The Titans and the State
How the Japanese Automotive Industry Flourished with Government Help (1912-1971)
Nobody makes cars like Japan does. The only two countries that make more cars than Japan are China, which has eleven times as many people, and the United States, where a long and storied history of car manufacturing, a three times larger population, and a four times higher GDP has earned them the title of producing 12% more motor vehicles than Japan.[1] Japan’s car-manufacturing prowess is not the product of just one successful company either; rather, Japan is home to the world’s #1 car manufacturer (Toyota), the world’s #6 car manufacturer (Nissan), the world’s #7 (Honda), #11 (Suzuki), #17 (Mazda), #20 (Mitsubishi), #21 (Subaru), and #27 (Isuzu).[2] How did this happen? Cars are not some new-fangled technology fit for a late-developing nation like Japan—they’re heavy machinery forged by the kind of mechanized and skilled industrial production that the West excels in.
Though American cooperation and events outside Japan’s control—like the Korean War—played a role, the Japanese government’s continued support for the automotive industry enabled its success. This support included the kind that was direct and monetary, like subsidies, contracts, and loans, but it also included the kind that was directional, like in facilitating tie-ups, or regulating fuel-efficiency, or encouraging passenger cars. And arguably the most important form of government support was protection, both from foreign competitors and from unruly unions.
Monetary Support
Compared to the steel, aircraft, chemicals, or technology industries, government support for the automotive industry was not so direct. Taxes were high in the sector and the industry was rarely if ever mentioned in economic plans.[3] Nonetheless, direct monetary support did occur, especially in the prewar era, with substantial subsidies and contracts, and then in the postwar era with loans and bailouts.
Light monetary support began in the early 20th century. After the Japanese army used just a few trucks in their victorious effort in the Russo-Japanese War, they were instantly impressed by the automobiles’ ability as a tool for defense. In 1912, the government created an Investigation Commission on Military Vehicles to inquire into the methods of automobile procurement in Western militaries. A few experimental trucks were developed by the army and used in the Tsingtao Operation in China, where once again, the trucks performed well. The passage of the 1918 Act to Aid the Production of Military Vehicles demonstrated to shipbuilders and other manufacturers that there would be government contracts to be won in truck manufacturing so long as companies were interested in expanding into the industry.[4] There were also subsidies written into the Act: a 1.5 metric ton, 6-wheeler truck could get a production subsidy of 2,700 yen, a purchase subsidy of 1,000 yen, and a maintenance subsidy of 600 yen.[5] The Osaka Arsenal even opened up its own plant, while at the same time telling Tokyo Gas & Electric to start making trucks, giving them basic materials, forging dies, cast items, blueprints, and technical advice. Government demand for automobiles rose again after the Kanto earthquake, when immediate recovery was needed before the railways could be finished being rebuilt.[6]
Government contracts soared in the 1930s as the military took control of the state and began mobilizing it for war. This is the era when Toyota and Nissan emerged, with direct incentives, amid rising army demand and the failure of the zaibatsu to enter the industry as the government had wished.[7] The 1935 Announcement of the Outline of the Automobile Manufacturing Law made it clear that automobile manufacturing was to follow the path of all of the country’s industries—it was to be built up quickly and efficiently for the purposes of national defense.[8] The war provided some contracts, but tight controls, high demand for aircraft, and Japan’s ultimate defeat amid considerable bombing prevented a true wartime boom.
After the war, direct support continued, although not in the form of military contracts. Though the Supreme Commander for the Allied Powers (SCAP, the almost entirely American occupying forces) had initially capped automobile manufacturing, it had grown tired of paying for the Japanese to import American cars and removed the cap in 1949.[9] That same year, Toyota approached bankruptcy, having been the victim of bombs and the victim of limited reparatory aid.[10] The Bank of Japan stepped in and loaned the company $560,000. There were conditions though: the sales and manufacturing departments would be split and demarcated, the manufacturing department could only make what the sales department promised it could sell, the workforce had to be thinned, and the company’s ownership would have to be turned over to outside personnel. This massive conditional loan was a rare move for a bank theoretically limited to loans to the government and to other banks.[11] Such industry loans in the future were done by the Japan Development Bank, a government bank focused on economic development, whose continued support involved once borrowing $234 million from the World Bank in 1956 for the express purpose of loaning it back out to Toyota. In the era around that year, government loans represented 19% of the capital in the industry.[12]
Direct economic support was also given to the parts’ industry. Between 1956 and 1966, nearly $50 million was given in the form of low-interest, long-term loans by the government to parts’ manufacturers. In this industry, there was instant success: car prices fell as early as 1958 in part due to how inexpensive parts were becoming;[13] between 1960 and 1965, automobile parts’ prices declined by around 30% each year.[14]
Directional Support
The government also offered direction to the automobile manufacturers, facilitating technical tie-ups with American companies, and providing incentives to create smaller and more fuel-efficient models. In 1952, the Ministry of International Trade and Industry (MITI) released its Policy Relating to the Treatment of Technical Tieups and Assembly Contracts, which laid out how foreign companies would be used to strengthen Japanese industry temporarily, until the Japanese industry could thrive on its own. This policy specified that foreign capital would be allowed for production (not for sales), with proper royalties and patent fees paid to the foreigners, but manufacturing rights had to be turned over to local companies, and after 5 years, at least 90% of the parts had to be produced domestically.[15] These tie-ups worked well and the contracts ended in 1958, with much having been learned from the foreigners.[16]
MITI also helped an industry born on military trucks to focus on fuel-efficient passenger cars. Though the contest never actually took place after backlash from manufacturers,[17] MITI made its stance known in 1955 with the proposal of a “People’s Car” contest, inspired by the Volkswagen,[18] aimed at developing an ideal passenger car for the masses. Though the contest did not happen, rising incomes and government’s willingness to fund and encourage passenger cars made it clear to the manufacturers that there was money to be made here. In the late 1960s and early 1970s, strict regulation on emissions spurred by pollution in Tokyo led to huge fuel-efficiency breakthroughs: Honda’s compound vortex controlled combustion (CVCC) engine, and Toyota’s three-way catalytic converter.[19] These innovations, cost-effective and fuel-efficient, helped Japan take off as not just a domestic manufacturing giant, but an export giant, especially after fuel prices rose in the 1970s.[20] The fraction of exported cars out of the total produced in Japan rose from 0.6% in 1955 to 10% in 1965 to a whopping 39% in 1975.[21]
Protection
But despite their influence, monetary support and directional support were dwarfed in importance by the protection that the Japanese government offered its once-fledgling automobile industry. This included classic protectionist measures like import quotas, tariffs, and even strict restrictions on foreign companies that wanted to make cars in Japan, but it also included protection from leftist unions.
Prewar protectionism began in the 1930s, with both tariffs and heavy restrictions on what foreign companies, especially Ford and General Motors (GM), could make in Japan. These first came in 1934, when Ford attempted to buy some land in Yokohama for its plant and was stopped by the army, which argued that Ford’s expansion would be the end of domestic manufacturing. When Ford tried to circumvent the government by buying from a zaibatsu, the government rejected its building permit due to army pressure.[22] That same year, the government also raised tariffs on imported cars, effectively ending Nissan’s planned partnership with General Motors and forcing Nissan to get innovative and make its own cars.[23] The tariff hike was soon followed by the passage of the Automobile Manufacturing Law in 1936. This law was enormously restrictive; it capped Ford and GM’s production at their current level (around 10,000 cars per year), banned joint ventures, raised tariffs to 50% on engines and parts, and required registration with the government in order to make more than 3,000 cars worth of parts per year. Later in 1936, the government passed the Automobile Industry Act, requiring each industry player to have majority ownership and control by Japanese nationals. If that were not enough, tariffs continued to rise for years after that.[24]
The prewar restrictions were not enough to immediately turn Japanese automobile manufacturing into a juggernaut, but luckily for them, the restrictions stuck around. The government wiggled and maneuvered as long as it possibly could to keep the tariffs high and the restrictions in place. It was not until 1965 that passenger car importation was liberalized, and it was not until 1971 that foreign capital could participate in the financing.[25] The United States allowed these protectionist measures to stay in place because it wanted a strong Japanese economy, both so Japan would be less reliant on them, and because it would create a strong capitalist power in an Asia that looked to be falling into the grips of communism.[26] Though the restrictions all originated in the prewar era, it was their continuation postwar that allowed Japanese automotive companies to flourish into the titans we know them as today.
Japan’s government did not just protect automobile manufacturers from external threat, but rather internal threats too, most notably radical workers’ unions. The first automobile workers’ unions were leftist in ideology,[27] and the labor movement more largely was closely linked to the Communist Party of Japan. The Red Purge of 1950 severed the explicit Communist ties, but the unions remained radical and leftist.[28] This came to a head at Nissan in 1953, where a 100-day strike occurred, finally broken with the help of the Japanese government and occupied forces.[29] The union was disbanded, and a cooperative, productivity-focused union replaced it, hellbent on increasing the size of the pie rather than its share of it.[30]
With oppositional unions dismantled, foreign manufacturers restricted, and the economy booming, the Japanese automobile industry grew immensely in the 1960s, bloomed in the 1970s, and dominated in the 1980s, finally peaking in 1985, when the Big Three American manufacturers that had dominated the industry since its inception were now making cars 30-40% more costly to make and deliver than Japanese firms, who had achieved a level of productivity that made even the Americans jealous.[31]
None of this would have been possible without government assistance. There were the direct subsidies and contracts that got the industry started, and then there were the 1930s’ restrictions on foreign involvement in the industry. When the industry was on the brink after the war, it was the government who stepped in to bail them out, loan them enough money to take off, focus their efforts on fuel-efficient passenger cars, and clear the field from internal and external threats. When economic growth took off, it necessarily followed that this well-supported industry would too.
Bibliography:
International Organization of Motor Vehicle Manufacturers. “2019 Statistics | Www.Oica.Net,” 2019. https://www.oica.net/category/production-statistics/2019-statistics/.
Cole, Robert E., and Taizo Yakushiji, eds. “The Automobile Industry and Public Policy.” In The American and Japanese Auto Industries in Transition. Ann Arbor, MI: University of Michigan Press, 1984.
Fujimoto, Takahiro. Competing to Be Really, REALLY Good. Tokyo, Japan: International House of Japan, 2007.
Genther, Phyllis A. A History of Japan’s Government-Business Relationship: The Passenger Car Industry. Ann Arbor, MI: Center for Japanese Studies, The University of Michigan, 1990.
Gordon, Andrew. “The Emergence of a Labor-Management Settlement in Japan, 1945-1960.” International Labor and Working-Class History Fall 1996, no. 50 (Fall 1996): 133–39.
Magaziner, Ira C. “Japanese Industrial Policy: Source of Strength for the Automobile Industry.” In The Japanese Automobile Industry: Model and Challenge for the Future?, edited by Robert E. Cole. Ann Arbor, MI: Center for Japanese Studies, The University of Michigan, 1981.
Odaka, Konosuke, Keinosuke Ono, and Fumihiko Adachi. The Automobile Industry in Japan: A Study of Ancillary Firm Development. Tokyo, Japan: Kinokuniya Company, 1988.
Shorrock, Tim. “Nissan: Portrait of a Global Giant.” Magazine. The Multinational Monitor, October 1983. https://www.multinationalmonitor.org/hyper/issues/1983/10/nissan.html.
“World Motor Vehicle Production.” International Organization of Motor Vehicle Manufacturers, 2017. https://www.oica.net/wp-content/uploads/World-Ranking-of-Manufacturers-1.pdf.
[1] “2019 Statistics | Www.Oica.Net,” International Organization of Motor Vehicle Manufacturers, 2019, https://www.oica.net/category/production-statistics/2019-statistics/.
[2] “World Motor Vehicle Production” (International Organization of Motor Vehicle Manufacturers, 2017), https://www.oica.net/wp-content/uploads/World-Ranking-of-Manufacturers-1.pdf.
[3] Robert E. Cole and Taizo Yakushiji, eds., “The Automobile Industry and Public Policy,” in The American and Japanese Auto Industries in Transition (Ann Arbor, MI: University of Michigan Press, 1984).
[4] Konosuke Odaka, Keinosuke Ono, and Fumihiko Adachi, The Automobile Industry in Japan: A Study of Ancillary Firm Development (Tokyo, Japan: Kinokuniya Company, 1988), 24-26.
[5] Ibid, 30.
[6] Ibid, 27.
[7] Ira C. Magaziner, “Japanese Industrial Policy: Source of Strength for the Automobile Industry,” in The Japanese Automobile Industry: Model and Challenge for the Future?, ed. Robert E. Cole (Ann Arbor, MI: Center for Japanese Studies, The University of Michigan, 1981), 71.
[8] Phyllis A. Genther, A History of Japan’s Government-Business Relationship: The Passenger Car Industry (Ann Arbor, MI: Center for Japanese Studies, The University of Michigan, 1990), 30.
[9] Ibid, 51.
[10] Ibid, 44.
[11] Ibid, 58.
[12] Ibid, 88.
[13] Cole and Yakushuji, “The Automobile Industry,” 87.
[14] Magaziner, “Japanese Industrial Policy,” 81.
[15] Genther, A History, 89.
[16] Odaka, Ono, and Adachi, The Automobile Industry, 43.
[17] Magaziner, “Japanese Industrial Policy,” 81.
[18] Cole and Yakushuji, “The Automobile Industry,” 85.
[19] Takahiro Fujimoto, Competing to Be Really, REALLY Good (Tokyo, Japan: International House of Japan, 2007), 77
[20] Odaka, Ono, and Adachi, The Automobile Industry, 50.
[21] Ibid, 49.
[22] Genther, A History, 31.
[23] Odaka, Ono, and Adachi, The Automobile Industry, 33.
[24] Odaka, Ono, and Adachi, The Automobile Industry, 35.
[25] Ibid, 51.
[26] Ibid, 92.
[27] Ibid, 48.
[28] Andrew Gordon, “The Emergence of a Labor-Management Settlement in Japan, 1945-1960,” International Labor and Working-Class History Fall 1996, no. 50 (Fall 1996): 134.
[29] Tim Shorrock, “Nissan: Portrait of a Global Giant,” Magazine, The Multinational Monitor, October 1983, https://www.multinationalmonitor.org/hyper/issues/1983/10/nissan.html.
[30] Gordon “The Emergence,” 133.
[31] Fujimoto, Competing, 78.