CONFIDENTIAL
Mr Thomas
JAPANESE BUSINESS PRACTICES IN LARGE CONTRACTS
67in
4kk 173/2-631 M. Guign
R. EVLJ
INDEX
ль
8 MAR 1979
X
23.3
Mr 6.3
S
+G FOR PLANT AND OTHER
1.
In recent correspondence concerning the tender for the Hong Kong mass transit system DOI suggested in view of the credit it was offering, the Japanese consortium must have official
financial support.
In fact there was no evidence to suggest.
that it did, and previous experience indicates that it is quite
likely that the Japanese group and the banks backing it were
proposing to make a loss on the project. They might do this for two reasons: either in order to use the project as a loss
Leader and establish a position in a new market eventually recouping their loss on subsequent replacement contracts; or alternatively, they may simply be prepared to take a loss on a
Japanese companies have relatively few variable costs. Gearing is high and capital is largely borrowed from banks at fixed interest; much of the labour force is "permanently employed". The result is that often only raw materials are a major item in
variable costs.
In a recession it therefore makes sense for
project.
a Japanese company to operate at a loss provided it is covering raw material and one or two other items of variable cost.
2.
These practices do not count
count as dumping as the companies in question are also operating at a loss in the home market, and there may be nothing in GATT or OECD rules to discourage them. But from the UK point of view, they are particularly undesirable, as size, financial structure and very different conditions permit
few UK firms to copy them.
If the present world recession
and especially the slump in plant orders continues, we may expect to see even more Japanese competition along these lines, and the time may come when we will wish to take it up with the Japanese
officially.
But although we have sporadic reports of these practices, so far we have little concrete or consolidated evidence.
CONFIDENTIAL
/I do not know