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Management Research News The growing business power of the Pacific Rim Thomas Bosch, Brian H. Kleiner,

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THE GROWING BUSINESS POWER OF THE PACIFIC

RIM by Thomas Bosch and Brian H. Kleiner

The Pacific Rim can be defined in two ways. Geographically, the name refers to the areas containing volcanoes located on the east and west coasts of the Pacific Ocean. These areas include the west coasts of North and South America, the east coasts of Asia and Australia, and the many islands in the Western Pacific including Japan, the Philippines, Indonesia, and New Zealand.

When referred to in an economic or business context, the Pacific Rim is usually used to indicate just the United States and Canada and their significant trading partners in the Western Pacific. This latter group of coun- tries consists of Japan, South Korea, China, Hong Kong, Taiwan, the Philippines, Thailand, Malaysia, Singa- pore, Indonesia, Australia, and New Zealand.

It is the latter definition of the Pacific Rim that will be discussed in this article.

The Pacific Rim covers a vast area of the globe. Countries within this region range from large in area and rich in natural resources, such as the U.S., Canada, Australia, and China, to very small in area and almost non- existent in natural resources, such as Hong Kong, Singapore, Taiwan, and Japan. Over 60% of the world’s popu- lation lives in the Pacific Rim and because of the high economic growth rates in many parts of this region, the Pa- cific Rim will soon become the world’s largest market for consumer and industrial goods. The Soviet Union has demonstrated the importance it places on the region by maintaining a Pacific fleet of approximately 440 surface ships and 135 submarines, which is larger than either the Russian Black Sea or Atlantic fleets.

1

Growing Economic Power in the Pacific Rim

Of growing importance to corporate management in the U.S. is the rise in trade with the Asian nations of the Pa- cific Rim and the resulting rise in their economic strength. In 1959, trade with these countries represented only 6% of American GNP. By 1986, trade had grown to 17% of GNP. Trade with the Pacific Rim has reached 25% by the year 2000.

2 As of 1980, trade with Asia had surpassed trade with Western Europe; and Asia has been the

number one trading region with the U.S. ever since.

The rapidly expanding trade in the Pacific Rim has allowed many Asian countries to raise their per capita in- comes dramatically. In addition, the higher savings rates of these countries (17% in Japan versus around 2% in the U.S.

3 ) has allowed Asian banks to accumulate large asset pools which have been used to expand industries at

home and, recently, to invest abroad. The ability to accumulate and concentrate capital has allowed Nippon Tele- graph and Telephone Company of Japan to replace IBM as the world’s largest public company and allowed Dai Ichi Kangyo of Japan to surpass Citicorp as the world’s largest bank in terms of assets.

4

The Japanese have also invested heavily abroad. In 1980, Japan had only $11 billion in net overseas holdings. Since then that total has risen to over $180 billion. During the same period American net overseas investments fell from $106 billion to -$264 billion. This year alone the Japanese are expected to buy over $50 billion in American stocks and bonds and loan billions more on commercial ventures.

5 The Japanese banking system has

become so strong and the Japanese have invested so much money in the U.S. that decisions made in Japan’s Min- istry of Finance presently affect stock prices on Wall Street and even the mortgage rates paid by American home buyers.

Although Japan is clearly the economic leader of the Asian Pacific Rim, the newly industrialised countries of Taiwan, South Korea, Hong Kong, and Singapore have also made enormous economic gains in the last decade. Averaging close to 10% annually, the newly industrialised countries have an economic growth rate which far surpasses every other region of the world. Along with Japan, these countries have developed strong export economies in spite of the fact that they all have small areas, large populations, and weak resource bases. They have been successful because they share the several critical ingredients for economic development necessary to succeed in today’s world economy—a strong work ethic, an openness to new ideas, and the ability to co-operate within groups to achieve goals. As a result of their successful export economies, over 50% of the United States’ current trade deficit is with Pacific Rim countries; and the currencies of these countries have appreciated consid- erably versus the dollar.

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Opportunities and Threats

The strong economic gains of the Asian Pacific Rim nations present many potential opportunities and threats for American businessmen to consider. The opportunities will be in the areas of exporting and finance, while the threats will be mainly from more vigorous competition and corporate takeovers.

Exports

The major opportunity for American businessmen is in the area of world trade, where an unprecedented opportu- nity exists for exporting American products. The opportunity has been created by the following factors which are the direct result of the Asian Pacific Rim’s growing economic power:

- Rising per capita and disposable incomes in Asian nations along with a strong desire by young Asians for foreign name brands.

- The successful pressure byworld trade agencies toreduce tariffs inJapan, Taiwan, and South Korea.

- The recent encouragement of the Japanese government for more internal consumption and less sav- ing by the Japanese people, which has stimulated the demand for imports in that country.

- Reduced shipping rates for American goods because ships that bring cargo from the Western Pacific often cannot find cargo for their return trip.

- The comparative advantage American high-tech products still have over the Japanese, especially in Asia where the Japanese often attempt to export low quality goods.

AWord of Caution

Although the returns can be quite high for a successful exporter, many of these ventures also carry a high degree of risk. Any exporter should plan carefully and move cautiously in any prospective market. The exporter will need to familiarise himself with the language, customs, and institutions of the particular market he is entering so as not to alienate his product from his potential customers or local authorities. One method used by some compa- nies is to send an Asian-American sales force who are fluent in the language and are already familiar with many of the local customs. To be successful, exporters should also maintain sales facilities in the prospective coun- tries, advertise, price competitively, produce specially designed products, and build research facilities in these countries (especially in Japan in order to gain product acceptance by the older generations and to monitor new developments in Japanese technology).

Exporters of technology have an additional risk to consider. They must weigh carefully the immediate profits of such a venture against the possibility that the technology they export may eventually be used competitively against them. This can happen easily because many Asian nations do not have strong laws that will protect an ex- porter against patent infringements. The risk is particularly great in China where laws and contract terms change constantly with the political environment. An American businessman hoping to take advantage of the great mar- ket potential in China will normally face the following conversation: “‘What protection or redress do I have if things go wrong with a deal?’an American executive is likely to ask. ‘You have our good will’, a Chinese official is likely to reply with a smile. ‘You can trust the word of the Chinese people’. Negotiating in China has reduced many strong men to tears”.*

Financing Growth Opportunities

Another opportunity for American businessmen is in the area of finance. The large savings rates in Asian nations have left Asian banks with large sums of money to invest while the recent devaluation of the dollar, high Ameri- can interest rates, and low returns on Asian investments have made American investments look quite attractive to foreign investors. American businessmen can take advantage of this situation by borrowing money from Asian banks to finance growth opportunities within American companies. Organisations which have already taken advantage of foreign investment capital are VF Corporation, Boston College, Marriott Hotels, and Bank of America.

6

Another method of taking advantage of foreigners’ willingness to invest in the U.S. is the use of sale and lease-back arrangements. American companies can raise capital for new projects or retire debt by selling their office buildings and real estate assets in major American cities to foreign investors and then leasing the assets

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back. The Japanese are willing to pay extremely high prices by American standards for these assets because of the relative strength of the yen and the low returns on real estate investments in Japan. An example of this type of Japanese investment is Shuwa Corporation’s purchase of the Arco Plaza in Los Angeles for $620 million in 1986. This was the highest amount paid for a piece of property in L.A. history and a much higher amount than any of the competing bids.

7 Many other Japanese investors are overpaying for prime real estate in other cities, al-

though not to the excess that Shuwa Corporation did.

Threats to American Business

The strong economies of the Asian Pacific Rim also pose several threats and concerns for American business- men. Some potential problems American executives should be aware of are:

- Increasing competition in the market place both here and abroad for the sale of manufactured goods and high-tech products, especially as China, Indonesia, Thailand, and Malaysia industrialise and en- ter the competition.

- A greater production advantage for many developing Asian nations whose higher birth rates, younger populations, and larger rural populations will keep industrial wages low while American labour rates continue to rise because the U.S. will have no such sources of labour.

- American businesses that have not already moved their production facilities overseas will have to give serious consideration to doing so or be priced out of the market. An example of this is the soft- ware industery where the cost of designing, producing, or adapting software programmes is ap- proximately 50% less in Asia than it is in the U.S.

8

- The possible take over of American companies by foreign competitors. The strength of foreign cur- rencies versus the dollar and the recent drop in American stock prices makes this an attractive oppor- tunity for foreigners. The Japanese are currently attempting to buy financial companies as well as entertainment and manufacturing companies.

- The possibility of retaliatory measures by foreign governments if the U.S. passes protectionist legis- lation, a likely occurrence if there is no significant improvement in the balance of trade.

- Continued building of subsidiaries in the U.S. by the Japanese in order to avoid American trade laws. Production from these factories will also compete with American exports in Europe where many restrictions apply to products produced in Japan but not to products produced by their Ameri- can subsidiaries.

Conclusion

Stronger economic power in the Pacific Rim will provide both positive and negative prospects for American management. Some industries will be able to take advantage of the situation by increasing exports or using Asian nations as a source of financing while other industries will need to develop new strategies to fight a new wave of competition, corporate takeovers, and competition from foreign built subsidiaries. Because of the latter two possibilities, managers in American companies as well as graduates entering a business career should re- member that some day they may be working for a company whose headquarters are based in a foreign land and whose management may expect things done in a manner that most Americans are unaccustomed to.

Endnote

*Aikman,David(1986).PacificRim:Areaof Change,Areaof Opportunity.Boston:LittleBrown&Co.,p.67.

References

1. Aikman, David (1986). PacificRim:AreaofChange,AreaofOpportunity. Boston: Little Brown & Co., p.14. 2. Ibid., p.5.

3. Milner, Brian (Nov. 14, 1987). “Home Ownership in Japan is a Fading Dream”. The Register, p.F3.

4. Dow Jones & Company (Sept. 18, 1987). “Tracking the Leaders”. Wall Street Journal, p.23D.

5. Sesit, Michael R. (Sept. 18, 1987). “When Tokyo Picks Up the Tab”. Wall Street Journal, p.5D.

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6. Ibid.

7. Lowenstein, Roger (Sept. 23, 1987). “Maverick Tokyo Firm Acquires Office Towers in U.S. at a Fast Pace”. Wall Street Journal, p.1.

8. Besher, Alexander (Nov. 15, 1987). “Asians Put Hard Sell on Software Firms”. The Register, p.M2.

Bibliography

Aikman, David (1986). Pacific Rim, Area of Change, Area of Opportunity. Boston: Little Brown & Co.

Besher, Alexander (Nov. 15, 1987). “Asians Put Hard Sell on Software Firms”. The Register, p.M2.

Darlin, Damon (Nov. 20, 1987). “Feud With U.S. Drains Japan’s Diplomats”. Wall Street Journal, p.20.

Darlin, Damon (Nov. 10, 1987). “Japan Turns Corner on its Trade Surplus”. Wall Street Journal, p.30.

Dow Jones & Company (Sept. 18, 1987) “Tracking the Leaders”. Wall Street Journal, pp.23D-25D.

Lowenstein, Roger (Sept. 23, 1987). “Maverick Tokyo Firm Acquires Office Towers in U.S. at a Fast Pace”. Wall Street Journal, pp.1,22.

Milner, Brian (Nov. 14, 1987). “Home Ownership in Japan is a Fading Dream”. The Register, p.F3.

Schoenberger,Karl(Nov.20,1987).“JapanesePricesForPropertyStartingtoFall”.WallStreetJournal,p.20.

Sesit, Michael R. (Sept. 18, 1987). “When Tokyo Picks Up the Tab”. Wall Street Journal, pp.5D-7D.

Sesit, Michael R. and Herman, Tom (Nov. 20, 1987). “Plan For U.S. Trade Bill Could Allow Big Japanese Ex- pansion in Bond Market”. Wall Street Journal, p.20.

Williams, Jack F. (1983). “Patterns of Economic Development”. In Clifton Pannel (Ed.), East Asia. Dubuque Iowa: Kendall/Hunt, pp.127-154.

Yoder, Stephen K. (Nov. 12, 1987) “Western Research Labs Sprout in Japan as Firms Lured by High-tech Boom”. Wall Street Journal, p.32.

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