If you have ever been to Tokyo, you may have visited Harajuku, Shibuya, Shinjuku, or other places popular among young people. You also may have noticed a chain of casual clothing stores, housed in warehouse-type buildings, called "Uniqlo." Their name is derived from the phrase "Unique clothing warehouse." Like GAP stores, they are full of casual clothes imported from China. They offer beautiful colored fleece tops, which are made to meet the exacting standards of Japanese consumers. Prices are surprisingly low and the stores are always packed with young people.
The company that runs these stores is called Fast Retailing Co., established by Tadashi Yanai, a local garment-store owner in the 1970s. Mr. Yanai came to one of our Brown Bag Lunch seminars recently and impressed everyone with his vision and desire to reform old Japanese industry. The Japanese textile industry is famous for its complex distribution system, but this company has revolutionized practices by directly connecting production and retail, through investment in China. Excellent product development, supply chain management, and marketing have made other general-merchandise stores outmoded. Uniqlo now has more than 400 outlets and its sales grew to 230 billion yen from 20 outlets and seven billion yen in sales just ten years ago. Their latest annual sales grew by 100% and profit by more than 300%, in contrast with aggregate chain store sales in Japan, which have been declining for 27 consecutive months until very recently. It is not only a great success story of a Japanese entrepreneur but also of the creation of a new business model in Japan. But they will not limit themselves to operating in Japan. In fact, they plan to open stores in London to test the waters in foreign markets.
Their success is not unanimously welcomed here because the increased imports from China create problems for domestic producers. For example, imports of textiles from China have increased by six times in these 10 years. First, this figure reflects the fact that the Japanese textile market is open to imports, even more so than the US or the EU. Currently Japan does not control imports whatsoever, while the US has more than 900 quotas, and the EU has 200, sanctioned under the Multi-Fiber Agreement. Japanese tariffs are between 5.2% and 14.4%, while US tariffs are between 5.2% and 33.6%. This Japanese open-market policy has certainly put pressure on domestic industry, especially since 1986, when the yen appreciated sharply, following the Plaza Accords. In 2000, import penetration rate was over 70%. Domestic production of fabrics and spinning declined by 50% in these ten years, and employment declined 35% between 1990 and 1998.
The recently published METI White Paper on International Trade features several interesting charts, which are attached to this essay. Industrial restructuring is characterized by: a shift in the textile industry to a net-importer, a long-term downward trend of the heavy chemical industry, and a peak in exports of machineries (see chart 1). Textile imports have come from the newly industrialized economies or NIEs (Korea, Taiwan, and Hong Kong), then from ASEAN four (Thailand, Philippines, Indonesia and Malaysia), and recently from China (chart 2). This trend has coincided with an increase of direct investment from Japan to China in late 1990s (chart 3).
There is a similar surge in imported vegetables. Tomatoes, okra, bell peppers, ginger, seaweed, and shiitake mushrooms are imported from China, Korea, and Thailand. They are substantially cheaper than domestic produce even though they are sometimes shipped by air. Producers are carefully studying the Japanese market, farming technology, and consumers' taste to the fullest extent possible. Some are even monitoring market prices in Japan daily.
On the one hand, overseas producers are reportedly using government subsidies to build large-scale production facilities for export, contributing to another success for Korean and Chinese exporters. On the other hand, Japanese consumers are finally starting to enjoy cheap imports, given the quality is acceptable. We may even call it "good deflation." Coming back from our stay in Washington D.C., my wife has been pleasantly surprised, and says prices of staples such as food and clothing, especially at the newly ubiquitous 100 yen (one dollar) stores, are finally coming down to internationally comparable levels.
Recently the Japanese towel industry as well as agricultural producers of shiitake mushrooms, igusa (the rushes used to make tatami mats), and scallions requested import relief under WTO safeguard measures. To our temporary tariffs on vegetables, China responded with retaliatory measures. Public debate is heating up between "free trade or protectionism."
In the case of the textile industry, restructuring was promoted for years by the Textile Restructuring Law, but this law was abolished in 2000, and the Transitional Safeguard (TSG) Rule was liberalized to the level WTO requires. In other words, industries can call for safeguards more easily because building a restructuring plan is no longer a prerequisite condition to introduce TSG measures. To quote, "No sector-specific assistance is granted to the textile industry; however, temporary TSG relief could be given for three years if the situation satisfies certain legal conditions." But it must also be noted that the re-introduction of these TSG measures after three years is practically prohibited, if not impossible, by the WTO. So industry will have no choice but to exit if they fail to restructure after the three-year grace period.
How did the agricultural market get this way? This situation arose partly due to the fact that Japanese trading firms, which are prohibited from engaging in agribusiness in Japan, moved overseas to export back to Japan. A kind of new-wave agribusiness is growing and current domestic agricultural policy is not keeping up with globalization. The government at one time recommended a shift from rice farming to vegetables, but now domestic producers are being challenged by imports. What needs to be reviewed is agricultural policy itself. That other service costs are incurred by agriculture, such as domestic transportation, freight, telecommunications, and electricity, also deserves attention. Distribution systems of materials and final farm products must be reviewed to cut down unnecessary costs. The issue is not a simple trade war between foreign producers and domestic farmers or towel producers, nor is it simply a domestic battle between consumers versus producers. It is more complicated. And what is needed is systemic deregulation and restructuring accompanied by an overhaul of relevant public policies. Safe guard measures have triggered a public debate, which has provided an unprecedented opportunity to understand the issue and move to a solution.
Globalization is a complex phenomenon, and we may see many more situations like this in the future. Corporations can now choose the country in which they operate, and not necessarily the other way around. Domestic policies will not be able to address current challenges without substantial changes. Prime Minister Koizumi is calling for "reform without sanctuary." This thinking will certainly provide ample opportunity to test the governmentA*fs willingness to accept market forces and to enforce domestic structural reform in the once-sacred industries, such as agriculture and textiles. Restructuring will certainly be a challenge for farmers and towel producers, but the same goes for a revolutionary company like Uniqlo, which will only prosper if it continues to satisfy customers through radical innovation.
Fast Retailing Co.(Uniqlo)'s annual report proudly says, "We are fast." Similarly, GE's annual report also said, "GE people today understand that pace of change, the need for speed, and the absolute necessity of moving more quickly in everything we do, ... They understand that slow-and-steady is a ticket to the boneyard in the 1990s." But that was the annual report of 1990. Ten years behind GE, Uniqlo is trying to prove its speed in the market. As for the Japanese government, we don't have a moment to spare. The choice is no longer "free trade or protectionism," but "fast restructuring or the boneyard."
Author, Nobuo Tanaka
Vice President and Senior Fellow
Research Institute of Economy, Trade and Industry, M.E.T.I.
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
