Presentation by William C. Duncan
General Director, Washington Office
Japan Automobile Manufacturers Association

Toledo, Ohio

The U.S. Government in its April auto report stated that "a solid foundation of growth has been put in place on which the U.S. auto parts industry can build a closer relationship with, and increasing sales to their Japanese customers." This statement is an important recognition of what the automotive industries of Japan and the U.S. have accomplished together. Indeed, I would go further and suggest to you today that we have progressed beyond that foundation to the building of a truly global structure which will be seen as one of the major economic monuments of the twentieth century.

No longer can we effectively talk of automotive issues in stark confrontational terms between countries. Rather we must talk of competition and cooperation between companies at all levels. We must talk of meeting challenges, not numbers or expectations. How, for example, do we as manufacturers and suppliers meet the sometimes conflicting demands of the environment, safety, fuel efficiency, performance, quality, affordability and consumer choice? How do we develop and adapt to rapidly changing production technologies? How do we meet the requirement of a global market and still remain flexible enough to meet the differences between local markets and their unique consumer needs? Herein lies the questions and opportunities for manufacturers and suppliers alike.

A Very Positive Story
Today there is a very positive story to tell in U.S.-Japan automotive relations.

• According to Department of Commerce figures, U.S. exports of new vehicles to Japan in the first six months of this year were up 26 percent, imports down 34 percent.
• Imports so far this year supplied nearly 11 percent of Japan’s passenger car market (excluding mini vehicles less than 660cc) and some 34 percent of Japan’s large car market. In 1992 imports supplied 4.9 percent of the market. In 1995 import car registrations increased 31.2 percent in a market that grew at 4.2 percent. Through July of 1996 import car registrations grew at 15 percent while the market grew at only 0.3 percent.
• In the last fiscal year JAMA members purchased over 21 billion dollars of auto parts from U.S. suppliers. According to DOC numbers, in the first six months of this calendar year U.S. auto parts exports to Japan increased 11 percent; imports were down by about 10 percent. Japan now imports more U.S. auto parts than any other country in the world outside the NAFTA union with Canada and Mexico.
• The overall balance of trade with Japan so far this year has declined by over 10 billion dollars. Nearly half this decline is due to automotive products. The U.S. automotive products deficit with Japan three years ago was about 72 percent of the overall U.S. automotive trade deficit. During the first six months of this year it had fallen to 46 percent or 14.5 billion dollars, almost even with the rising U.S. automotive deficit with its NAFTA partners.

All of this, of course, did not happen overnight or for that matter in the last year. It happened as a result of a decade and a half of effort at the company-to-company, manufacturer-to-supplier level. The trade associations, JAMA and JAPIA, along with a number of U.S. trade associations have played and continue to play an important role in facilitating these efforts. Governments have also played a role. There have clearly been strong differences of view, some of which may still remain. Nevertheless, in constructive meetings such as the one we are holding today both governments have helped to identify opportunities and to provide information, education and encouragement.

Fifteen Years of Working Together
We have come a long way from the structure of automotive trade in 1980. At that time the Japanese manufacturers sold 2.4 million cars and trucks in the U.S. market, all of them imported. Japan’s market share which had been about 11 percent in 1978 had jumped to 22 percent largely as a result of the huge demand for high quality small cars and trucks resulting from the oil crisis of 1979. At that time there was a rising cry for import quotas and local content requirements. The slogan heard from the UAW, the Big 3 and U.S. parts suppliers was the now famous phrase: "invest where your market is."

In response to this pressure the Carter Administration and the Japanese Government in May of 1980 signed an agreement that committed the Japanese government to encourage "economically viable" investment in the U.S. by Japan's auto and auto parts companies. This agreement included an understanding that the Japanese vehicle industry would send parts purchasing missions to the U.S. and that the Japanese parts industry would send a mission to the U.S. to identify sites for local parts production.

Clearly with the massive shift from imports to local production the letter and intent of this agreement has been met. Since 1980 Japanese vehicle manufacturers have invested over 12 billion dollars in plant, equipment, R&D facilities and design centers in the U.S. These facilities employ 40,000 Americans and produce some 2.3 million vehicles. I would also note that over 300,000 Americans are employed in 6,500 dealerships selling Japanese name brand vehicles. Japanese name brand vehicles still take about 23 percent of the U.S. vehicle market; yet, import share has fallen well below the 1978 level. Through August of this year import share of Japanese vehicles in the U.S. market was only 7.4 percent.

THE 1986/87 MOSS Talks
As the scale of production in the transplants increased in the 1980s two things happened. Japanese manufacturers began more actively seeking local suppliers and U.S. parts companies showed greater interest in selling to Japanese manufacturers. Meanwhile, the trade deficit in auto parts began growing. Accordingly, the next round of negotiations focused on sales of U.S. auto parts to Japanese vehicle Specific or (MOSS) Talks, which began in 1986 and ended in August of 1987. The focus here was on the ownership relationships between Japanese manufacturers and their suppliers, particularly the so-called "Keiretsu" relationships.

After careful review, the MOSS report concluded that "there is no evidence given the severe competition among parts suppliers that "affiliated suppliers" are being accorded a special position over other suppliers by their parent automaker." This was later reaffirmed in a 1990 report published by the Motor & Equipment Manufacturers Association (MEMA). That reported stated: "no evidence surfaced that these relationships (Japanese automaker supplier affiliations) unfairly hinder sales nor that these relationships effectively prevent the development of independent suppliers." Subsequent investigations by both the International Trade Commission and the Federal Trade Commission into the so-called "Keiretsu" relationships found no practices that represented unfair trade barriers to U.S. auto parts sales.

JAMA/MEMA Cooperation and the Market Oriented Cooperation Plan
Nevertheless, U.S. auto parts companies were still having difficulty understanding the Japanese procurement system and selling to Japanese companies. Shortly after the conclusion of the MOSS talks then MEMA President Bill Raftery approached JAMA with the idea of establishing formal relationships between the two associations. These discussions led to the establishment of a Liaison Committee in 1987 which has since met twice annually. The committee was founded as a small group of top procurement executives from the JAMA member companies and CEOs of U.S. parts companies or their divisions. The sole focus of the group was on how to develop business. It was a voluntary group working on a cooperative basis absent the rhetoric and political posturing that often hardens positions and inhibits working relationships. The group developed purchasing manuals, published service catalogues, established and published purchasing contacts points within the JAMA companies, among other activities.

The crown jewel of the Liaison Committee is the "One-on-One Conference," held approximately once every 18 months. The conference was founded on the recognition that the relationship between Japanese manufacturers and their suppliers goes well beyond simply a marketing one. It involves the entire commitment of marketing, production, engineering and top management. Accordingly, the "One-on-Ones" bring together teams from the JAMA member companies with multi-functional teams of executives from U.S. parts companies. These meetings take place on a private company-to-company basis over a period of two to three days. The last meeting held in June 1995 in San Francisco included 30 buying teams from Japan and 60 U.S. parts suppliers. The next meeting is scheduled for February 1997. These activities compliment the individual JAMA members’ supplier outreach and development programs.

It was the success, not the failure, of these private sector initiatives that led the Bush Administration to reject trade action under section 301 of U.S. trade law and join with the Government of Japan in the Market Oriented Cooperation Plan. The objective of this plan, initiated in Louisville in June of 1990, was to encourage and build on this industry-to-industry and company-to-company interaction.

The result of all this is that purchasing by JAMA companies of U.S. auto parts increased dramatically from 2.5 billion dollars in 1986 to 10.5 billion dollars in 1991. It topped 19.8 billion dollars in 1994 and over 21 billion last year. This activity has continued both before and throughout the two years of the Auto Framework discussions. JAMA continues its keen interest and activity in promoting relations with U.S. and other overseas suppliers.

All this activity was not limited to the United States. Throughout the 1980s Japanese manufacturers have been expanding rapidly on a global basis. For example:

• In 1986 Japan exported 6.6 million vehicles from Japan. By 1995 this had fallen to 3.8 million. Production overseas meanwhile increased from 1.3 million vehicles to 5.6 million.
• In 1987 exports amounted to 54 percent of production in Japan. This fell to 37 percent last year and 35 percent in the first six months of this year.

The Framework Agreement
The Japanese Government entered the Framework in 1993 with a solid history of industry support for creating and pursuing opportunities with overseas suppliers. It also entered the agreement with the confidence that there were no unfair barriers to trade regarding auto and auto parts in Japan. This is one reason why the purpose of the agreement was to focus on developing opportunities. JAMA viewed and continues to view the agreement as a Framework for opportunity to increase mutual relationships and business. It was in this spirit that both JAMA and the JAMA companies coincident with the signing of the Agreement outlined their global business plans over the next several years. I would urge you to read these plans carefully for in them you will find, albeit described differently by each company, a significant furtherance of globalization and efforts to cooperate with suppliers of other nations. These include:

• Expansion of production capacity in the U.S. and other countries around the world.
• The expansion of engine, transmission and other component production in the US and elsewhere.
• Continued localization of parts purchasing.
• Development of global purchasing programs to maximize the best combination of price, quality, delivery and technology both for Japan and globally.
• Further development of supplier support and design-in programs.
• Exports of vehicles from U.S. plants to Japan and other countries.

JAMA for its part will continue to support this globalization process through cooperation with overseas auto parts associations, vehicle manufacturers, and others. In addition to meetings with MEMA, the Equipment Tool Institute, the American Automobile Manufacturers Association among others in the U.S. JAMA holds regular meetings with CLEPA in Europe, APMA in Canada, and other automotive associations in Europe, Australia and Asia.

Some have put their own numerical expectations on the Framework Agreement, but as most are aware this is not what was agreed to. The Agreement’s focus was on developing relationships and opportunities as well as recognizing that business can only be developed on a mutual basis. Where the process leads is not a matter of one sided "results-oriented" expectations but rather will depend on economics and continued competition and cooperation within an increasingly global automotive market place. JAMA and its member companies are aggressively playing their part in this process.

But if we are to look at numbers it is important to see from whence we have come and to put them in historical context. I believe a quick look at a couple of charts will demonstrate this.

FIRST CHART

This chart clearly shows the transformation of supply from imports to local production that has taken place between 1980 and today. First I draw your attention to the start up of U.S. production by plant along the bottom of the chart. Note the concentration between 1985 and 1990.

As the plants came on stream you can see the sharp increase in local production corresponding to the sharp decrease in imports.

Of particular interest here is that domestic production was not significantly affected by the 1991 recession. On the other hand, total sales, imports and domestic production together, declined by about 4 to 6 percent.

SECOND CHART

This chart shows the steady increase in auto parts purchasing correlated with the localization of supply. Note the geometric increase particularly during the start up years. Purchasing, following production, increased sharply throughout the 1991 recession. Just as a frame of reference note where purchasing was in 1987 with the MOSS talks, 1990 with the first "One-on-One meetings and the start of the MOCP program, then in 1993 with the beginning of the Framework discussions and today.

While the current level of activity clearly demonstrates that relationships between the automotive industries of the U.S. and Japan are strong and enduring, I would caution against judging these relationships in terms of simplistic numerical measurements and arbitrary expectations. It is unrealistic to expect production and purchasing numbers to show the same steady geometric rates of increase as we have seen in the developmental years. While some of the companies have announced future expansion of production capacity in the U.S. this expansion is not as steady or dramatic as it was in the 1980s. Furthermore, the value of expanding engine, transmission and other in-house production would not be reflected in these purchasing numbers, at least not fully. Certainly, with the maturity of localization, purchasing will be more vulnerable to fluctuations in the business cycle, and other market factors. The point here is that care must be taken in judging potential opportunities from gross purchasing numbers.

The same is true for exports as well. As a general rule auto parts exports follow either vehicles as replacement parts or investment as original equipment. The latter as in the case of U.S. investment in Europe and as we are seeing now with Japanese investment in the U.S. tends to be replaced over time with local production. The one major exception is Canada and Mexico where the Big Three dominate production and supply parts and vehicles across the borders. U.S. parts exports, on the other hand, take a low percentage of the European markets, according to the Department of Commerce generally in the range of between one to five percent.

There are opportunities in the Japanese market, particularly if aggressively pursued. DOC reports U.S. auto parts exports to Japan in 1995 at 1.6 billion dollars which as I pointed out earlier are larger than U.S. exports to any country other than Canada and Mexico. Furthermore, U.S. customs statistics don’t report the full extent of auto parts trade as many parts destined for use in automobiles may be classified as textiles, electronics or other customs categories. JAMA companies in Japan, for example, currently report purchase of over 3 billion dollars of auto parts and materials from the U.S. In addition as sales of U.S. vehicles continue to rise in Japan so also will come the demand for replacement parts for those vehicles.

Exporting to Japan as to any overseas market is not an easy task. It requires patience, persistence, knowing the market structure and the competition, and a total commitment on the part of the company. Of particular importance in selling in the Japanese market is a permanent presence on the ground. Developing strategic alliances with Japanese companies or other companies with marketing presence in Asia can also be a plus.

The Japanese Government is encouraging imports of autos and auto parts through a variety of incentive programs, many of which developed as a result of the Framework discussions. I believe you will hear more about these in the afternoon session.

The JAMA companies purchase parts under a concept know as "global best." This means strictly maintaining the highest standards in procurement decisions -- the highest quality, the best speed and flexibility of delivery, the most advanced development capability, the lowest cost, and a committed management focused on developing long-term cooperative relationships. Japanese

automakers purchase parts based on these criteria regardless of the supplier’s nationality or country of origin of the parts. I can not emphasize strongly enough that nationality is not a purchasing criteria. I would encourage any interested supplier here who has not already approached JAMA member companies to do so. I have left in the back of the room packets of material which include a brochure listing the contact points for JAMA member companies both in the U.S. and Japan. You will note that these contact points are separately identified by OE parts, materials, accessories and service parts.

Conclusion
In conclusion, I would like to point out again the extraordinary changes that have taken place in U.S. Japan automobile trade over the past 15 years. These changes are reflected not only in terms of the localization of production and parts purchasing by the Japanese vehicle manufacturers in the United States, but on a global basis as well. Japanese manufacturers have developed a strong supply base of overseas suppliers dedicated to providing the consumer with the highest quality vehicles at the lowest price. While all manufacturers must contend with the fluctuations in the economy, environmental challenges, and changing consumer tastes there is no doubt that the global orientation of the automobile industry is here to stay. As I pointed out in the beginning no longer can we effectively talk of auto issues in terms of national confrontation. We must become more aware of the competition and cooperation taking place between companies. After all countries don’t build cars or parts, companies do.

Thank you for your attention.