Ed Wallace

The China Automotive Syndrome

On July 8, 1853 U. S. Commodore Matthew Perry and his small naval fleet entered Tokyo Harbor and demanded that Japan open itself to foreign trade. One hundred and nineteen years later President Richard Nixon flew into China and opened their market to the world trade system again. Studying the industrialized West’s relationship with the Orient over that 119-year period reveals the chaotic path international trade relationships can sometimes take.

If you or someone in your family has ever used an EpiPen® to save a life, there’s a direct connection between that, the Cherry Blossom Festival in Washington DC next month, and your ability to purchase a Toyota after reading this column.

Your Country Needs You

The year after Perry opened Japan, Takamine Jokichi was born in Takaoka. The bright son of a physician would first attend the Imperial University in Tokyo, then pursue higher studies in Scotland. In the rarest of situations he was raised bilingual, having learned English as a boy from a Dutch family living in Japan. For a while he worked in Japan’s Department of Agriculture, then started his own company and created an enzyme that catalyzes the breakdown of starches.

By then he had traveled to the United States, acting as a co-commissioner to the 1884 Cotton Exposition in New Orleans. During that trip he would meet his future wife, Caroline Hitch. In time Jokichi emigrated to America; he set up his new lab in New York, but made his first fortune licensing the rights to the enzyme he had created, Takadiastase, to Parke-Davis pharmaceuticals. Then in 1901 he isolated and purified adrenaline; known as epinephrine today, it has been used to save millions of lives from the effects of anaphylactic shock. It is said that his personal fortune soon rose to $30 million, an outlandishly huge sum at the time. Eleven years later Jokichi, along with the Mayor of Tokyo, paid for and helped donate most of the nearly 4,000 cherry trees that line the Tidal Basin in Washington D.C. At the time it was treated as a gift of friendship between the two countries and cultures.

Two years before that trans-Pacific gift, however, Sakichi Toyoda had traveled to America; and the wealth he saw in the largest cities here stunned him. Toyoda had already started two loom companies, but larger and more powerful rivals had taken him out of business. Now in May of 1910 he visited with Jokichi in New York and asked his help to emigrate here. But the good chemist told Toyoda that, while he could help him come to America, Japan needed men such as him, true visionaries, to move their homeland forward. More to the point, Jokichi told Toyoda that if all of the truly talented Japanese left for greener pastures, then Japan would always remain a feudal country. Toyoda went home, invented what was considered the world’s finest automatic loom, and used the profits from selling those looms to England’s Platt Brothers to found a car company two decades later.

That closes the chapter joining Washington DC’s cherry trees, your EpiPen®, and your ability to buy a Toyota Prius today. It also brings us to the Great Depression and echoes of today’s international trade.

Foreshadowing China

Ford had entered the Japanese market in the mid-1920s, with General Motors following a year later. Although that market was small at the time, or maybe because of that, the two American car factories there quickly came to control nearly 90 percent of new car sales. Toyota was small at the time, as was Nissan. And Nissan had hired William Gorham, an American engineer who went to Japan to ply his skills, to design its first Nissan automobile. During the Depression Gorham returned to America to purchase and ship to Nissan the factory equipment of the Graham Paige Motor Company from its bankruptcy receivers. Then two things happened.

First, in 1936 as the Japanese military moved to influence the country, they had the Automotive Manufacturing Industrial Law passed, which demanded that non-Japanese car companies building and selling at least 3,000 vehicles a year in Japan had to be half owned and managed by Japanese partners.

At the same time, Nissan received a huge order for trucks that the Japanese military needed in Manchuria. Knowing there was no way his company could fulfill that request, Nissan’s Aikawa Yoshisuke called his friends at Ford Japan to build those trucks for his company. They also held talks about a merger because the new Japanese law had gone into effect. GM held minor talks with Nissan, but claimed they were more likely to merge their Japanese operations with Toyota. Neither merger came to pass, because Tojo’s military took control of vital Japanese industrial sectors in 1939 to move toward war production. GM and Ford got the hint and left; Nissan took that opportunity to hire most of Ford’s workforce and strip his factory of equipment.

Then there was a war, which you may have heard something about.

Swords into Plowshares

Afterwards Toyota was in dire straits, down to making cookware to keep its workers busy and growing crops on factory land to feed their families. Nissan cut a deal with British Austin for rights to build their product and engines in Japan. Again, these were tough times in Japan. We then made a decision to rebuild Japan after the Second World War, making it a capitalistic paradise as a beacon against the darkness of communism that was trying to fan out across Asia and had already overtaken China.

We did the exact same thing with South Korea after that war in the early 1950s. When President Trump wanted to tear up our trade agreement with South Korea, much in the same way as he’d dealt with NAFTA, cooler heads in Washington explained to him why that trade agreement was critical to the safety of the American public: Because America’s early warning system, which would detect any nuclear launch out of North Korea within seconds, exists just south of the DMZ. And South Korea’s economy would collapse without us as their primary trading partner — meaning that early warning missile detection system would go away. Wisely, we made minor changes and quickly reapproved that trade agreement.

Japan was a financial basket case, but had a strong work ethic. In 1953 a Toyota Crown sedan cost $2,639, but the average Japanese family earned barely over $200 a year. In concert with America’s neocolonialist foreign policy, put in place after the war, Japan became an economic powerhouse in the Sixties, sending the world everything from motorcycles to automobiles and high-end electronics. Japan became a shining example of how quickly a country could go from total devastation to challenging its benefactor for supremacy in many competing industries. But they didn’t do it alone. We invented things like the transistor, videotape, and the moving assembly line, and Japan figured out better ways to use those items in consumer products. Japan’s success was the unstated economic calling card that Nixon used to open China to the world again. And what does China do with this opening? They copy the Japanese historical model.

Think about it. First China wanted only 50/50 partnerships for foreign automakers in that country, just like Japan demanded in 1936. Then China wanted foreign car companies to flood that country, to teach them how to engineer, design, and build world-class vehicles. China even went so far as to demand technology transfers, from not just our auto companies, but other critical foreign industries, too.

How is that any different from Austin allowing Nissan to build Austin’s vehicles and engines in Japan — which taught Nissan how to build better vehicles on its own?

And where is Austin Motors today? Well, through mergers and downsizing it finally devolved with other UK automakers into the Rover Group, which was sold to Nanjing Automotive in China. (The Rover SUVs went to Tata of India.) Austin also allowed BMW to build its products in the 1920s.

So BMW and Nissan survive today as worldwide powerhouse automobile companies; Austin is long gone although Nanjing has the right to use that name on a future product if it so chooses. And just as Japan’s Sony built its company on the back of Bell Lab’s transistor and Ampex’s videotape recorder, one wonders what China is learning about advanced electronics from Apple and other brands.

All of this is an amazing story and one of the most misunderstood byproducts of intentionally moving foreign rivals from military threats to business threats. It’s cheaper for our government, but far more costly to our established industries. About the only difference is that after the Second World War, Japan was no longer a military threat to us, just a business threat, which we consider the better alternative. But in the case of China, it is a business threat now, but some worry it’s still a military threat in the future. Bummer.

Forgetting that for a moment, one wonders what will happen to all the car companies helping China learn how to beat them one day at their own game. Apparently auto CEOs have already forgotten the lessons of Austin.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. Email: edwallace570@gmail.com