable price. As both domestic and export sales increased, additional benefits would accrue to the Japanese economy in the form of capital expenditures for land, buildings, and machinery. The business would provide additional employment, tax revenues, improved techniques in the soft drink industry, and an expanded market for other Japanese raw materials and products.
Despite the repeated efforts on the part of Embassy officers over an extended period to impress upon Japanese officials the beneficial effects to the Japanese economy of various investment proposals of a similar nature to those made by the aforementioned companies, [Page 1626] no improvement in their restrictive attitude is discernible. As a matter of fact, from the discussions recently held on these three cases with officers in the Economic Affairs Bureau, Ministry of Foreign Affairs, there is reason to believe that the arguments have fallen on deaf ears. The same cliches were expounded; they all appear to be intellectual rationalizations for a fundamentally emotional attitude which manifests itself in fear and suspicion of foreign equity capital investment.
The Foreign Office officials indicated on behalf of the Ministry of International Trade and Industry (MITI) that these three projects were unacceptable. The principal reason given was that the firms involved were unable to positively assure that exports would actually develop, and therefore the proposals might constitute a drain on Japan’s limited dollar exchange holdings. This attitude is yet another example of the basic inability of many Japanese bureaucrats to think in terms of a market as dynamic and not static. Therefore, they discount the idea of selling cars or coca-cola or other items to Argentina or Southeast Asia or elsewhere in larger quantities at lower prices. They consider the proposals as subterfuges by the American companies to obtain a foothold in the economy. After the facade and rationalizations are stripped away, the basic reasons for the negative decision is clearly exposed, fear of competition.
As Mr. Otabe indicated so well, Studebaker would be very serious competition for the local industry, and how right he is! And how salutary it would be for Japan’s position in world markets if it were more competitive. Of course, the MITI officials are correct when they say that, if the Studebaker case were approved, other American and perhaps foreign companies may ask for the same treatment, and MITI would be hard put to deny such requests. This is further evidence that the evaluation of private foreign investment is not made in terms of the beneficial effects to the economy of Japan and its balance-of-payments position, as stipulated in the Foreign Investment Law, but rather on the basis of its effect on the competitive position of domestic producers and the degree of ownership or control exercised by foreigners.
As indicated in the reference telegram, the Ambassador plans to discuss this matter in most serious terms with the Foreign Minister. He intends to impress upon him that the United States Government considers this matter of prime importance, not only because it adversely affects our interests, but also that it is inimical to Japan’s own self-interest. He will stress that the restrictive attitude is contrary to the provisions of Japan’s Foreign Investment Law and is in violation of the spirit and the letter of the FCN Treaty. In accordance with the Department’s permissive authorization, [Page 1627] a formal protest will be made to the Japanese Government under Article VII of that Treaty, unless there is a discernible improvement in the investment climate in the near future.
Counselor of Embassy for Economic Affairs