Section 2. Motorization and Liberalization of Trade and Capital

Item 3. Capital Liberalization and Automotive Industry Reorganization

The passenger car import liberalization implemented in 1965 nearly completed trade liberalization related to automobiles, leaving only a few items restricted such as engines and their parts. Thus, trade and currency exchange liberalization was nearly complete, but the issue of capital liberalization still remained before Japan's economy could become truly open.

The need for liberalizing capital transactions in Japan became a real issue when Japan joined the Organization for Economic Co-operation and Development (OECD1). Giving Japan high marks for its extraordinary economic growth rate and the liberalization of its trade and currency exchange, the OECD decided at its directors meeting in 1963 to invite Japan to join. Japan became an official OECD member in April 1964 and enjoyed such benefits as the elimination of import restrictions by European nations. At the same time, however, Japan was obliged to liberalize capital transactions according to the general principle of capital liberalization.

Facing the challenge of foreign capital liberalization in Japan, Japanese automakers were striving to establish mass-production structures, increase their owned capital, and strengthen their technology development capabilities. As these efforts to enhance corporate structure progressed, competition among the companies intensified and the differences between them became noticeable, making the time ripe for a reorganization of the Japanese automotive industry. Then in 1964, a merger proposal with Prince Motors was brought to Toyota Motor Co., Ltd. Eiji Toyoda, as Toyota Motor Co., Ltd. chairman, recalled the event as follows:

This was brought up by Shojiro Ishibashi, founder and former chairman of Bridgestone, in 1964, the year of the Tokyo Olympics. ...

We turned down the offer. Ishibashi had made it clear that 'if things don't work out with Toyota, we'll have to go elsewhere.' So we foresaw, more or less, that Nissan would take over Prince if we didn't. And that's exactly what happened. ...

When Nissan and Prince merged, the Fair Trade Commission gave its official sanction, citing as justification that 'the Nissan-Prince merger results in a market share smaller than that of Toyota'. What this meant was that, as the top automaker, Toyota was not free to merge with anyone.

(Eiji Toyoda, Toyota: Fifty Years in Motion, pp. 130-132.)

The August 1966 merger between Nissan and Prince paved the way for accelerated regrouping of the Japanese automotive industry, with the goal of strengthening its international competitiveness.

Meanwhile, the domestic automotive industries of the United States and Europe had already matured and therefore were being forced to explore new overseas markets. As noted, in 1967, Japan surpassed West Germany to become the second largest car-producing nation in the world. As such, American and European automakers were eyeing Japan as a promising market and began to strongly demand liberalization of foreign capital in the Japanese automotive industry.

The first country to demand liberalization of foreign capital in the Japanese automotive industry was the United States. In January 1968, at a subcommittee meeting of the Japan-U.S. Trade and Economy Joint Committee, the U.S. side strongly demanded liberalization of foreign capital in the Japanese automotive industry. The negotiation surrounding capital liberalization remained difficult, but soon a position promoting liberalization began to gain momentum, even within Japanese financial circles and the Japanese government. The reasoning was that since the Japanese automotive industry had climbed to the second place in the world in production volume and was increasing exports, it was sufficiently competitive to withstand liberalization. Japanese automakers, on the other hand, experienced the massive corporate power of the U.S. Big Three as a major threat.

Japanese car exports in 1969 had grown by 40 percent from the previous year to 860,000 units. Because exports to the United States amounted to 340,000 units, accounting for 39 percent of total car exports, the demand for capital liberalization from the Big Three continued to intensify with every passing day.

Meanwhile, in May of the same year, Mitsubishi Heavy Industries, Ltd. (MHI) announced a partnership with Chrysler Corporation, and began preparations to form a joint venture, with 65 and 35 percent of its capital to be provided by MHI and Chrysler, respectively.

Against this backdrop, in October 1969 the Japanese government made a cabinet decision to implement capital liberalization in the Japanese automotive industry beginning in October 1970. It also decided that the foreign capital ratio must not exceed 50 percent when a new joint venture is formed, and that capital participation in existing automakers would be individually examined.

n response, then-President Eiji Toyoda, made it clear both internally and externally that Toyota was committed to remaining a 100 percent Japanese-owned corporation and would establish an annual production capacity of 2 million vehicles as quickly as possible:

What Toyota must do in preparation for the imminent capital liberalization is solidly establish our mass production system. By the time liberalization is implemented-that is, by 1971-we hope to have established an annual production capacity of 2 million vehicles. For Toyota, our basic philosophy of protecting Japan's national capital has not changed. Furthermore, capital liberalization will rekindle the issue of industry regrouping. I believe regrouping will be promoted but will not go as speedily as expected.

We will continue to increase the subcontracting of production to Daihatsu and Hino Motors over the long term. In any case, we must establish an annual production capacity of 2 million vehicles as quickly as possible, including that of our affiliates. For this reason, we are currently building a new plant and are also looking to purchase land for other plants.2

Toyota's policy during this period could be condensed into the following two goals:

  1. 1.Enhancing the model lineup to establish a complete product lineup in response to the diversifying demand in the Japanese market
  2. 2.Establishing a 2 million-unit capacity as the immediate goal and achieving cost reduction as a result, in order to cope with capital liberalization

Since Toyota's production volume had just reached 100,000 units per month and 1 million units per year in 1968, 2 million was a distant goal. Back then, only General Motors and Ford Motor Company had achieved annual production volumes exceeding 2 million units.

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