Beware The Trojan Horse

Inside those Japanese auto plants are the seeds of destruction for thousands of small U.S. companies
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It will be a most bizarre legacy of Ronald Reagan, that most nationalistic of Presidents, that he presided over one of the great losses of American sovereignty. I refer neither to a military defeat nor to a setback in the Cold War. I'm talking about the wholesale surrender of the most American of industries -- the auto industry.

To review: the monumental Reagan deficits begat the strong dollar, which begat a huge trade deficit, which begat a weak dollar. In the past two years, the Administration's campaign to bludgeon the dollar to its knees was supposed to set foreigners to buying American products. Instead, they simply set about to buy the United States itself.

Prime real estate and common stocks were the first to fall from American ownership, followed by forests, farmland, and eventually entire companies. By the end of 1986, this reverse investment in the United States had reached $1.3 trillion, a good part of it stashed away in portfolio accounts in London, Tokyo, and Geneva.

"America is selling off the family jewels to pay for a night on the town," warned Congressman John Bryant, a Texas Democrat. Picking up on the same metaphor, Peter G. Peterson, the investment banker and former Secretary of Commerce, wrote ominously about the future in a cover essay for The Atlantic magazine entitled "The Morning After." Time's cover was more straightforward: "The Selling of America." One Japanese tycoon who bought $2 billion worth of U.S. real estate in a recent 18-month spree told The Wall Street Journal that the United States now has "the charm of a developing nation." I doubt we should feel complimented.

Now comes the latest assault on American economic sovereignty, which goes by the name of direct investment -- foreign companies opening up subsidiaries and manufacturing operations here in the United States. From a scant $31 billion when Jimmy Carter took office, direct investment had reached $209 billion by the end of 1986. And much of it has come from Japanese car manufacturers that, having reached a limit on the number of automobiles they can export to the United States under existing trade agreements, now propose to finish off the domestic industry by assembling still more cars here.

It is hardly surprising that the Japanese carmakers, their growth hemmed in by "voluntary" import restrictions, would look to overseas operations as a way of increasing their share of the American market. What is remakable is that American governments -- states and counties and cities -- would fall so completely for the ploy that they are offering multi-million-dollar subsidies to the Japanese manufacturers.

Kentucky, for instance, "landed" Toyota's new $800-million assembly plant by offering $125 million in incentives. The state bought the vast tract of land that Toyota had selected and spent $25 million preparing it for construction. The Lexington Herald Leader, calculating the interest on the $92-million property-bond issue and other costs that the state hesitates to disclose, puts the value of the total incentive package at $354 million -- or more than $115,000 for each of the 3,000 jobs created, which could be something of a record.

Kentucky is by no means unique among the struggling industrial states of the Rust Belt that have joined in on this beggar-thy-neighbor act. Illinois, going after the new Diamond-Star Motor sports-car plant, a joint venture between Chrysler and Mitsubishi, ponied up subsidies and incentives of more than $150 million, or an excess of $50,000 for each of the 2,900 jobs that the plant will generate. In a similar manner, Ohio got its new Honda assembly plant, Michigan its Mazda operation, and Tennessee signed up Nissan for a car and truck factory. So dismayed was Indiana at being left behind that it went all out to bag the $500-million Subaru-Isuzu venture, which broke ground last May. The Hoosiers chipped in a cool $86 million, the largest incentive that that state had ever made to an industrial prospect.

Indeed, so completely have the Japanese got the not-very-united states dancing to their tune that a "goodies book" of state giveaways now circulates among industrial planners in Tokyo. And if written assurances are not enough, the governors are happy to deliver them in person: in the past couple of years, a majority of the 50 governors have visited Japan.

"These states are just doing what they can for their citizens," explains Charles D. Preston of the Indiana Department of Commerce, who helped to bolt together the Isuzu deal. "We sure would hate to see the automotive industry shift south, to Texas or Tennessee." He continues, "Economic development is very important to the states, and we'll do whatever we have to do to get it."

Everything, it seems, including bringing the wooden horse inside the gates of Troy. For these otherwise alluring Japanese auto plants, with their high-paying, high-visibility jobs, are the means by which an important U.S. industry will be destroyed from within. It is not only that every job added at a new Honda or Toyota plant will likely result in at least one job subtracted from an assembly line at General Motors or Ford or Chrysler -- although such is the mathematics of an American auto market that is expected to remain flat for the next four years. It is also that every job lost at the Big Three will result in two or three additional jobs lost in those thousands of smaller companies that supply these American firms with everything from the parts in their cars to the machines in their factories to the professional services contracted by their executives.

Auto parts would be the hardest hit. Today, with sales in excess of $215 billion annually, auto parts represent roughly two-thirds of the automotive sector of the American economy. Parts suppliers employ 1.6 million Americans -- about twice the number of people employed by the Big Three -- and nearly 80% of those work in small and midsize companies.

Will the local Nissan or Honda plant buy parts from these companies to replace the orders once placed by GM, Ford, and Chrysler? Don't bet on it. Last year, about 500,000 cars were produced by three transplant assembly lines in the United States, and an estimated 80% of the components were made in Japan -- including most of the engines, electronics, and other high value-added items. If that ratio were to continue into the future, when production at Japanese-owned facilities in the United States is expected to reach 1.7 million cars and trucks, it could well mean an additional job loss of half a million in the auto-parts industry by 1990.

In an effort to head off these losses, Democratic Congressman John LaFalce of New York has proposed domestic content legislation that, for trade purposes, would treat cars assembled in the United States as imports unless they included a certain percentage of domestically manufactured components. But the Japanese have anticipated such a defense. In a classic follow-the-flag maneuver, they have begun opening their own parts companies here as well. In the past two years, they have more than tripled in number, from 50 to 150. By 1990, the U.S. Commerce Department expects the number to reach 300.

"A lot of American suppliers aren't even conscious of this because most of these Japanese companies haven't come on-line yet," says Donald Conover, an industry consultant. "And by the time they are felt in the marketplace, it will be too late to do much about it."

One company that will not be caught unawares is the Denver-based Gates Corp., a manufacturer of, among other things, automotive belts and hoses. Gates has two plants and a distribution center in Illinois, and while business has been good, it still has unused capacity. So imagine its interest when it learned that Illinois Governor James Thompson had handed Mitsuboshi Belting Ltd. a $2-million interest-free loan and $500,000 in training funds to set up shop in the state -- all that on top of the free land and road donated by the city of Ottawa. And imagine its shock when, after the deal was all signed, it discovered that Mitsuboshi already had a long-standing contract to supply belts to Mitsubishi Motors Corp., and will be supplying Mitsubishi's Diamond-Star operation in Illinois.

"Our own employees' taxes were handed to a foreign company to set up a plant in direct competition with them -- and this at a time when we needed business," gripes Gates spokesman Lewis Keim. Keim says it would not be so grating if Gates could turn around and build a plant in Japan to compete for business there. It tried once, but given Japan's infamous protectionist policies, it failed.

Many auto suppliers are afraid to speak out against the subsidies to foreign-owned manufacturing facilities lest they miss out on a contract from one of these new plants. But so infuriated was Gates that it took its case to the Illinois state capital. In a private meeting, the governor told company officials that he had offered the subsidy because if he hadn't, another state would have -- an otherwise accurate statement that missed the essential point. A more receptive audience was found in the Illinois legislature, which unanimously passed a bill calling for studies of the economic impact on existing jobs. Thompson, however, vetoed the bill in September, and the next day took off on a trip to Europe to offer more subsidies for still more foreign transplants.

At a U.S. Senate hearing on industrial policies earlier this year, auto industry executives said the issues raised by Japanese transplants went well beyond the question of protecting "uncompetitive" American companies. Among those testifying was William Thornton of Stant Inc., which last year sold $50 million in radiator and fuel caps from its plants in Indiana and Arkansas, none of them to Japanese manufacturers. "While we . . . do not fear competition," Thornton said, ". . . the specter of Japanese suppliers with brand-new facilities, operating in free trade zones, funded by overeager state and local governments, and guaranteed business by their Japanese parent company, is not our concept of fair competition."

Moreover, it would be a mistake to think that it would be only parts suppliers who would be shut out if the Japanese are able to gain control of a substantial portion of U.S. auto production. That, anyway, was the considered view of Julian Morris, president of Automotive Parts & Accessories Association Inc. (APAA), who testified last summer to the House Small Business Committee. "Japanese bankers will finance the new plants and Japanese construction contractors will build them," Morris warned. "Japanese capital goods will equip them. And a good deal of Japanese steel will be used to build and equip the factories. Japanese investment, like trade, means keeping the money in the family."

In the face of this challenge, the Reagan Administration stands silent and inactive. Ideologically wedded to states' rights, it has done nothing to try to curb the war among the states in offering incentives to the Japanese transplants. "Our unsolicited advice to the states on curbing the use of incentives has been disregarded," was about all that a Treasury Department official could offer up to the inquiring House committee. And ideologically wedded to free trade, the Administration has also opposed any initiatives that would restrict Japanese investment or require any level of domestic content in U.S.-made cars.

These are nice-sounding concepts, states' rights and free trade, but they are terms of an earlier era. They lose their meaning in a world in which individual states can buy the rights to set national and international economic policy for an entire nation. And they lose their moral and political appeal when the countries we compete with don't honor them at all.

"We are being played for suckers," complains Lee Kadrich of the APAA. And history may record that the biggest sucker of all was a tough-talking President named Ronald Reagan.

Last updated: Dec 1, 1987




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