Japanese firms expect lower profits from overseas plants

Japanese firms expect lower profits from overseas plants

TOKYO (Reuter): Japanese firms earn less than they had hoped
from their factories overseas, the government said in a report.

Even more galling is that U.S. and British companies are
bringing home bigger profits from such operations.

While cautioning firms to study costs and local labor
practices more carefully before setting up plants overseas, the
report also urged them to be more adventurous in going to
developing countries and emerging markets.

After a decade of boosting overseas production, "profits
Japanese firms earn from their direct investment are still less
than those earned by overseas units of U.S. and British
companies," said a Trade White Paper published by the Ministry of
International Trade and Industry (MITI).

The yen's sharp rise against the dollar since the mid-1980s
and the need to ease trade friction with major partners have
prompted firms to move factories to cheaper locations overseas.

Japanese direct investment is now concentrated in emerging
Asian economies and the United States rather than in Europe and
other parts of the world. Cumulative direct investment by
Japanese firms up to mid-1995 totaled US$485.3 billion.

"Expansion of Japanese business through direct investment has
caused a big change in Japan's export and import structures. New
problems associated with direct investment are now emerging," the
report said.

Production shifts overseas have helped curb Japan's exports,
resulting in a substantial fall in its trade surplus, which has
often been a source of tension with trading partners.

MITI's survey of 250 Japanese companies found that more than
30 percent of them have either withdrawn from overseas production
or cut back overseas operations.

More than half the firms that have withdrawn from overseas
production said they did so because they could not expect any
improvement in earnings.

Reforms

The report called for aggressive reforms in Japanese business
structures so as to promote new industries and thus to create new
jobs to make up for losses of many jobs in Japan caused by
increased production shift abroad.

"It is inevitable for Japan to carry out economic structural
reforms to make investment inside Japan more attractive by
rectifying its costly system and promoting innovations," the
report said.

Increased overseas production could also create a problem in
the quality of research and development as products which will be
manufactured at overseas plants are still developed mainly at
research facilities based in Japan.

"If relations between overseas production units and
development centers become loose, they could adversely affect the
level of technology," it said.

The report called on Japanese firms to make more thorough
studies of conditions of other countries before moving to them,
including local labor practices and suppliers of materials and
components needed for production.

"It is sometimes pointed out that Japanese firms tend not to
pay due consideration to local business practices compared with
European and U.S. companies," it said.

As an example, it said Japanese firms do not appoint enough
local people to executive jobs at their overseas units.

The report also said Japanese direct investment is too
concentrated in a small number of countries in which the presence
of other foreign firms shows there is no risk in such investment.

"Japanese firms now lag behind European and U.S. companies,
which have been very active in investing in so-called emerging
economies such as those in central and Eastern Europe, Latin
America and India," it said.