There's more to the U.S./Japan trade shootout than meets the eye. This bilateral showdown is ostensibly about lowering the automotive trade deficit between the two countries. But it also influences how American suppliers are investing capital and effort in the industry's growth markets, especially the Asia/Pacific region.

The U.S. slapped punitive tariffs on 13 Japanese luxury models and scheduled them to go into effect on June 28, unless an agreement is reached in the automotive talks that have been going on for two years. Ever since that threat, both sides have vociferously impugned the other's position.

As Tokyo and Washington wrangle, however, U.S. suppliers are making an end run around Japan. More than 30 have joint ventures in China (see story, p.56). As carmakers expand into India, U.S. partsmakers are setting up joint ventures there, too.

There's a developmental contest underway as auto companies identify growth markets and set up assembly operations in what are expected to be tomorrow's profit centers. The Big Three should be abashed at their late arrival to the competition, but growth curves in places like Malaysia and Indonesia give them a chance at closing the global gap with Japanese and European carmakers.

General Motors Corp. is eyeing assembly operations in the Philippines, and the brass at GM's world headquarters is reportedly looking at North Korea's free economic and trade zone for a components plant. If the facilities are actually built, GM no doubt will take along its suppliers.

Partnered with Mazda, Ford Motor Co. ponders a move into Thailand. Even if that's not done, Ford tells its suppliers to go global as it targets overseas markets.

What's more, the most reasonable solution to the trade dispute, the purchase of more U.S.-made components by Japanese transplant producers, strengthens American suppliers' efforts to gain share in Asia/Pacific countries. The stimulus is the negotiating position of the Clinton Administration.

To lower the automotive trade deficit with Japan -- $36.8 billion last year -- the U.S. wants more access to the Japanese car market and an opening into the country's auto parts aftermarket. It also wants Japan to buy more American-made original equipment for their cars sold in Japan and the U.S.

The Big Three can forget the first two requests.

It's unlikely that Japanese manufacturers will allow their car salesmen to go door-to-door and, the way autos are sold in Japan, hawk American-made, right-hand-drive cars. Although Toyota has agreed to import 20,000 Chevrolet Cavaliers a year, they'll be rebadged and sold as Toyotas. So the situation remains the same. More of the Big Three's offerings might be in dealer show-rooms, but they won't be pitched in Japanese living rooms where cars are sold.

Japan's auto parts aftermarket is 25% of the country's annual $107 billion automotive components business. Access for American suppliers is through certified garages that make repairs using mostly Japanese-made parts after they undergo shakens -- government-mandated vehicle inspections. The mood in Japan doesn't allow for an edict forcing the use of U.S. components to make those repairs.

And implicit in the U.S. demand for the Japanese carmakers to use American-made original-equipment parts for their domestic market is the break up of the country's automotive kereitsus. That won't happen. However, the U.S. will continue to pressure Japan on the issue.

At press time a potential doorway to a resolution opened. First, from the G7 summit meeting in Halifax, President Bill Clinton and Japan's Prime Minister Tomiichi Murayama told their trade negotiators to strike an accord when they met in Geneva in late June. Almost simultaneously, reports surfaced that Japanese carmakers were willing to buy more U.S. components for use in their North American operations.

Trade officials denied that a deal had been struck and continued to express pessimism. But the idea is the lone palatable solution offered, thus far, to the dispute.

Japanese carmakers are localizing their North American supply base anyway (see story, p.31). A voluntary agreement to buy more parts merely accelerates existing plans. Such an accord also would give Japanese manufacturers political cover, under the guise of trade pressure, to shift more parts production out of Japan where the soaring yen and stagnant market are eroding profits.

For U.S. suppliers the gain is obvious: more business from Japanese carmakers here. What's not so obvious is that a deal to sell more parts to Japanese carmakers in the U.S. furthers American suppliers' penetration of the world's growth markets.

To get such an automotive trade pact, the U.S. likely would continue to grumble loudly but drop its strident demands for more access to Japan's domestic vehicle market. That's a big, strategic break.

U.S. suppliers could keep trying to generate business in Japan -- and probably make some incremental progress. But they wouldn't have to commit massive capital and effort to break into the market in a major way because of a political settlement.

In other words, it doesn't make good business sense to jump into a market with both feet that has too much capacity, too little growth, too many manufacturers and is due for a shakeout that looks like it's coming sooner rather than later.

And by approaching Japan with reserve, U.S. suppliers can proceed with their blitzkrieg-like effort to develop manufacturing operations in the other Asia/Pacific countries, which have the world's fastest growing automotive markets.

According to the London-based Economist Intelligence Unit (see WAW--August 1993, p.37), mature marekts like the U.S., United Kingdom, France and Japan will have compound annual growth, for the rest of the decade, ranging from 1% (Japan) to 3.3% (U.K.). But developing markets swell as China (21.9%), India (10.8%), Malaysia (10%), Thailand (7.7%), as well as South America/Mexico (6.4%), will easily outpace the world average expansion rate of 2.4%.

Whether they like it or not, the Big Three have learned from their Japanese competitors that to profit later takes investment now. So, they're rushing to set up assembly and partsmaking operations in the Asia/Pacific region. That creates bridges into those markets for their natural allies -- U.S. suppliers.

The US./Japan automotive trade flap is a mess born decades ago. But it does present an option for suppliers from both countries to aid their globalization efforts. There's a lot at stake. Cleveland-based Freedonia Group Inc. estimates the world's component demand will grow from $376 billion in 1993 to $542 billion by 1998. As suppliers from all countries globalize, they'll be better positioned to duke it out for market share in the next century.