Why Japan remains the biggest investor in the United States

Earlier this year, Mazda cars rolled off an American production line for the first time in a decade. Mazda Motor’s new plant near Huntsville, Alabama – a joint venture with fellow Japanese automaker Toyota – has begun producing a sport utility vehicle designed for the US market.

Mazda’s U-turn, years after cutting ties with longtime partner Ford and pulling out of US manufacturing, shows just how dependent the company is on US sales. North America became its largest profit center outside of Japan, reaching 30% of group sales even as Japan’s share declined.

Mazda and Toyota jointly own and operate the Alabama plant and have together invested $2.3 billion in the project. Neither can afford to fail.

“Our future growth lies in the United States,” says Masashi Aihara, a Mazda veteran who is now chairman of the Mazda-Toyota joint venture. “Our fortune is built on this recovery of manufacturing in the United States.”

Japan has been the largest foreign investor in the United States for three straight years as companies seek growth in the world’s wealthiest country. But the market also presents challenges — particularly rising costs and cultural differences — that may make some potential investors think twice.

Japan’s cumulative direct investment in the United States reached $721 billion last year, or 14 percent of the $4.98 billion total, according to data from the U.S. Commerce Department. U.S. subsidiaries and affiliates of Japanese companies exported $75.3 billion worth of goods in 2020, well ahead of second-place Germany’s $47.5 billion. Their research and development expenditure totaled $12 billion, second only to Germany’s $12.7 billion, and they employed around 930,000 workers, second only to British companies.

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About half of Japanese investment has gone into the manufacturing industry. Besides the automotive industry, there was new spending in food and pharmaceuticals, taking advantage of strong US demand. Fujifilm last year announced plans for a 200 billion yen ($1.4 billion) drug manufacturing plant in the United States.

In the services sector, retail group Seven & i Holdings acquired gas station convenience chain Speedway for $21 billion in 2021. It now expects its overseas convenience stores to overtake their counterparts nationals in terms of operating profit this fiscal year.

“North America is becoming the main driver of our business,” said Ryuichi Isaka, President of Seven & i.

Japanese companies operating overseas have generally focused on China, Southeast Asia and Europe as well as the United States. The surge in investment in America comes amid concerns about China, which is expected to rival the US market in size but is beset by growing political risks.

These include the punitive tariffs imposed on Chinese imports by Washington, as well as the Chinese government’s growing interference in the private sector. Japan’s direct investment position in China grew by only 26% between 2015 and 2021, compared to 50% in the United States, according to Bank of Japan data.

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“Given the business risks, we can’t really ramp up our operations in China,” said an executive at a Japanese automaker.

Efforts by US President Joe Biden’s administration to bring manufacturing and supply chains home have made it difficult for Japanese companies to import parts and materials from China to the United States, as they have done in the past. Companies looking to expand into the United States need to invest more in developing local supply and production networks.

This expense does not guarantee success. Competition is intensifying not only from local players, but also from European and South Korean rivals.

And the US doesn’t necessarily offer the best returns to start with.

Profit margins on direct investment by Japanese companies have remained solidly in the double digits in China, with Southeast Asia generally not far behind at around 10%. But they have long been below 10% in the United States, dropping to less than 5% since 2020.

One of the factors is the high cost: in a survey carried out last year by the Japan External Trade Organization (Jetro), a trade promotion body supported by the Japanese government, more than half of Japanese companies operating in the United States cited rising wages as a challenge, with nearly as many reporting increases in logistics and supply costs.

Another difficulty is the wider range of wages in the United States compared to Japan, where deflation has gripped the economy for three decades.

Employee pay tends to vary little within the seniority-based pay structures that Japanese companies typically use, and efforts to introduce merit-based pay have so far done little to change that. But in the United States, it can be difficult to attract exceptional talent without exceptional compensation.

Industry group Hitachi, for example, which is trying to fill engineering and other positions at its digital technology center in California using a global database of employees, says it is ” not easy” to share personnel between Japan and the United States because of the differences. in the compensation systems between the two countries.

This also applies to management, leading to situations like the head of US-based 7-Eleven earning around 20 times more than the boss of Seven&i, its Japanese parent company.

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Weak returns from mergers and acquisitions, particularly in the finance and telecommunications sectors, are also weighing on the overall profitability of FDI. When Japanese companies buy companies in the United States, they often struggle to integrate, overcoming differences in language, culture and business climate to align local management with the Japanese parent company. The growing political divisions in the United States can be particularly difficult to manage.

Take abortion. As conservative states ban the procedure, companies are faced with the question of how to support their workers. But Japanese companies are largely unfamiliar with the Christian cultural context of the debate and struggle to unite employees with differing viewpoints. A list compiled by Yale University of nearly 140 companies offering abortion-related support includes a few from Japan.

Japan’s cautious business culture adds to these challenges. Historically, companies have tended to enter the US market only after their products and services have established themselves in Japan, but size and agility don’t necessarily go hand in hand.

Some observers believe that doing things the other way could offer higher returns. Ralph Inforzato, special adviser to Jetro Chicago, argues that Japanese entrepreneurs should look to the United States as soon as possible. “In 2022, Japanese companies, especially tech start-ups, should consider rapidly expanding their business models in the United States first and then in Japan,” he said.

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