A message for Richard Katz and other Japan declinists: Look at the big picture.
Probably no commentator has been more outspoken in proclaiming the demise of the Japanese economic model than Richard Katz, author of The System that Soured. While many of his erstwhile comrades in the “collapsing Japan” school have long since quietly acknowledged that their previous extreme views were overdone, Katz keeps on keeping on.
In his latest salvo, Katz has portrayed the Japanese electronics industry as a basket case. “Japanese High Tech’s Five Circles of Hell” is how Business Week’s Brian Bremner sums up Katz’s findings.
Sounds pretty serious. But anyone who checks the facts finds that Japan continues to lengthen its lead over the United States.
Not everything in the Japanese electronics garden is rosy, of course, but — has anyone told him? — there is a global slump on.
Much of his analysis is just a case of “lies, damned lies, and statistics.” He reports, for instance, that Japan’s share of world electronics exports has fallen. He fails to mention that he is referring to gross exports, whereas what matters is net exports — that is, exports netted for imported content. In these days of rampant globalization, gross exports are a meaningless measure. Many nations, most notably China, have huge gross exports because they are just assemblers of components made elsewhere. Netted for imported content China’s performance is underwhelming (as much as 95 percent of the content of typical electronic products stamped “Made in China” is actually made in other nations, most notably Japan, Taiwan, and Korea). Japan is at the other extreme in that virtually everything it exports really is made there.
Katz points out that Japan’s share of the global chip fabrication business has fallen. This is true, but again it hardly signals the malaise he suggests. On the contrary the Japanese electronics sector has moved on to more sophisticated activities – activities that he seems unaware of.
Industries go through life cycles. When an industry is young, it typically requires leading-edge manufacturing techniques and thus production is dominated by just a few advanced nations. As it matures, other nations catch up. And this is what has happened in memory chips and other so-called “commodity” semiconductors. Whereas Japan was the world’s biggest producer in the 1980s, it long ago passed the torch (and much manufacturing technology) to Taiwan, a nation that trails well behind with a per-capita income at market exchange rates less than half of Japan’s.
This might be tragic if the Japanese had nothing else to do. In fact electronics manufacturing is a fast expanding universe and, while some Japanese corporations such as Sony are in trouble (by the way, how is Zenith doing?), the overall Japanese electronics industry has found ever more challenging new worlds to conquer. It is busy making a host of leading-edge producers’ goods that though invisible to the consumer are driving the electronics revolution. Examples include tantalum capacitors, charge coupled devices, laser diodes, ceramic packaging, and LCD drivers. Such components are essential in countless applications from cellphones and car navigation devices to optical fiber communications networks and avionic systems.
A typical area of Japanese leadership that is completely overlooked by the declinists is the battery industry. It happens to be one of the fastest growing sectors of the global electronics industry. Batteries may seem like an old technology, but the sort of batteries that used in cellphones and laptops, not to mention hybrid cars, are a world away from traditional alkaline or acid batteries. Today’s nickel-metal hydride batteries, for instance, require super-advanced manufacturing techniques. As Fareed Zakaria has pointed out, eight of the world’s top ten battery manufacturers are based in Japan (and only one, Johnson Controls, is based in the United States).
Then there are such fundamental areas of Japanese leadership as electronic materials. Not the least such material is semiconductor-grade silicon. Two Japanese companies, ShinEtsu and Sumco, enjoy a world duopoly. Monsanto of the United States and Wacker of Germany once successfully contested this geopolitically crucial market but they long ago dropped out: their problem was that every new generation of chip requires ever purer silicon and they just could not keep up with not-an-atom-out-of-place Japanese quality. The Japanese also are the dominant – and in many cases only – suppliers of a host of precision machinery vital in making electronics components and materials. They enjoy a monopoly in, for instance, LCD steppers, which are the key machines needed in the production of liquid crystal displays.
In the end the way to decide this is to look at overall economic aggregates. This is something Katz seems not to have considered. I have never seen him mention, for instance, Japan’s remarkable trade performance of the last two decades — the so-called lost decades of the popular imagination. It ranks as the most impressive of any advanced nation. Japan’s current account surplus – the widest and most meaningful measure of its trade – zoomed more than three-fold between 1989 (the last year of the 1980s boom) and 2010 (the year before the earthquake). In the same period, America’s current account deficit ballooned more than five-fold. Japan’s performance also contrasts markedly with that of such formerly strong trading nations as the United Kingdom, France, and Italy, which are now going ever more deeply into debt.
Perhaps more telling is the fact that Japan increased its exports to China more than fourteen-fold in the period. The result was that as of 2010 these totaled $167 billion. By contrast, the United States with considerably more than twice Japan’s population managed to export only $97 billion to China that year. While we don’t have exact statistics because Japanese statisticians often categorize exports in misleading ways (they count semiconductor-grade silicon, for instance, under “Raw materials”), it is clear that one of the biggest contributors – if not the biggest contributor – to the super-strong trade performance is the electronics industry.