Japan in the 1990s-23

The Locomotive Role of Service Industries in Japan's

Maturing Economy - Part i by Gregory Clark

One of my stronger memories from my time inJapan was during the economic slump of the early 80s. The steel industry was suffering from slow exports. Steel industry leaders were predicting unending economic gloom for Japan,on the grounds that productive capacity for allgoods had far outstripped foreseeable demand.

Concerned by all this I arranged to visit one ofthe large steel mills on the shores of Tokyo Bay.It was a depressing picture. Dedicated workerswith the latest in modern equipment were onlybeing allowed to operate at 60% capacity becauseof lack of demand. Maybe the Japanese economyreally was headed for chronic depression.

But on the drive back to the city I saw something that changed my mind. On reclaimed land by thebay a site the size of a full steel plant was bustling with building activity. They were setting up Tokyo Disneyland. The conclusion wasobvious: the leisure industry was beginning toreplace manufacturing as the source of economic growth. Prospects for the Japanese economy were not quite as bad as I feared.

Returning to Tokyo I wrote an article along these lines for a leading Japanese business magazine. The response from a well-known but nameless steel industry leader was immediate: I had failed to realise that the steel industry was far more important to Japan than the leisure industry, and that if other people began thinking as I did then the future of the Japanese economy really was bleak.

I mention all this because it highlights the ease with which Japan in the past has tended to ignore its service sector. My father, the economist Colin Clark, happens to be well known in Japan for his
statistical work in the 30s proving that as economies develop manufacturing inevitably replaces agriculture as the major sector. However his second conclusion tends to be ignored in Japan, namely that as economies mature services inevitably replace manufacturing as the lead sector of the economy.

This shift is inevitable. Just as agriculturalists cannot stop the shift to manufacturing, manufacturerscannot stop the shift to a service-sector-led economy. In the final result, the structure of an economy is decided by the structure of demand. And as people become prosperous it is inevitable they will demand more services-such as education, transport and leisure-rather than more steel.

In this situation, industry leaders have no choicebut to shift production to meet demand. If they do not, demand will simply find other sources of supply. For example, the extraordinary boom inoverseas travel and pachinko is a direct result of the failure to develop a satisfactory leisure industry.

Before Japan had its Disneyland, Japanese had togo to the U.S. to see Mickey Mouse. Now Asianadmirers are coming to Japan. The building of Disneyland in Japan also helped, even if indirectly, to increase demand for Japanese steel. Indeed,even some steel makers now want to move into the leisure business. One has recently built an indoor water park on company-owned land and another has built a theme park to rival Disneyland on an old steel plant site.

But there is much more Japan could be doing.Every suburb should have an indoor sports centerequipped with child-care facilities where one can enjoy a game of squash or tennis cheaply. In theU.S. or Australia, family driving holidays are popular because of the cheap and good roadsidemotels. In Japan, a family would have to stay at a prohibitively expensive ryokan. Maybe there arestill a few conservative industry leaders unhappy about the development of the leisure industry.But in the long term it is inevitable, both for thewelfare of the Japanese people and the health ofthe Japanese economy.

In my previous article, I argued that Japan's economy overall had been severely handicappedby the slow development of new service industries,the leisure industry especially. As a result consumerdemand is either suppressed or flows overseas.One obvious example is the way many youngJapanese now prefer to take their holidays in Hawaii or Hong Kong rather than in Hokkaido or Kyushu.

However, an even larger problem is the inefficiency in service industries. Thice the car industry forexample. In manufacturing, Japan is well ahead of U.S. or European rivals in terms of productivity.But when it comes to selling or renting cars Japan's productivity is only half or even less. In Japan the average car salesperson sells only four to five cars a month compared with twenty cars in the U.S. Why? Because Japan relies heavily on door-to-door or personal introduction sales. In the U.S. most cars are sold direct from the showroom.

True, door-to-door sales can mean superb service for the customer. I have even heard stories of customers demanding that the sales person repair flat tires a year after buying a car.But the price tag for such service is equally superb.Where the normal car buyer elsewhere wouldassume immediately that he or she could get a better price by going direct to the salesroom, the Japanese consumer is often too gullible or too flattered by the individual attention from door-to-door sales people to even think about the extra price tag. Nor is the service quite so good all the time. As often as not a very expensive price tag will be attached to very ordinary or mediocre service.

A major problem seems to be one of injecting price competition into the service sector. In manufacturing it is hard to avoid competition. Finished products can easily be compared withidentical products on a nationwide or even world-wide level. Prices have to be competitive or theenterprise will not survive.

In the service sector, however, competition is restricted to the areas in which the services can be physically delivered. Within those restricted areas the few competing firms often find they cansurvive very well simply by reaching implicit agreements to restrict competition and to keep prices high.

However, in the few areas where nation wide competition does exist for a standardized service we find remarkable productivity. The best exampleis truck delivery (takkyubin) service for small parcels. Here each company provides the same nationwide services. The scope for fudging on prices and delivery times is very limited. The result is an efficiency on a par with anything in the world.

Unfortunately, this kind of productivity is the exception however. Whether it is construction or transport, finance or distribution, gas or electricity utilities, or even my own industry (university education) the inefficiency found in Japan stands in such glaring contrast with manufacturing as to make one wonder whether the same nation could be involved in both sectors.

To date Japan has relied too much on its manufacturing sector for economic growth. When markets were not available at home it sought aggressively new markets abroad. But foreign opposition and the rising yen have shown the limits to this approach. An improved service sector will allow Japan to develop as well if not better than an improved manufacturing sector, if only because the service sector is now twice the size of the manufacturing sector. And an expanded service sector does not require expanded exports; if anything it cuts exports and increases imports. A very considerable plus for the foreseeable future.

What is now needed is some way to make producers more subject to competition, and consumersmore price conscious. Maybe this is one area wherewe foreigners have something to teach Japan