Japan as Number One Again?

by John Boyd

So why would someone as astute as Eamonn Fingleton, author of the brilliantly controversial Blindside (Houghton Mifflin Co.; ISBN: 0395633168), insist that Japan is still on track to overtake the US by 2000? In a nutshell, his answer is manufacturing.

The US is fast forsaking its manufacturing base in favor of creating a post-industrial economy that esteems producing movies, money (through financial services), and computer software over manufacturing such fundamental technologies as high-tech materials, semiconductor production equipment, and LCDs (liquid crystal displays). And Fingleton doesn't believe that a post-industrial society can be prosperous. "It's not a question of one [society] or the other," he says. "Most modern societies need post-industrial services. The issue is they need manufacturing even more if they are to maintain their position at the forefront of the world economy."

The race is on
Naturally, he's aware that individuals can do well in a service economy. Microsoft's Billionaire Bill has done just that. But, Fingleton asks, "What is good for the nation? Particularly from the point of view of competition between the US and Japan? There's an economic race there. And the Japanese, in backing the manufacturing horse, have backed the right horse."

Japan's steed is created out of the most advanced materials and components, and is formed by the most sophisticated high-tech manufacturing equipment available - materials, components, and equipment that essentially only Japan knows how to produce, in many cases. To illustrate, Fingleton points to the manufacture of portable phones. The important chips that make these mobile communicators masterpieces of miniaturization are made from gallium arsenide, a material requiring specialized knowledge and much capital to transform it into high-frequency semiconductors. And Japan has forged a monopoly in the volume production of these chips.

In addition, stepper machines used in printing the circuits for these chips (as well as the common silicon variety) is another area in which Japanese manufacturers dominate. Steppers are marvels of optical, mechanical, and electronic integration that can print circuit lines smaller than a millionth of a meter. They also cost millions of dollars.

Only three companies in the world make steppers: ASM in Europe, and Nikon and Canon in Japan. Notes Fingleton, "Nikon has 60% of the world market, and it basically is the only company that can produce all the significant levels of manufacturing in making that device."

A dark horse of a different color
This kind of manufacturing creates jobs for all levels of society, from blue collar to white laboratory coat. By comparison, Fingleton argues that service jobs are mostly filled by the top 10% of society. At the same time, manufactured products can be easily exported, while post-industrial services are typically culture-specific and require adaptation for each new market.

What's more, high-tech items such as LCDs, steppers, and gallium arsenide chips, or even mundane products like specialized steel pipes, require much capital and arcane knowledge to produce. The lack of these resources creates barriers for potential competitors. Writing software, meanwhile, is easily learned and can be done on a workstation or a PC anywhere in the world - which is why we see competition mushrooming in low-tech countries like India and the Philippines.

Besides, most of the world's people are poor. More than movies and software, they need agricultural production help, consumer goods, and transportation, power generation, and communications infrastructures, says Fingleton. "And one country, in particular, is bringing all this together, and that is Japan."

So what, then, happened to the economic juggernaut of the 1980s that threatened to oust the US as Number One? Despite the problems mentioned at the beginning of this column, Japan is still right on course, according to Fingleton. Japanese per capita income has risen 56% since 1989, to reach $36,500. US per capita income has risen only 24%, to $28,500.

Regarding trade, in the first seven years of the 1980s, Japan's current account surplus totaled $192 billion. In the first seven years of the '90s, it has ballooned to $655 billion. As a result, Japanese investments overseas have risen 50% in the '90s.

America's deficits, meanwhile, are becoming unsustainable, and the market will address this before the decade is over, says Fingleton. He predicts the dollar will drop to \70. "And at that level, Japan will pass the US as the world's largest economy."

John Boyd writes about IT for CMP's TechWeb and the Japan Times. For a change, he welcomes your e-mail (boyd@gol.com) on "Japan as Number One Again?" Look for his further thoughts on this in next month's Industry Eye.

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