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

Before the Society of Automotive Analysts
Tokyo, Japan

Maryann has asked me to discuss the recently concluded automotive agreement and what it means for the future. This brings to mind what one of my economics professors told me many years ago. Economics is easy, he said, all you have to do is simply start with the phrase "it depends." Well the answer here again is "it depends." It depends on the degree to which the agreement is seen for what it is - an opportunity or set of opportunities - rather than for what it is not - a results oriented numerical commitment.

The Automotive Framework Agreement was reached after two years of contentious confrontation, which came perilously close to shutting out 6 billion dollars of automotive trade from the U.S. market and seriously undermining the world's confidence in the U.S. commitment to multilateral trade. Given the unilateral threat and the lack of credible economic analysis to support it, retaliation would have undoubtedly led to a destabilization of currency and trade flows sending shock waves far beyond the automotive industry. Certainly, one of the most most positive results of the agreement is that which did not happen.

I will focus today on the negotiations, their historical context and the opportunities arising from them. In the course of this I intend to make three points:

The first I have already made
Neither previous agreements nor the current one constitute numerical performance requirements. The unfortunate distortions of the agreement by the Big Three and their recent attack on the JAMA companies clearly confirms the assessment that such "results oriented" expectations are an invitation for abuse and counterproductive to developing cooperative relationships.

Second
The sales and trade numbers that we see reflect a decade or more of significant change that has occurred in the automotive industry including globalization and localization of production, the need to respond to new environmental and safety challenges, new production and management methods, a restructuring of the supplier industry, as well as competition and cooperation between firms. To be meaningful data must be analyzed in the context of the specific characteristics of consumer demand in individual markets as well as existing practices and changing practices in the automotive industry worldwide.

Third
The Auto Framework Agreement provides significant opportunities. The Japanese government has gone beyond "opening" by offering specific financial incentives to facilitate marketing of imported automotive products in Japan. Equally important the agreement provides the opportunity to lift tensions and to address marketing, manufacturing and technical issues that can lead to the expansion of business and the management of costs for both vehicle manufacturers and suppliers.

Immediate Background
Let me focus for a moment on background since there were certain basics to the negotiations that must be kept in mind.

The first basic is that the auto agreement was negotiated under the "United-States Framework for a New Economic Partnership." established in July 1993. The purpose of this mechanism was to determine macro-economic and sectoral initiatives to be taken by both the U.S. and Japan to reduce imbalances of trade in goods and services. In doing so both sides committed to preserving and promoting an open multilateral trading system under most favored nation principles. Specifically excluded would be matters outside the scope and responsibility of governments. . There was nothing in the Framework, even in the reference to evaluation , the so-called "objective criteria," that would even suggest that it was to take a "results oriented" course towards reducing imbalances through establishing targets or other non-market mechanisms.

The second basic is that automotive products were included in the agreement on the basis of trade expansion, not because of identified unfair barriers to trade. Practices relating to Japan's auto industry had been intensively reviewed over the decade of the 1980s with no violations of law or international trade rules to be found. None were specified in the Framework agreement or the discussions leading to it.

The third basic is that the stated objective of the automotive sector discussions was and I quote as follows:

There is a vital distinction being made in this language. The task of the Framework was expanding opportunities and pursuing these opportunities be they through de-regulation, sales promotion measures, increased competitiveness, or other means.

Furthermore this focus on opportunities was not at all new. Industry on both sides of the Pacific had been focusing on opportunities for some time and quite successfully. The background here of U.S. Japan automobile diplomacy is vital to understanding the position of the Japanese vehicle industry. .

The Yasukawa/Askew Agreement In 1980 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 the UAW, the Big Three and U.S. parts companies were demanding limitations on imports and that Japanese vehicle makers invest in the U.S. where there market is.

In response to this pressure the Carter Administration and the Japanese Government in May of 1980 signed an agreement, named the Yasukawa-Askew agreement, after the names of the chief negotiators, that committed the Japanese government to encourage economically viable investment in the U.S. by Japan's auto and auto parts companies. The agreement specifically included a mission to the U.S. on the part of JAPIA for the purpose of seeking investment sites. At the same time JAMA sponsored a mission of its member companies to Detroit for the purpose of seeking out U.S. parts suppliers.

Clearly the intent of this agreement has been fulfilled. As of 1993 Japanese vehicle manufacturers had invested over 11 billion dollars in plant, equipment, R&D facilities and design centers in the U.S. Japanese name brand vehicles still take about 23 percent of the U.S. vehicle market; yet, import share has fallen below the 1978 level. Through September of this year import share of Japanese vehicles was about 9.5 percent, including those vehicles imported and sold by the Big Three. Import sales of Japanese vehicles in the first 9 months of this year are 16 percent below last year.

The 1986/87 MOSS Talks
As the scale of production in the transplants increased, U.S. parts companies showed greater interest in selling to Japanese manufacturers. Accordingly the next round of negotiations focused on sales of U.S. auto parts to Japanese vehicle manufacturers. This was called the Market Oriented Sector Specific Talks for Transportation and Machinery 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. 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 U.S. Motor & Equipment Manufacturers Association that concluded:

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.

While the MOSS talks dismissed Keiretsu as a barrier the talks did result in an agreement by which MITI would collect and report U.S. auto parts purchasing data from JAMA member companies on a semi-annual basis. Of most significance here, however, is not the talks themselves but the cooperative inter-industry efforts that developed following this agreement. I refer specifically to cooperation between JAMA and MEMA.

JAMA/MEMA Cooperation and the Market Oriented Cooperation Plan
Shortly after the conclusion of the MOSS talks , the President of the Motor and Equipment Manufacturers Association, Bill Raftery, who had taken an active position in promoting U.S. auto parts sales to Japanese vehicle manufacturers, approached JAMA with the proposition that the two associations work together to find ways to develop business between their members. He pointed out that U.S. suppliers wanted to sell to Japanese companies and that Japanese companies were looking for local suppliers in the U.S. The concern here was that while there may not be unfair barriers to trade, U.S. companies were still having difficulty in understanding and working with Japanese procurement practices which differed substantially from those of the Big Three.

To address this concern the two associations established a liaison committee consisting of a small group of director level 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, meeting semi-annually, focused on specific projects. They developed purchasing manuals, published service catalogues, established and published purchasing contacts points within the JAMA companies, identified the concept of design-in as a significant factor in procurement and published explanations of that process. The most ambitious project was the "One-on-One Conference."

The One-on-One Conferences bring together purchasing teams from the JAMA member companies with teams of executives from U.S. parts companies in a series of company to company meeting which are held over a period of two to three days. This conference grew from the recognition that procurement was more than a sales function. The JAMA companies were looking for a broad commitment to the procurement process across corporate functions and at the highest levels , including engineering, design, sales , finance, executive management etc. By bringing these groups together, these conferences have been notably successful in building solid relationships between the companies and developing substantive business.

It was the success, not the failure, of these private sector initiatives that led the Bush Administration to reject 301 action on auto parts and join with the Government of Japan in the Market Oriented Cooperation Plan. The objective was to encourage and build on this industry-to-industry and company-to-company inter- action. Under the plan private sector initiatives continued on the trade association level with the One-on-Ones, purchasing seminars, and other educational activities as well of course on the company level with supplier development programs and individual company contacts.

The result of all this is that purchasing increased dramatically from 2.5 billion dollars as reported by the MOSS numbers in 1986 to 10.5 billion dollars in 1991 and 19.8 billion dollars last year.. The number of U.S. suppliers supplying Japanese manufacturers increased from below 300 to over 800 in 1991 and to over 1200 currently. This activity continued both before and throughout the two years of the Auto Framework discussions.

The Bush Visit and the 19 Billion Dollar Purchasing Plans
It was in this context of private sector initiatives that President Bush went to Japan in January 1992. At the time the U.S. trade deficit in auto parts had reached 10 billion dollars. The University of Michigan at the behest of several auto parts suppliers had made the outlandish forecast that the volume of auto parts imports from Japan would continue to grow at the same geometric rates of the late 80s and that the trade deficit with Japan on auto parts would reach 22 billion dollars by 1994.

Given the sensationalism surrounding the Michigan forecast, the Bush Administration sought an indication of where the industry-to-industry activity would lead by 1994. Accordingly, the JAMA members voluntarily and individually announced the dollar volume of parts which they believed would result from business decisions already made or soon to be made. The sum total came to 19 billion dollars. These business plans were contingent on production increases in the U.S. and continued positive cooperation by U.S. suppliers to meet JAMA companies’ procurement criteria. It was clear that these were not agreements or pledges and this was so stated by U.S. trade officials reporting to Congress at the time. As it turned out the fiscal 1994 combined purchasing amount reached 19.8 billion dollars.

Enter the Big Three
Following the Bush visit, Ford General Motors and Chrysler began to express a more serious interest in the Japanese market.

Throughout most of the 1980s the three Detroit companies had shown less interest in building and selling to the Japanese market than did their European counterparts who were establishing dealerships and a marketing base in Japan. European sales in Japan increased three fold during the decade. Big Three sales were actually lower at the end of the decade than in the beginning.

During the 1980s the Big Three trade related efforts focused primarily on limiting imports of vehicles from Japan to the U.S. market rather than promoting exports to Japan. The primary battles in Washington surrounded such efforts as the escape clause case and voluntary restraints, and local content or as mentioned above the "invest where your market is," theme. The Big Three supported the extension of the 25 percent import tax to finished trucks and later to SUVs and Mini-vans. Dumping charges were threatened but were either withdrawn or thrown out.

By decade’s end the Detroit companies were focusing on the trade deficit with the famous Poling proposal named after Ford’s Chairman. The proposition here was that it was solely Japan's responsibility to reduce the trade deficit and that they should eliminate it within five years or face retaliatory consequences. This was the origin, at least in part, of the so-called "results oriented" approach that came to shape the policy of the Clinton Administration.

Meanwhile in May of 1992 under the concept of the Market Oriented Cooperation Plan the CEOs of Ford, GM and Chrysler met in Chicago with the CEOs of five of JAMA’s leading car companies and agreed to establish two working groups, one to discuss marketing in Japan and the other to discuss technical matters of interest. The working groups never met, hung up over the Big Three insistence that the focus of discussion be on reducing the trade deficit as versus more practical marketing issues. The Big Three notified JAMA in the summer of 1993 that they would abandoned the working groups in favor of the Framework Talks.

Numerical Targets

A Case of Misinterpretation and Misdirected Focus
When the auto sector negotiations began, the confrontation over numbers was already firmly in place. Several months earlier the Clinton Administration had determined that the 1992 voluntary plans were "pledges" which they expected to be met. A letter sent by Ambassador Kantor to then MITI Minister Mori stated : "I expect that the auto parts pledges made by the Japanese in January of last year will be fully met.....I would appreciate hearing from you about the steps Japan intends to take to meet this pledge to expand U.S. auto parts sourcing." To this Minister Mori replied "In your letter you state that the numbers announced by the Japanese automobile manufacturers constitute a "pledge."....These figures are clearly not "pledges." I wish to reconfirm that there is no misunderstanding between our two countries on this point." Indeed there was.

The Bush Administration had characterized the 19 billion dollar number differently. Ambassador Hills testifying before the Senate Finance Committee had referred to these as "targets" and said that if the targets were met or exceeded it would indicate an opening of the market. In any event it was clear that the numbers were not part of an agreement that would justify retaliatory action. The interpretation of the plans as such by the Clinton Administration clearly hardened positions.. U.S. persistence on future numbers, both for dealerships and parts purchases, consistently proved to be the sticking point in the negotiations.

As a result a pattern began to appear. The U.S. side would ask for numbers in some form. The Japanese side would reject them; the talks would break down; the U.S. would change the vocabulary and then the talks would resume again. Over the course of the two years the Clinton Administration used such terms as: specific expectations, numerical targets, measurable results, forward looking criteria , vision, voluntary plans, among others. In the end they all amounted to the same thing, some form of negotiated numerical forecast.

In March of 1993 several of the JAMA companies announced voluntary global purchasing plans covering the next couple of years. These were rejected as insufficient by the Clinton Administration only confirming that USTR’s objective was to negotiate procurement levels. This hardened position even further.

In September last year while other Framework issues were being resolved the auto negotiations broke down again. This time USTR turned to section 301 of U.S. trade law and began the retaliation process. The grounds here were regulations relating to Japan’s vehicle safety inspection system. Actually at the time the Government of Japan had largely met U.S. demands in this area, but again the real sticking point was purchasing plans. In private Ambassador Kantor had made it abundantly clear to the industry that these plans were the "sine qua non" of any agreement, in the absence of which the U.S. would shut out Japanese vehicles from the U.S. market.

The Auto Framework Agreement
On June 28th the Japanese manufacturers announced future business plans. However, these were not part of the agreement and did not include purchasing numbers. This is clearly stated both in the joint announcements and in the agreement itself. For example:

1. The joint statement announced on June 28th states explicitly that the plans "are not commitments and are not subject to the trade remedy laws of either country. Rather they are business forecasts and intentions of the companies based on their study of market conditions and other factors. Both Ministers recognize and understand that changes in market conditions may affect the fulfillment of these plans."
2. The agreement itself, signed on August 23rd, does not include plans or future purchasing numbers. . In regard to objective criteria the agreement states. "These criteria do not constitute numerical targets, but rather are to be used for the purpose of evaluating progress achieved towards the goals of the Framework and the goals of these measures (under the framework)..
3. The Clinton Administration unilaterally estimated that these investment plans would result in 6.75 billion dollars in increased U.S. parts and would meet the Big 3 expectations of 1000 dealerships in Japan by the year 2000, among other numbers. However, the Japanese Government clearly stated in the joint announcement that "the Government of Japan has had no involvement in this calculation because it is beyond the scope and responsibility of the government....USTR’s estimates are solely its own." Numerical targets could not have been rejected more firmly. td>

Yet despite all this USTR issued a fact sheet the day of the agreement which read as follows:

The "Detroit News" In an interview shortly after the announcement asked Ambassador Kantor "What happens if they (the Japanese) don’t reach the goals that the Administration expects? Ambassador Kantor’s answer: " Then we’ll use our trade laws...."

Meanwhile the Big Three have taken the position in a letter to Toyota and I quote: "In reference to parts procurement by Japanese transplants USTR’s Fact Sheet on the U.S. Japan Auto Agreement specifically states that "the transplants plan to buy $6.75 billion more parts from U.S. suppliers by 1998... The purchase goal is specifically referred to in supporting documents to the agreement." Clearly the USTR fact sheet is wrong and MITI was quick to point this out to USTR. Purchasing numbers were mentioned in the supporting documents only in that they were specifically denied or disavowed.

Two weeks ago the Big Three issued a press release charging that the Japanese vehicle manufacturers had "gotten off on the wrong foot" because they had not yet provided the respective company contact points indicated in the agreement. No new dealerships have been opened to them, they said, since the agreement was signed on August 23rd. It is truly unfortunate to find Ford, General Motors and Chrysler undermining the agreement and turning a blind eye to its opportunities before the ink is hardly dry. In fact the JAMA companies had provided the contact points and the agreement was only signed a month ago. This is hardly enough time for the Big Three to make the necessary efforts.

The Japanese vehicle manufacturers currently purchase nearly 20 billion dollars of U.S. sourced auto parts. Where purchases go from here will depend on a wide range of factors which will come from economic forces and business decisions, from the bottom up rather than the top down. What is important for the industry , however, is not the number but the means and process by which relationships are built and sales are made. The industry has made steady progress in this regard, progress that began well before the Framework negotiations, and continued through it. Unilateral assertions that markets are closed detract from an understanding of the dynamic that is taking place in the industry. Basing a "results oriented" policy on such assertions, particularly under threat of of unilateral retaliation, is unwise and dangerous.

Opportunities
The hope is that this futile pursuit of numbers can be set aside and companies can go about the business of expanding trade. There are opportunities in the Japanese market and with Japanese companies. Opportunities have been demonstrated by competitors already active in the market. The agreement provides for more.

Vehicles
A dominate theme underlying these negotiations was the assertion that if U.S. companies sell in one market its the fault of another market if they don’t sell there as well. Thus there was the attempt to make U.S. market share in Japan look as small as possible - - below one percent- - and as large as possible in other markets.

Personally I do not believe such comparisons of market shares between markets tell very much. If so where does competition fit. Was the U.S. market closed to those manufacturers that have entered and withdrawn from the market such as Yugo, Fiat or Daihatsu? Obviously as analysts it is important to look at the dynamics of individual markets and particularly market segments. Certainly this is the first step for the corporate marketing planner.

The Japanese market is made of three segments: regular, small and mini vehicles. Mini vehicles are treated separately both for registration purposes and statistically. No importer has yet attempted to market in this very small low priced vehicle segment. In fact the Big Three don’t even build these vehicles. If you include mini vehicles as part of the total car market, import share was 4.2 percent in 1994. If you exclude them it was about 8.1 percent in 1994, about 8.9 percent so far this year and 12.8 percent in August.

If you look at the large car, over 2000 cc, segment where the Detroit makers concentrate their efforts at the moment, import share is over 28 percent and in August this year reached 32 percent. Import share in the highly competitive small car market is 3.8 percent so far this year and 5.1 percent in August. In fact a certain portion of this increase is due to successful marketing of the GM Opels and Fords out of Europe. Opel sales as of August this year have increased by 76 percent. Ford Europe’s sales have increased over 4 fold. Overall import sales have increased by 33 percent this year in a market which is up 5.6 percent.

Clearly someone is doing something right. There has indeed been an increase in marketing efforts and the success would suggest that there are indeed opportunities. I can’t resist pointing out, however, that selling vehicles out of Europe rather than Detroit does little for the U.S.-Japan trade deficit or American jobs if indeed that is the primary objective of the Big Three. .

The Auto agreement makes a number of changes which facilitates imports further.

The Japanese companies insist that their dealers are free to enter into agreements with competing companies. To dispel any notion to the contrary contact points were established both in the government, in the companies and in the dealer association. It hardly need be said that persuading Japanese businessmen to make the necessary investment to carry products, is clearly a function of the importers, not their competitors. The Big Three, like everybody else in the market, must provide the product in sufficient quantity with competitive quality and marketability. They must provide dealers the support, servicing, advertising and all those other factors that go into developing a dealer network. Clearly the success of the agreement depends on whether the Big 3 seize the opportunity and make the necessary investment and marketing effort. Only this way can they obtain the results they seek.

Meanwhile the Japanese Government has agreed to facilitate these efforts by providing financial support for exhibitions and demonstration of foreign vehicles, financial incentives through the Japan Development Bank to provide low interest loans for construction facilities, import financing from the Export-Import Bank of Japan, and loans to facilitate sales from the Small Business Finance Corporation among others. These loans are going to companies that are not altogether small or strapped for cash.. GM and Ford, for example, have already taken advantage of these loans.

Auto Parts
I have already discussed both the efforts of the Japanese vehicle manufacturers and U.S. parts companies working together to create opportunities and develop business. I have also discussed how these have led to significance results. These efforts will continue.

The agreement gives particular attention to the market for aftermarket parts in Japan and outlines changes in the vehicle safety inspection system including removing some key aftermarket parts from the critical list of items for safety inspection.

This issue is too extensive to go into here. However , I do believe it is important, as in the case of vehicles to look at Japan’s aftermarket in terms of practices and demand patterns in the industry, not in terms of macro market share. One need only read the document from the U.S. Auto Parts Advisory Committee which supported the 5.9 billion dollar retaliation number to see what I mean. This document argues that the U.S. should have 20 percent of Japan’s aftermarket since the U.S. has 20 percent of the aftermarket of other OECD countries. How does APAC arrive at this figure? They estimate that U.S. exports have 77 percent of Canada’s auto parts sales. Given the dominance of the Big Three transplants in Canada this is not at all surprising. By averaging the 77 percent share in Canada with the 3.5 percent in Germany, the 1.8 percent in France, the 2.5 percent in Britain etc. APAC concluded not only that Japan should turn to the U.S. for 20 percent of its aftermarket supply but also that it is legitimate for the U.S. to unilaterally shut out an equivalent 6 billion dollars worth of Japanese luxury vehicles in retaliation if they don’t.

The analysis is obviously absurd both mathematically and in terms of practices in the industry. Aftermarket parts as a general rule follow the vehicles and OE parts sales. The trend generally is for OE purchases to be localized.. It is worth noting, however, that excluding Canada and Mexico, Japan imports more U.S. auto parts than any other country in the world.

The point here is that there is opportunity for marketing both OE and aftermarket parts in Japan. The agreement by making changes may well facilitate this process further. However, the gross market share game does not tell us much of what is happening in the market or in the industry and certainly clouds the opportunity for individual companies looking to take advantage of specific market segments.

Conclusion
In conclusion I would simply say that the Auto Agreement has been negotiated and signed and is what it says it is. Opportunities are clearly there and its time now to move away from the rhetoric, the pre-judgement and unilateral results oriented demands. Its time for careful analysis of industry trends within and between markets. I believe that if this done we will see on balance that the changes in Japan, in the U.S. and worldwide are positive for the automotive industry, the consumer and the environment.

Will manufacturers have problems with governments? Most likely. Problems constantly occur both within countries and between them, neither Japan or the U.S. being an exception. However, if we can keep these issues from being politicized and address them analytically and carefully in the context of an increasingly global automotive industry, I am sure we can avoid the kind of disaster both to the industry and the world trading system that was so narrowly avoided last June 28th.

Thank you very much for your attention and I will try to answer any question you may have.