we wonder whether the United States, through our piecemeal, uncoordinated programs, can continue to match the long-range visions of the Japanese. Just as we had a "vision" in the 1960's to reach the moon, we need a "vision" in the 1980's of the type of industrial progress we need to achieve a strong economy in the 21st Century.

ROBOTS

Japan is the world leader in robotics-the use of machines to operate other machines to perform repetitious and often dangerous assembly line work. Not only can the use of robots help hold down costs and improve productivity, but it can help improve quality by removing the human error that creeps into monotonous and difficult jobs.

While much of the technology of robots originated in the United States, Nomura Securities estimates that there are 135 Japanese manufacturers of robots, compared with a total of only 40 to 50 in the United States and Western Europe. Reportedly, the number of industrial robots in operation in Japan is about 10 times the number in America and Europe. "There are currently 63 college and public research labs in Japan studying robotics with work now beginning to stress recognition (visual and tactile), manipulating and moving functions." 5 In 1980 production of robots is predicted to increase 30 percent to ¥43 billion and by 1985 will be a ¥195 billion a year business."

This robot lead has ominous implications for ever-increasing Japanese cost and productivity advantages. The trend lines are frightening, as revealed by the following statement to the Subcommittee from the Ford Motor Company:

1. It is extremely unlikely that Japanese productivity is significantly worse than U.S. productivity levels for subcompact cars.

2. Japanese productivity might be 15 percent or more better than U.S. productivity.

3. Our best guess is a Japanese productivity advantage of 10 percent worth $80

a car.

The heavy expenditures by Japanese auto makers in automation have been well publicized. A recent report in Ward's Auto World (February 1980) indicates that usage of robots, as defined by the Robot Institute of America, included about 2,000 in the United States, 1,000 in Europe, and 13,000 in Japan. In the United States, U.S. auto manufacturers buy about half of robots sold. If we assume that in Japan half of the robots are used by the auto companies, Japanese manufacturers would be using over six times as many robots per million vehicles as are U.S. manufacturers. Such robot use is not necessarily an index of high productivity, but it does suggest a major effort to reduce the already low labor costs in Japan. Since 1965, productivity in the Japanese automotive industry has risen at about 81⁄2 percent a year, though the rate of improvement has slowed-to about 32 percent between 1975 and 1979. In the United States since 1965, productivity has risen at a 21⁄2 percent rate-the same as over the past 4 years.

Although the Japanese and United States data are not exactly comparable, we believe they are indicative of the basic trends."

Japanese workers appear to accept robots as eliminating some of the dullest and most dangerous factory jobs, and as helping improve the competitiveness of the company. Americans must realize that robots are no longer just toys for use in Star War adventures. A plant full of Japanese R2D2's means a loss of jobs for American humanoids. Development and use of robots by Americans for American purposes, on the

5 Memo from Tokyo Embassy, A51, p. 9.

6 Nihon Keizai, July 1, 1980.

7 Hearings before the Subcommittee on Trade, "World Auto Trade: Current Trends and Structural Problems", March 7, 1980, pp. 96, 97.

other hand, can mean more competitive production, job up-grading and a safer, better workplace. To catch up with Japanese leadership in this area we need a creative partnership between government and industry. We note MITI's leadership in encouraging experimentation and use of robots:

(1) With MITI encouragement, if not direction, a robot leasing company, Japan Robot Lease, was founded in April, 1980 with the initial paid-in capital of ¥100 million. This company is jointly owned—70 percent by the JIRA members and 30 percent by 10 non-life insurance companies. The objective of Japan Robot Lease is to support robot installation by small- and medium-scale manufacturers and increase their productivity. As 60 percent of operating funds is financed by government subsidy (Japan Development Bank Loans), Japan Robot Lease will be in a position to lease industrial robots under conditions more advantageous than the ordinary leasing companies.

(2) MITI has arranged for direct government low-interest loans to small- and medium-scale manufacturuers to encourage robot installation for automating processes dangerous to human labor and for increasing productivity. The government has budgeted for fiscal year 1980 ¥5,800 million for these loans which are extended through the Small Business Finance Corporation, a government finance agency.

(3) MITI has permitted the manufacturer who installs a robot to depreciate 12.5 percent of its initial purchase price in the first year in addition to taking ordinary depreciation.

American efforts to catch up with the Japanese will require some form of similarly creative tax and innovation policies.

MACHINE TOOLS

Japan is becoming a major exporter of machine tools, and this will be a major area of future trade tensions. The Japanese are especially competitive in the development of highly advanced numerically controlled (NC) machine tools which operate with the use of microprocessors. The Japan Machine Tool Builders Association reported that domestic and overseas orders received by its major 68-member companies in 1979 totaled ¥436,361 million, up 44 percent from 1978.9 U.S. world exports of machine tools in 1979 rose 16 percent above the previous year to total $648.8 million, but imports zoomed by 46 percent to $1.04 billion, for an overall foreign trade deficit of $395.0 million.10 Moreover, U.S. exports to Japan accounted for just $48.3 million, making Japan our fourth largest consumer; U.S. imports from Japan totaled $353.3 million, making Japan our leading supplier, well over West Germany at $197.0 million.

Compounding difficulties, over half of the total demand for Japanese machine tools is now coming from the auto industry and its related sectors. Lack of American capacity in advanced auto assembly machine tools is choking the efforts of the auto industry to retool and compete with the Japanese. For instance, Nihon Keizai, in the May 20. 1980 edition, wrote:

Toshiba Machine Co., has set the target of its transfer machine sales to automakers in fiscal 1980 at ¥7,500 million, up 2.3 times from the year-ago performance. A spokesman for the company said, "We believe we will chalk up the ¥8,000million mark in transfer machine sales next fiscal year.'

8 Paul Aron Reports (No. 22), Daiwa Securities America Inc., July 3, 1980, p. 3. A similar leasing program helped expand the use and sophistication of computers in Japan.

9"Machine Tool Builders Are Swamped With Orders From Auto Companies," Nihon Keizai, May 20, 1980, 10 American Machinist, July 1980, p. 65.

p. 6.

Toshiba is now operating its transfer machine plants at full capacity to cater to domestic orders exclusively. The company finds it difficult to fully comply with new orders from abroad.

The spokesman said that his company could not afford to accept an inquiry received from Ford Motor last fall.

The situation holds true for other machine tool builders. The only hurdle facing the industry is the lack of capacity to keep pace with rising demand.

A spokesman for Hitachi Seiki Co. said. "Our company also did not comply with a bid from Ford." 11

How did Japan achieve her present status in the machine tool industry and where will she go from here? Magaziner and Hout in "Japanese Industrial Policy" explain:

In the early 1970's, government policy turned away from rationalisation, home market protection and stimulation, and export assistance measures, and towards research and development assistance to companies for whole plant sales abroad. The goals are to move Japan into the forefront of machinery technology, to build world market share by attacking the new growth markets in developing countries, and to build upon strong Japanese process industries to emphasise whole plant sales

The primary thrust of Japanese industrial policy in machinery is currently in research and development. The policy includes grants, loans, and tax subsidies

In total, between eight and ten billion yen per year is spent in direct grants for research and development in the industrial machinery industries in Japan. In addition, there is a complex series of loan programmes to stimulate research and development. Over the years, this lending, primarily carried on by the Japan Development Bank, has grown steadily and is now well over 30 billion yen per year, of which about eight to nine billion on average goes to industrial machinery companies

The final series of measures the government uses to aid technology development involves tax incentives for research and development. Twenty five percent of all new spending on research and development can be taken by a company as a direct credit; these credits were worth about 12 billion yen to the machinery industry in 1976. In addition, the government allows special depreciation on equipment. Although the impact of this provision is hard to measure, we estimate its annual value at roughly 5 billion yen.

From 1968 until 1975, a special depreciation programme existed for machinery embodying commercial application of new technologies. Regional property taxes as well as corporate income taxes were shielded by this programme, which assisted both users of new machinery and manufacturers. Overall, about 73 billion yen of equipment was covered in this programme during its existence.

Finally, tax credits are allowed on the dues for establishing co-operative research associations among companies. Over 25 of these associations have been created and the funds paid into them can be subtracted from the individual company's income as depreciation.

Over the past few years, grants and loans have accounted for 10 to 15 percent of all research and development in the machinery industry. Tax credits related to research and development have averaged about three percent of the industry's total tax paid.12

AIRCRAFT

The Japanese aerospace industry appears to be preparing for takeoff. MITI is the pilot, urging and cajoling in order to raise the domestic industry from a technologically backward assembler of U.S.designed military hardware to a full-fledged independent maker of commercial jet transports. By signing pacts with foreign makers of engines and aircraft, the Japanese aerospace companies are aiming at world markets. Japan's airplanes have so far had a negligible impact on the world market (the YS-11 project of two decades ago was not successful), but the picture may rapidly change.

U.S. aircraft presently are one of the few "big ticket" items we sell to Japan, and these sales have been important in cutting down on

11 Nihon Keizai, May 20, 1980, p. 6.

12 Magaziner and Hout, op. cit., pp. 78-79.

our bilateral trade deficit. Once Japan has her own commercial aircraft to sell, however, sales to Japan will probably be cut drastically and U.S. producers will face another major competitor.

There are numerous signs of the resurgence of Japan's aircraft industry. Mitsubishi, Kawasaki, and Ishikawajima-Harima_signed a contract to develop a jet engine with Rolls-Royce Ltd. of Britain. Another group of Mitsubishi, Kawasaki, and Fuji have a venture with Boeing Co. and Alitalia to develop and produce Boeing 767's and 777's. In addition, Japanese companies are beginning production of F15 jet fighters under license from McDonnell Douglas, as well as production of Lockheed Corporation's P3C anti-submarine aircraft. Japanese firms participate in building aircraft by subcontracting, consortiums, risk-sharing partnerships, and licensed production, to provide experience in various aviation processes.

Despite possible overcapacity in worldwide large commercial aircraft facilities, the Japanese, at government urging, are entering the field. The competition may well be good and creative, but it is also likely to eat into the market share held by the big three American. producers, thus reducing the value of a major area of U.S. balance of trade surplus. If aviation were not a MITI goal-part of the "vision" for the 80's-one wonders whether Japanese firms would be so active.

REASONS FOR SUCCESSFUL JAPANESE INDUSTRIAL CHALLENGE

There are a number of reasons for the success of Japan's industrial challenge in so many sectors:

1. Growth of Industries under Protectionism. From 1950 into the early 1970's, Japan was an extraordinarily protectionist country, which allowed her industries to mature and capture a large domestic market without serious foreign competition. This aided the ability of her firms to cut prices abroad in competition with foreign firms. Today, Japan is a relatively open market; she asks why we suddenly do not export more to her, and she expects that trade will be open and fair. In light of Japan's recent past, Americans often find such statements infuriating.

2. Emphasis on Exports. Japan has paid infinitely more attention to exporting than has the United States. Her foreign commercial information gathering-part government and part her unique general trading companies (Mitsubishi, Mitsui, etc.) is spectacular, and exceeds anything available in the United States. She is also an aggressive exporter. There have been many instances of dumping, but not as many as most assume. Her export aggressiveness can be seen in instances of price indexing and channeling.

13

3. Japan's Industrial Policy. There is a consensus in Japan on the need to export. This consensus has helped pull together a series of

13 Following are examples of price indexing and channeling:

"The Commission further obtained information that the Japanese mills preset price increases or decreases as follows:

"Re: Hot Rolled Steel Sheet in Coil

"DEAR CUSTOMER: We are very pleased to submit our quotation regarding the captioned subject for July, August and September shipments as below.

"According to the agreement among all Japanese integrated mills, the price shall be subject to escalation clause equal to U.S. Steel price increase or decrease. For example, if U.S. Steel increases 5¢ as of July 1st, our July shipment will be increased by 5¢.

"For 1972-77, price indexing was a marketing technique which appears to have played a role in the acquisition of imports' present share of the market for carbon steel mill products in the Western States. .

(Continued)

policies which have made Japanese firms very competitive: in wages, in the ability to obtain capital through tax relief and bank financing, in the formation of import and export cartels, and in support of government policies which have moderated the decline of certain industries (where imports could be expected to be larger) and supported the growth of industries of the future.

The development of industrial policy in Japan has been difficult and it certainly has not always been successful. But we believe that the "plans" and "visions" of the Economic Planning Agency and MITÍ have helped accelerate the Japanese economy into becoming our most serious competitor. We believe that there are lessons to be learned by America from how the Japanese have developed and implemented these policies.

(As the debate in the United States on "industrial policy" accelerates, references are often made to "Japanese industrial policy". We note the lack of a thorough understanding of exactly how Japanese policy is developed and implemented. We have asked the Subcommittee staff to prepare a brief "reader" of articles on Japanese industrial policy, describing this poorly understood subject.)

4. The Japanese industrial efforts have not always been successful. While the Japanese seem to be overwhelmingly successful in many fields, there are other areas where they have attempted to develop strong industries but have not succeeded:

Where the Japanese succeed, they displaced leading Western companies through a superior understanding of the competitive evolution of a business and a willingness to invest heavily for a sustained period of time. But they do not succeed in every industry. Japan has become the leader in steel but not in chemicals, in motorcycles but not in marine engines, and in consumer electronics but not in industrial electronics. In these less successful industries, the Japanese enjoy the same advantages of a well disciplined labor force, a supportive government, easy access to debt financing, etc. Yet the Japanese remain marginal producers. This is no accident. It largely reflects the more astute strategies of the Western competitors.14

This point raises the question, why have American and other world firms often responded poorly to the Japanese challenge?

U.S. RESPONSE TO JAPANESE CHALLENGE IN HIGH-TECHNOLOGY INDUSTRIES OF THE FUTURE

Following is a discussion of some steps we believe the United States can take to respond better to the Japanese challenge in high technology

areas:

(Continued)

"On the basis of discussions with Japanese interests and Western States importers, the Commission's staff found that the practice of channeling appears to exist among the leading trading companies and mills. Japanese trading companies have indicated that they compete vigorously for customers and sales in the Western market with U.S. producers and other importers as well as among each other. It would appear that once an account has been established by a Japanese trading company, other trading companies respect that relationship. The channeling of customers in this manner tends to reduce competition among the Japanese steel mills and trading companies. According to domestic importers this policy is honored by other trading companies either by refusing to grant additional quotes when requested or by making quotes which are not competitive with those of the trading company already servicing the account. The Commission has no information to suggest that other importers engage in this practice.

"According to the Japanese, the practice of respecting each others accounts once established is done in the interest of efficiency. Increased efficiencies arise from better mill predictability of tonnage requirements, better production planning, longer production runs, and lower unit costs. The Japanese mills are therefore able to maximize profits during periods of high capacity utilization and minimize losses during periods of low capacity utilization. The practice of channeling also reduces price competition between Japanese trading companies and thus permits cost savings to the trading firms."

Source: U.S. International Trade Commission, "Conditions of Competition in the Western U.S. Steel Market", Interim Report, Publication 951, March 1979, pp. 60-61.

14 Magaziner and Hout, op. cit., p. 1.