Sea Change: Pacific Asia as the New World Industrial Center

Sea Change: Pacific Asia as the New World Industrial Center

by James C. Abegglen, Abegglen
Enormous economic growth in East Asia is changing the very structure of world business and industry. In this brilliant analysis of East Asian politics and markets, James Abegglen shows the causes and consequences of the historic shift from the North Atlantic to the Pacific. He argues that, with some 900 million consumers, East Asian economies continue to grow several


Enormous economic growth in East Asia is changing the very structure of world business and industry. In this brilliant analysis of East Asian politics and markets, James Abegglen shows the causes and consequences of the historic shift from the North Atlantic to the Pacific. He argues that, with some 900 million consumers, East Asian economies continue to grow several times faster than the world average due to three great forces: the move of Japan lo world industrial and financial leadership; the political independence and stability of East Asian governments dedicated to economic growth; and the rise of overseas Chinese entrepreneurs whose business genius sparks much of the change.

Through detailed studies of the organization and strategies of companies in each country, with penetrating insights that only an insider could bring, Abegglen reveals for the first time the immense opportunities as well as the obstacles that every Western manager with global aspirations must consider before investing in production or opening markets in Pacific Asia. The failure of Western companies to capitalize on these markets, Abegglen warns, has the strategically disastrous consequence of allowing competitors to dominate market share and gain industry leadership by exploiting the high growth without competition.

With numerous examples, Abegglen assesses the range of strategic options for Western companies in East Asia. Nike, he shows, has taken full advantage of the cost and speed of production in East Asia, while keeping its high-value added operations of design and marketing in the West. Several industrial electronics companies such as IBM, AT&T, and Uniden have followed other strategies,including building world-scale facilities, engaging local governments for shared development, and making the region a center for corporate decision making. These strategies, Abegglen argues, take full advantage of East Asian industrial growth and competence, while forestalling the growth of competitors.

Finally, Abegglen discusses the true strategic issue in East Asia: commitment. Western firms, he argues, must be willing to put at risk the capital, technology, and human resources that this competitive environment requires. Effective positioning will not be easy but will determine the winners of the competitive race into the twenty-first century.

Editorial Reviews

Library Journal
In this timely, clearly written book, Abegglen (coauthor, with George Stalk, of Kaisha, the Japanese Corporation , LJ 12/85) shows how the enormous economic growth in East Asia is changing the structure of world business. The work presents an astute analysis of East Asian markets and politics and illustrates the ``sea change'' now underway as the center of world industry moves from the North Atlantic to the Pacific. Using extensive company examples and economic statistics, Abegglen provides studies of each country (Japan, China, Singapore, Taiwan, South Korea, and the Southeast Asia countries). He discusses opportunities and obstacles that every Western manager with global aspirations should consider. For example, networks, groups, and growth are examined; trading blocs, political and military risks, and implications for the United States are also addressed. This refreshing work is recommended for most business collections.-- Joseph W. Leonard, Miami Univ., Oxford, Ohio
David Rouse
There have been so many recent books profiling the advantages, opportunities, and benefits of doing business among the burgeoning Pacific Rim nations that one would be hard-pressed to suggest one more title. However, Abegglen, a professor of international business at Tokyo's Sophia University and coauthor of "Kaisha: The Japanese Corporation" (1985), includes an analysis of Japan's growing role in the region that makes "Sea Change" unique. He also investigates often-overlooked Asian economies, such as Indonesia, the Philippines, and Vietnam; and he warns that U.S. companies must be willing to take risks in this "new world industrial center." While others have criticized companies like Nike for exploiting cheap capital and human resources in Asia, Abegglen holds that company up as a model and also examines the growing presence of other firms, such as IBM, AT&T, and Uniden. Recommended for both large business and international relations collections.

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Chapter 1 SEA CHANGE

A sea change is underway in the world economy, as the center of world industry moves from the North Atlantic to the Pacific. The long-held economic wealth and power of the Western economies is now being increasingly shared by East Asia's hundreds of millions. The map of world business and industry is being redrawn as East Asia's economies continue their extraordinary rates of growth.

Northeast Asia -- Japan, Korea, and Taiwan -- now provides one-third of world vehicle output. In autos, the prototypic twentieth-century industry, Japanese firms alone are estimated to hold nearly a 40 percent share of the entire world market. It is predicted that this will move to 45 percent, nearly half of world market share, within two or three years. And these estimates do not include the fast-growing production of autos in Korea. It seems nearly certain that Northeast Asia will control half of the world auto market in a few years.

As autos have been central in twentieth-century industry, so electronics are fast taking over that role as the twenty-first century approaches. Here too East Asia -- Japan, Korea, Taiwan, Hong Kong, and Singapore -- holds world lead in production. Two-thirds of all consumer electronics products are produced in the area and nearly half of electronic components. In more sophisticated electronics, the region supplies about one-third of the world's computers. In 1990, Asia accounted for nearly half, about 45 percent, of world trade in electronic products.

East Asia's industrial strength is by no means limited to these two key sectors of autos and electronics. About one-quarter of world steel production is now in Northeast Asia. Textile production is centered in the area. Much helped by East Asian investment, Japanese machine tool makers dominate the world industry as 15 of the 25 largest machine tool makers in the world are Japanese companies. Shipbuilding moved to East Asia some years ago. The list of sectors in which East Asia holds major industrial power is long and growing. Computer games is the most recent addition.


East Asia includes Japan, the newly industrializing economies (NIE) of Asia -- Korea, Taiwan, Hong Kong, and Singapore -- and the four large nations in the Association of Southeast Asian Nations (ASEAN: Thailand, Malaysia, Indonesia, and the Philippines). In the broadest sense, East Asia also includes all of China (see Table 1-1).

China's coastal provinces, linked now economically and industrially to the rest of East Asia, have become an integral part of the area. When these coastal provinces are included, East Asia includes some 800 million people and the combined economies are nearly $4 trillion in size (see Table 1-2). This is not a great deal less than the combined economies of France, Germany, Italy, and the United Kingdom -- most of the economy of western Europe. The region is already a major part of the world economy, with 15 percent or so of world population and a similar share of the world economy.

The growth of East Asia is the critical dimension in gauging the region's importance. To estimate the region's size in the near future, at the end of the century, assume that Japan grows at a 4 percent annual rate, down from its 1980s performance as the economy matures. Assume further that the rest of East Asia grows at an annual rate of 7 percent to the end of the 1990s, a bit less than its 7.6 percent annual rate over the past 20 years or so. Not unreasonable assumptions, it appears.

If East Asia performs in this fashion, that is, much as it has been for nearly a generation, then the total East Asian economy would be about $6 trillion in 1990 prices and exchanges rates. That will make the area a bit larger by the turn of the century than the United States, Canada, and Mexico -- the North American Free Trade Area (NAFTA) economies -- are today. The growth over the period would be the equivalent of adding the 1990 economies of German and France to the area.

The size and growth of the region will be increased as Vietnam moves to full participation in the world economy, with its 60 million population and considerable potential for rapid economic growth. The economic size of the region will seem even greater than these figures suggest, owing to another factor as well. This kind of rapid growth means rapid productivity increases, which in turn should mean generally appreciating currencies, especially against the U.S. dollar, which in trade-weighted terms has lost one-third of its value since 1985. In dollar terms, then, East Asia is likely to be larger still than these projections suggest, by perhaps an additional 10 percent or so.

The growth of East Asia at high rates began in the late 1960s, a turning point for much of the area. Japan, the main external driving force for the area's growth, was completing its era of double-digit growth and becoming a major industrial power. In Indonesia and Korea, government changes in the mid-1960s led to strong economic growth policies. Singapore became an independent nation. World trade was growing rapidly in a generally positive economic environment. As Figure 1-1 indicates, East Asian growth took off and has continued at an extraordinarily high level, despite oil crises, sustained recessions in the developed world, and war in the region itself. Even in 1975, 1982, and 1991, when world economic growth went to zero, East Asia's economies continued to grow 6 to 7 percent annually. Note too that as the base has broadened, East Asian growth rates have not slowed. An assumption of continued growth rates that double these economies in real terms in a decade seems a reasonable one.

In fact, there appears to be a considerable, even surprising, degree of agreement among various observers on the continued rapid growth of East Asia. The prospects for the region as projected by a major Japanese research institute show growth in Japan in the 1990s at an average rate twice that of the United States and Germany and in the rest of East Asia, at triple the U.S. and German rates. In an OECD study of world economic futures, the authors posit four different scenarios of growth over the next 25 years. In the least favorable scenario, termed the Global Crisis scenario, the "dynamic Asian economies," as the authors term East Asia less Japan, grow at an annual rate of 6.0 percent in the 1990s. In the more positive scenarios the growth of these East Asian economies is seen as up to 7.3 percent per annum.

A British observer offered an interesting way of viewing the prospects. "Let us assume that all these countries together can achieve a growth rate averaging 6 percent per annum (in total, not per capita). If the established industrial countries achieve a growth rate averaging only 2 percent, they will be overtaken by 'Asia' just after the year 2040, within the lifetime of the majority of people now living. Even if Western growth rates buck up to 3 percent or Asian growth rates are slightly lower, the catch-up will come around 2060, still within some people's lifetimes."

Even the World Bank, not given to rash enthusiasm, predicts a virtual end to East Asian poverty within the decade, in contrast to a continued or even increased incidence of poverty in much of the rest of the developing world. These are truly sea changes, for widespread poverty of peasant masses is surely a general view of East Asian societies. The World Bank expects a spectacular drop in Asian poverty levels in only fifteen years (see Table 1-3). National wealth and general prosperity are no longer exclusive to the nations of the West -- all of East Asia is joining in.


A corollary of this growth is a problem that exists throughout East Asia of requirements for the whole range of infrastructure facilities -- road and air transport facilities, harbors, electrical power generating capacity, and telecommunications. The surging growth puts demands on the infrastructure that require massive investments even in highly developed Japan. These investments, across a broad range of products from steel and cement to radar and cellular phones, are necessary for growth as bottlenecks keep occurring and are themselves a force for growth, a main source of increased demand. Each government in the area has announced huge investment programs in the whole range of infrastructure needs, led by Taiwan's $300 billion six-year plan, for a grand total in East Asia of announced plans of just under $600 billion -- not including Japan's ten-year, $3.5 trillion commitment. The changes in life-style and standard of living implicit in these huge budgets make up a good deal of the shift from poverty that the World Bank expects. At the same time, world companies that fail to capture a significant share of this massive demand will fail in the competition of the 1990s and after.

The growth of East Asia and the ambitious infrastructure investment programs on the planning boards will be drawing down the world's supply of new capital at the same time that the needs of eastern Europe and the republics of the former Soviet Union continue to be very great. Given competing demands for capital, made greater by the needs of the United States and Britain to rebuild their industrial bases, can East Asia in fact fund the kind of growth that is expected in the region?


The issue is key to the future of the region. Clearly, most observers do not see a capital shortage as a major issue or their estimates of East Asian growth would be less sanguine. Capital supply will come first of all from very high levels of domestic savings throughout the area, savings rates that are a multiple of the savings rate of the United States and that have increased over this period at exceptional speed. Note that in both Korea and Indonesia the savings rate in the mid-1960s was less than 10 percent of GDP. Not surprising then that investment rates in the two countries were so low as to preclude real economic growth; the problem eased somewhat for Korea by substantial foreign aid flows from the United States especially. In the 1960s, however, savings rates throughout the region were at or below the level that is creating a major problem now for the United States of inadequate investment (see Table 1-4).

By the 1990s, savings rates throughout East Asia were at very high levels. Gross savings in most of these economies were at the level of one dollar for every three dollars produced. Indonesia, with a long period of stable and reasonably competent government, has moved from its disastrously low savings rate of only 8 percent to the startling level of 36 percent -- a level that can fund a good deal of growth. And so, less dramatically, for the rest of the area as well.

The major exception is the Philippines, whose savings rate was not high and has deteriorated to a lower level still, equal to U.S. levels, although aid programs, mostly from Japan, make a somewhat higher level of gross investment sustainable. The Philippines remains plagued by political instability, corruption, and governmental incompetence, with land reform still only a dream and ghastly disparities between a few of great wealth and a great many of extreme poverty. A cliché of pre -- World War II days described Turkey as "the sick man of Europe." The Philippines is "the sick man of East Asia" and shows little sign of addressing the terrible problems that have prevented this one East Asian country from participating in the move to relative prosperity.


Except for the unhappy case of the Philippines, East Asia's high savings rates find their reflection in the trade surpluses of the more mature of the region's economies, Japan and Taiwan in particular. There has been a certain fashion in America to describe Japan as a production-focused economy, said critically because somehow Japanese consumers are seen as deprived as a result of this production emphasis. The United States is in the same fashion described favorably as a consumption society. This is true enough in a way. Japan's economy produces more than is consumed, and the difference is savings. American's economy consumes more than it produces, and the difference is the awful situation where the world's richest nation by many measures is maintaining its consumption level by drawing on the savings of the world, through world funding of U.S. deficits, to the disadvantage of those poorer nations badly in need of capital investment funds. The fact is that consumption is easy; production and savings are more difficult but absolutely essential if the world is to enjoy economic growth. These savings find one expression in balance-of-payments surpluses.

Assessing the importance to the world of Japan's balance-of-payments surpluses, Derek Healey notes the high level of East Asian savings and their impact: "Besides Japan, only Germany and Taiwan -- and until recently although to a lesser extent the Republic of Korea -- are generating balance of payments surpluses. Of these, the German surplus will undoubtedly be used, first, for the rehabilitation of the former East German Economy; second, for the restructuring of the East European countries...; and third, for assistance to the Soviet Union in its reconstruction process. Thus only Japan and Taiwan are currently in a position to provide capital to assist the economic development process in the rest of the world."

Healey might have added China to the list, given its recent surpluses and its growing foreign exchange position -- although no doubt those surpluses can be absorbed domestically in support of China's growth. In any case, Japan is setting record surpluses, with foreign exchange reserves of $80 billion. Taiwan has even greater reserves, at some $90 billion, probably now the world's highest, leaving gold out of account. China's additional $45 billion or so means that East Asian exchange reserves represent a very substantial part of world totals, $200 billion among these three nations.

Recycling the Japanese surplus in particular has provided additional capital to the economies of East Asia in two forms: first, aid funds, and second, direct investment. Japan is the largest aid donor nation now in the world, with a special emphasis in its aid programs on East Asia. In 1990, bilateral aid amounts were similar for Japan and the United States, about half again as great as the German aid program. However, the six major recipients of Japanese aid were all Asian nations, with Indonesia as usual receiving the largest amount of Japanese aid funds, but China and the Philippines also major recipients. In contrast, one-third of U.S. aid goes to Israel and Egypt, with the Philippines the only East Asian nation among the top ten U.S. aid donees, the U.S. grant to the Philippines being less than half that of Japan's. German aid goes to a broader geographic range of nations, with some focus on the Near East and South Asia. The concentration of Japanese aid funds on East Asia is strikingly different than the aid patterns of the other major donor nations.

In addition to the concentration of aid in East Asia, "another characteristic of Japanese aid is the high percentage directed toward infrastructure. In 1989, for example, 32 percent of the spending went for things like roads, railroads, ports, telecommunications systems, and power plants. The United States, by contrast, provides relatively little money for physical infrastructure. It gives far more food aid than the other leading donors, and it also invests fairly heavily in "social infrastructure." As noted earlier, the shortfall in physical infrastructure is precisely a main barrier to more rapid economic growth throughout developing East Asia, and much of Japanese aid is aimed precisely at helping to clear away those bottlenecks in transport, energy supply, and telecommunications that are both a major problem for these economies and a major opportunity for Japanese suppliers.

Taiwan and Korea are beginning to develop aid programs as they move to the Japanese position of savings accumulations and current account surpluses. However, programs from Taiwan are limited by political issues, as Taiwan's government does not have formal diplomatic relations with many of the countries in the area, and Korea's programs are constrained by sheer lack of funds as Korea struggles to reestablish a trade surplus again after several years of deficits. Both of these economies, however, join Japan in being major suppliers of direct investment to the economies of Southeast Asia.


With this has gone as well a general inclination to encourage foreign investment as supplying capital, technology, and skills badly needed in these developing economies. The moves of Deng Xiaopeng in China to use foreign investment as an instrument of economic growth have been an unexpected and unusual Communist recognition of the positive effects of foreign investment, and have been as well a brilliant success along the China coast, with steady increases in the openness of China to foreign investment.

The potential for investing abroad has been essential to the continued economic growth of the investing as well as the receiving nations. The first wave of investment from Japan, and then in turn Taiwan and Korea, had been to secure raw material sources -- Japan's large investment in Sumatra to obtain aluminum, the Korean and Taiwanese ventures elsewhere in Indonesia for plywood and pulp. However, the investments have driven mutual growth in the next wave, from the mid-1980s, in search of labor as Northeast Asia encounters labor shortages and increasing labor costs, in search of less expensive land, and to balance the pressures of increasing exchange rates against the dollar that make exports more difficult, from Japan and Taiwan in particular.

This is not a "hollowing out" of the Northeast Asian economies. The industries that are moving into the Southeast and into coastal China are the lower value-added industries that must move if the Northeast Asian economies are to continue to increase their income levels. These economies would be "hollowing out" in the U.S. sense only if critical higher value-added products and components such as those for electronics manufacture were being sourced from offshore. This is not the case, at least not yet, for Japan, Taiwan, or Korea.

The combination of development aid and direct investment provides a measure of the total capital contributions made to the area. In 1990, the flow into East and Southeast Asia from the United States was $3,856 billion in combined aid and investment, nearly all investment. The EC nations together provided an almost identical amount of aid and investment to East Asia, a total in 1990 of $3,947 billion. The total Japanese flow that year was $9,647 billion, or two-and-one-half times greater than the flow from either the United States or western Europe. It appears that Southeast Asia is to Japan as Latin America is to the United States and eastern Europe to western Europe. The Japanese appear to have the best of it.

Nor are Japanese flows diminishing. Aid in 1993 is up again by about 7 percent, with the Asian proportion of Japan's total aid declining as more Japanese aid flows to South Asia and the Middle East, but the amounts to East Asia are continuing to increase. Japanese direct investment to the world declined sharply in 1992 as the economy slowed, down nearly 20 percent from the year earlier. Direct investment into East Asia, however, increased. The large flows of capital continue.

The role of the United States in this process has been critical. "The spectacular Asian economic 'miracle' owed much to the United States. First of all, the latter continued to provide a military presence through its bases and fleet in the region...although it might be questioned (as it was in various parts of Asia) whether such a presence was really needed....Secondly, the United States more directly helped the Asian countries' economic growth through purchasing large quantities of their goods....It may be said without exaggeration that the accessibility of American markets to Asian goods was a principal cause of the expansion of Asian export trade in the 1980s which in turn fueled its growth."


It has been remarked often, and accurately enough, that one of the reasons for the economic success of East Asia has been the emphasis on export promotion in managing these economies, rather than import substitution. Import substitution as a way of dealing with trade deficits and of supporting domestic growth was a standard part of the development strategy of many nations, including at an earlier period many of the East Asian developing economies. Led by the Taiwanese and Korean examples in particular, however, and those economies' great successes, the region as a whole has opened itself to trade to a considerable degree and has sought growth through export promotion rather than through protectionism and import substitution.

Trade has been a critical part of the performance of these economies. Exports were seen as the route to success, and this helped determine their openness to foreign investment, viewed as another support to trade growth. The performance has been spectacular, just as total growth has been. East Asia now accounts for one-quarter of world trade. While Japan's export growth has slackened with growth driven by the internal demand of a maturing economy, nearly all the rest of the area has experienced double-digit export growth, and these rates are continuing. While world trade in 1991 grew only 3 percent, East Asia's major trading economies increased their exports by 13 percent and imports by 17 percent.

Eight of the ten economies of East Asia are now among the 25 largest traders in the world, and East Asia's quarter share of world trade is up from only 10 percent three decades ago. Japanese expectations are of continued rapid export growth for the area (see Table 1-5). In this growth, the U.S. market was a major factor, as noted, especially with the Asian NIEs. As recently as 1986, nearly two-fifths, 37 percent, of the exports of Taiwan, Korea, Hong Kong, and Singapore were to the U.S. market. Only 10 percent went to Japan. By 1991, dependence on the U.S. market by the NIEs had dropped by one-third to just under 25 percent, while Japan remained at 10 percent.

The ASEAN 4 present a quite different pattern, with Indonesia, Malaysia, and Thailand never so dependent on the U.S. market as the NIEs. The United States has taken about 20 percent of the exports of the ASEAN economies, with Japan at about 25 percent. As intra-Asian trade increases, dependence on both Japan and the United States has lessened slightly. The Philippines, no doubt for historical reasons, is in the NIE pattern of heavy, and in this case even increasing, U.S. dependence. Here again, as in so many ways, the Philippines seem the odd man out in East Asia.

China needs special mention. As Overseas Chinese investment flooded into South China, and as Guangdong and Fujian production and export of such light items as textiles, shoes, toys, and the like took over the place in the U.S. market held earlier by Taiwan and Hong Kong in particular, China's trade with the United States has moved into substantial surplus. The predictable political reactions in the United States are occurring with some risk of U.S. protectionist moves against Chinese exports to America. Isolation of China is unlikely to serve U.S. purposes overall and would certainly have a negative impact on East Asian economic development and U.S. relations in the area.


In economic terms East Asia has been the beneficiary of a curious period in U.S. history, during which U.S. consumption increased greatly as tax levels were slashed in the 1980s. Individuals, corporations, and governments in the United States all reduced savings to very low levels, and the national government became a massive dissaver. Import restrictions on textiles, steel, autos, and other products were drowned by the surge of import-satisfied consumption. This all occurred at precisely the time that it best served the interests of the economies of East Asia, as their production levels and quality of output moved to meet world standards.

This era is no doubt drawing to an end as dependence on the U.S. market diminishes and as the need of the United States to remedy its savings failures becomes more urgent. It is clear that the economic progress of East Asia is no longer dependent on the West but has become self-sustaining. East Asia is now a more important market for Japan than North America. Asian trade with Asia is nearing half of total trade and on current trends will be more than half by the end of the decade. There are clear implications in this for trade policy and for the issue of trading areas and trading blocks, to be discussed below.

In military and strategic terms too an era has ended with the collapse of the Soviet Union. Remnants of the cold war remain in East Asiathere is no peace treaty between Russia and Japan; the Korean peninsula remains potentially explosive; the problems of Cambodia continue. Three major countries in East Asia are still led by Communist parties, even with China's "Socialist market economy" and Vietnam's Doi Moi reformation.

So it is not so easy in East Asia to speak of the end of the cold war. Still, there is not -- nor has there been for some time, in the opinion of a great many -- a serious military threat or issue in the region. There is interest in a continued U.S. military presence, but that interest seems driven by a desire to avoid taking regional responsibilities as much as by a felt need for U.S. troops in the area. And certainly, barring some catastrophic change in world conditions, the U.S. military will continue a steady reduction in Asian bases and troop deployments. Domestic U.S. conditions and attitudes will require and demand a steady military withdrawal from Asia. The question is whether the United States has the wit or will to devise for itself a different role in Asia than marketplace or policeman.

One conclusion must be that the growth of East Asia has moved past dependence on the United States or any other single factor and has now become truly self-sustaining. "Growth in Asian demand is now more than compensating for falls in demand in the U.S. and elsewhere. The impact on Asia from the global economy has become very small," according to Chi Hung Kwan, senior economist at the Nomura Research Institute? As seen earlier, East Asian GDP growth, and export growth, has continued without significant pause despite a sustained downturn in what have been considered until recently the regions' main markets of North America and Europe. A key clue in a classic Sherlock Holmes story was that the dog did not bark. The key to understanding the new autonomy of East Asia is the recession of 1989 to 1992 that did not take place.

A neglected aspect of East Asian development is its heavily urban focus. To a considerable degree, it is misleading to speak at length, as here, about these economies as national. First, the notion of the nationstate is essentially a concept developed in the West. In a good deal of East Asia the nation-states' boundaries are more porous. Indonesia, Singapore, and Malaysia are examples of recently established nations where religious, ethnic, and subregional identities are likely to be a good deal stronger than national identities. Taiwan and Hong Kong are further examples. No doubt this aspect has made for the development of regional economies in much of the area -- national boundaries are less important, for example, than language and area identities to many of the Overseas Chinese, who play so important a part in these regional developments.

A second way in which the Western emphasis on nations can be misleading is the size and importance of Asia's cities. In evaluating Asian markets, Western businesspeople must learn to look at urban markets rather than national ones to understand their true scale and configuration. In developed and homogeneous Japan and Taiwan, the differences in per capita income from main city to country are not great. The income advantage of the average Tokyoite is only a little more than twice that of residents in Japan's poorest prefecture, Okinawa. In Taiwan, the income spread from high-income Taipei to the poorest region, Yunlin, is about 2.5 times. National averages in these economies can be a meaningful guide to the configuration of the market.

However, the income differences in sprawling and developing countries like those in Southeast Asia can be very great. The income difference between the Bangkok average and Sisaket in Thailand's remote northeast is nearly 14 times in per capita income. Similarly, from Shanghai in China to China's lowest-income province, Guizhou, the income spread is 8 times. Yet these main cities are very large markets in their own right. Bangkok has a population of six million persons, nearly 15 percent of the entire nation -- and no doubt this understates the real size of the Bangkok urban area. Manila, Taipei, Kuala Lumpur, and even Vietnam's Hanoi have 10 to 15 percent of the national population, with Seoul the highest, at 26 percent. The market is not a remote province, nor yet the national average. The market for most industrial products and most services is in these great cities. Hong Kong and Singapore, of course, are pure city-states, entirely urban. These are also young populations, with an average age under 20 years, half the average age of most Western populations.


The economic growth of the great urban centers of East Asia powerfully supports the argument of Jane Jacobs that cities, not nations, are the relevant unit for understanding economic growth. "Nations are political and military entities, and so are blocs of nations. But it doesn't necessarily follow from this that they are also the basic, salient entities of economic life or that they are particularly useful for probing the mysteries of economic structure, the reasons for the rise and decline of wealth."

"It is important, if we are to understand the rise and decline of wealth, for us not to be fuzzy about an abstraction like 'expansion' but to be concrete and specific about how expansion occurs and of what it consists. The expansion that occurs from city import-replacing consists specifically of these five forms of growth: abruptly enlarged city markets for new and different imports consisting largely of rural goods and of innovations being produced in other cities; abruptly increased numbers and kinds of jobs in the import-replacing city; increased transplants of city work into non-urban locations as older enterprises are crowded out; uses for technology, particularly to increase rural production and productivity; and growth of city capital."

The cities of Asia, notably the city-states of Singapore and Hong Kong, fit this pattern well. Note too the great shift of population in Japan from the countryside to the cities in the 1950s and 1960s, and in Korea in the 1960s and 1970s. Something like this is now happening to Bangkok and Jakarta. The process is not pretty and is especially harsh for those who hold nostalgic feelings for these cities as they once were. But the process is development, and the loss of charm is often quite simply the overcoming of poverty. What was seen as East Asia's problem -- overcrowded cities as refuges from a desperately poor countryside -- would in this view have in fact been a principal cause of East Asia's more recent successes.

An accurate assessment of the configuration of East Asia's move to industrial power involves therefore an appreciation of the special role, importance, and wealth of its cities. It involves as well an understanding of the position of Japan in the area. The stark fact is that the Japanese economy is a full three-quarters of the entire economy of East Asia (see Table 1-2). Even assuming slowed growth of the Japanese economy and continued rapid growth of the rest of East Asia, at the turn of the century Japan will still be 70 percent of the entire region in economic terms.

This mirrors the relationship of the United States to the Western Hemisphere. The U.S. economy accounts for some 75 to 80 percent of all the Western Hemisphere's economic activity. The rather large numbers of corporations in the United States and Europe that failed to develop positions in Japan are inclined to seek an alternative to Japan in East Asia. There is no alternative. The position of Japan is one of economic dominance in the area, like it or not, and that position will not change significantly in this generation.


The importance of the Japanese economy in the area is especially striking in terms of size of companies. Nearly 90 percent of the top 500 companies of East Asia are Japanese. The largest 34 are all Japanese, with Korea's Samsung in 35th place with sales of about $14 billion. Ninety of the top 100 companies are Japanese, 6 are Korean, with 1 each from Malaysia, Indonesia, and Taiwan. This is due first of course to the massive size of the Japanese economy relative to others in the area, but also to the fact that in these recently developing economies many of the firms are rather new and still under family management. It can be assumed that the number of large East Asian companies, competitive in size to Japan's companies, will increase rather rapidly over the coming years. These companies, like Japan's, will be reaching out from the region to world markets, and growing proportionately.

The position of Japan's companies in East Asia is examined in some detail below. Asia is now by a good margin the most profitable area of investment for Japan's companies. It is, clearly, the area where the growth is. East Asia not only provides growth and profits but resources, labor supply, inexpensive land, and growing local markets. These factors are all reinforced by a steadily appreciating currency. Japanese companies' production abroad is still well under 10 percent of total output, compared with 20 to 25 percent for U.S. and German companies. However, continuing very large Japanese trade account surpluses, along with the forces at work that make investment attractive, mean a continuing increase in offshore production by Japan's kaisha.

Japan's business executives seem convinced of East Asia's advantages. When Japan's powerful association of business firms, Keidanren, asked a sample of top managers, "What priority does your company assign to markets of the future?," 62 percent placed a higher priority on Asian markets than on the U.S. market. The most recent foreign investment data suggest that the largest proportion of Japanese direct investment is still going into the United States. This no doubt will continue to shift toward East Asia, the more so as Asia continues to welcome Japanese investment and U.S. attitudes toward Japan become more critical.

As we have seen, East Asia is now Japan's largest export market and the fastest growing, with exports in late 1992 to Asia up 15 percent on the year. Jardine, Fleming Securities noted in late 1992, "In October, Asia replaced Europe as Japan's second biggest export market for transport machinery (cars, trucks and motorcycles.)"

Japan's historic move to a leading position as an industrial power has made possible the development of East Asia, and that is still the single most important factor in East Asian development, while East Asia in turn is now supplying Japan with a new and important support for Japan's continued industrial growth. These patterns of investment, trade, and mutually reinforcing growth are clearly not zero-sum games, and there are no moves in East Asia toward protectionism or closing borders to foreign investment. A winning game for all is now being played in East Asia.

The question remains, is there to be a second Japan in East Asia within the next generation? Can some nation displace Japan as the region's economic power? If Japan falters economically, is there a successor economy to step into the lead?

No one of the East Asian nations seems to qualify. Korea lacks the infrastructure of education and scientific skills that Japan built over a century, and with a population of 40-odd million is too small to be a major power. In combination with the North this could change, but only after a long period of great difficulties, in the manner of the German reunification. Indonesia has the population and resources but has a very long way to go to build the economic base from which to move to leadership. It is a candidate, but only far into the future.


One of the most striking phenomena in the current economic growth of East Asia is the rise of regional economic zones, combining the capital and technology of Hong Kong, Taiwan, Korea, and Japan with the coastal provinces of China, opened as markets and investment sites by the reforms led by Deng Xiaopeng. The most dynamic of these are the Hong Kong-Guangdong combination and the Taiwan-Fujian combination. Both of these regional economic zones are Chinese -- of different dialects and regions though -- with growth in both being led by Overseas Chinese, both focused in light industry, and both providing access to the vast Chinese hinterland of labor supply and potential market.

It takes no great ingenuity, then, to suggest that these might become a single economic zone -- or that indeed they are in process now of becoming such a zone. The flow of investment, trade, and people into Fujian from Taiwan is now mainly through Hong Kong, given the lack of direct connections between Taiwan and the mainland. Table 1-5 provides some basic data on the regional zone compared with Japan and with ASEAN. The similarities to Japan in population and area are striking, with GNP estimated at about one-tenth that of Japan in total and per capita.

"Some Taiwanese leaders are advocating the formation of a greater China economic zone that would encompass mainland China and Southeast Asia. This concept is seen as a means of competing with the world's three major economic zones (Europe, North American, Japan) and preventing the expansion of Japanese economic influence in Asia." Clearly, there are political bamers to a formal structuring of this zone, but clearly too the market place and economics are driving these entities together, and the absorption of Hong Kong into China in a few years will mark a step toward actual integration. In any case the concept does not require a formal structure but instead a continuation of recent and current economic trends. Nomura Research states, "The greater China economic zone is already a reality, albeit an invisible one."

Whatever configuration this and other regional economic groupings may take over the next years and decades, their existence and dynamism is characteristic of the sweeping changes that continue in East Asia. The economic growth of the area is now self-sustaining as East Asia for the first time in nearly three centuries moves again to a central position in world affairs. There has been a sea change, as the industrial center of the world has moved to the western Pacific. No country nor company will go unaffected as the region's success reorders the economic structure and marketplaces of the world.

Copyright © 1994 by James C. Abegglen

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