The deals have a familiar ring to them. After all, in the 1980s, Japanese companies spent nearly $100 billion snapping up assets in the United States–everything from “trophy” acquisitions like Columbia Pictures to California’s famed Pebble Beach golf course. But while last week’s story line may have seemed the same, the plot of Japan Buys America has been altered dramatically for the 1990s.
That’s because the economic sobriety that has seized the United States now also stretches across the Pacific. The days of the headline-grabbing deals from Japan are largely gone. In their place will be an era of technology-driven investments-like the one Toray Industries made last week. Though it vanished with nary a trace in the press, the Toray acquisition represents the model for Japanese direct investment in the ’90s. Companies will seek a foothold in American businesses that interest them but won’t bet the house to acquire the stake. And in a capital-starved U.S. economy, even that much investment will seem welcome. These days the money “could come from Mars as far as the bottom line is concerned,” says Howard Foley, director of the Massachusetts High Tech Council in Boston. “You bite your ‘Made in America’ tongue and cut a deal.” Such purchases won’t be without problems, however. If the Japanese start gobbling up American technological know-how, the response could be a strong new wave of protectionist sentiment.
For now, at least, Japanese businesses are intent on avoiding the mistakes of the last decade. One sector of the U.S. economy after another has slumped since the mid ’80s, and many Japanese companies have taken a brutal beating. Most analysts in Tokyo believe that of the billions of dollars spread across the United States between 1986 and 1990, little of it is delivering strong returns. Just last week, for example, efforts to sell the glitzy Dunes Hotel in Las Vegas–owned by Japanese investor Masao Nangaku–collapsed. In 1987 Nangaku paid about $158 million for the property, which is losing $500,000 a month these days. Analysts reckon Nangaku could, at best, fetch two thirds of that price now.
What went wrong.? Too often during the roaring ’80s, Japanese firms and fat cats alike paid premium prices for U.S. assets. So, for that matter, did many U.S. investors. But for the Japanese there was a crucial difference: the yen was soaring in value, making dollar-priced assets look cheap. Real-estate and stock prices were also rising without interruption in Tokyo, and that combination went to the heads of even conservative Japanese investors. Now, concedes Genshiro Kawamoto, president of Tokyo-based Marugen K.K., it’s clear that many of those U.S. investments were “crazy. " Says Kawamoto: “Not only all the investors were crazy, but the financial institutions backing them … were all crazy.”
The Japanese learned their biggest “what goes up must come down” lesson in real estate. They bought heavily and paid dearly for what may now be the most depressed sector of the U.S. economy: urban office buildings and hotels. From the Arco Plaza in Los Angeles, which huge developer Shuwa Corp. bought in 1986 for an estimated $620 million, to the Citicorp building in New York (majority-owned by the Dai Ichi Life Insurance Co.), “anything that they bought is not worth what they paid for it,” says Howard Sadowsky, an executive vice president of Julien J. Studley Inc., a New York-based real-estate brokerage firm. The bath has been particularly deep in southern California. Los Angeles “is beginning to look like a nightmare,” concedes Makoto Toda, director of the international planning department at Nippon Life Insurance Co. in Tokyo. third of the major office buildings in downtown L.A., where vacancy rates are soaring.
The real-estate debacle is the worst of Japan’s problems in the United States, but it is hardly the only one. The bad-timing award goes to Nippon Life, which bought 13 percent of Shearson Lehman Brothers in the spring of 1987. Some five months later the stock market crashed. Industrial investments have suffered as well. When Tokyo’s Bridgestone bought huge U.S. tire maker Firestone for $2.6 billion in 1988, the investment bankers representing the then Akron-based company were stunned. The offer was several million dollars above what they ever expected to get. Now the auto-sales slump has forced Bridgestone to pump more capital into Firestone than it had planned.
Even in businesses where Japanese excellence is unchallenged, there have been unpleasant surprises. For the most part, Nissan, Toyota and Honda have had little but success with their U.S. operations. But McKinsey & Co. released a survey earlier this year that reported that the majority of Japanese auto-parts suppliers that also came to America are hurting. Several built expensive state-of-the-art factories yet have failed to broaden their customer bases beyond the Japanese manufacturers.
Any temptation among Americans to gloat over Japan’s travails-the seemingly invulnerable economic giant finally gets his-should be restrained. The beating Japanese investors are taking has real consequences for the United States, and on balance most economists believe the fallout will be negative. As Toda of Nippon says, with un-Japanese bluntness: “We are fed up with U.S. real estate.” That means Japan is unlikely to resuscitate the American market with fresh purchases any time soon-despite the fact that with the dollar weakening against the yen, and real-estate prices lower on average than a decade ago, the United States could soon look very inexpensive again to Japanese companies.
Yet for all the problems, the Japanese still see the United States as that rare investment opportunity: a country that’s long in technology and short of capital. And they are once again racking up huge trade surpluses that eventually must be reinvested abroad. By the mid-1990s, the money could be rolling in again. Many huge high-tech companies in Japan will continue to build new plants in the United States, while keeping an eye out, as Toray Industries did, for small innovative companies starving for cash. Says NEC vice president Isao Okamoto: “To complement our business we need to add technologies, and for this we need to invest.”
Ironically, the rifle-shot, high-tech approach may ultimately create more political problems for Japan in America than the “throw money at anything” 1980s did. Few believe that new manufacturing facilities present a problem, but the increasing number of technologically innovative small American companies relying on Japanese capital arguably does. For instance, when Fujitsu earlier this year increased its stake in a small maker of date-book-size computers-Poqet Computers of Santa Clara, Calif.-some analysts suggested that it only wanted to defend a rapidly growing market niche.
Expect those kinds of deals to increase as the ’90s wear on, raising with them an inevitable question: is the United States selling its technological crown jewels to its primary economic competitor? Linda Spencer, an analyst at Washington’s Economic Strategy Institute, has produced a report showing that since 1988, 272 U.S. high-technology companies have been purchased outright or have received investments from Japanese firms. And that number should keep growing in the 1990s. America’s recent open-door policy toward foreign investment, Spencer says, “reflects ideological beliefs, not rational considerations.” In Washington, she is echoed by a group of skeptics called the “techno-nationalists,” who argue passionately against giving up high-tech research to the Japanese. As the next wave of Japanese investment rolls in, Tokyo will be hearing an earful from them.
The Japanese will target small to medium-sized firms that are technology rich but capital poor.
Burned by mega-real-estate deals, especially on the West Coast, the Japanese will shy away from trophy urban centers and fancy resorts. As one mogul puts it: “We are fed up with U.S. real estate.”
Last year Minoru Isutani paid $800 million for the fabled California golf course. He’s going to have to peddle $150,000 memberships to make it work, and he’s facing fierce opposition from local residents.
Investor Masao Nangaku gambled $158 million on this Las Vegas casino and resort. Now he’s losing $500,000 a month.
In 1986, Shuwa Corp. paid dearly for the office complex in Los Angeles. Now the real-estate market looks ’like a nightmare.’
