BUSINESS

INVESTING JAPAN-STYLE

TENSIONS RISE AS JAPANESE FIRMS SHARPLY INCREASE THEIR INVESTMENTS IN CANADA AND THE UNITED STATES

JOHN DeMONT November 20 1989
BUSINESS

INVESTING JAPAN-STYLE

TENSIONS RISE AS JAPANESE FIRMS SHARPLY INCREASE THEIR INVESTMENTS IN CANADA AND THE UNITED STATES

JOHN DeMONT November 20 1989

INVESTING JAPAN-STYLE

BUSINESS

TENSIONS RISE AS JAPANESE FIRMS SHARPLY INCREASE THEIR INVESTMENTS IN CANADA AND THE UNITED STATES

They dined on cod tongues in St. John's, Nfld., visited the fictional home of Anne of Green Gables on Prince Edward Island, took a helicopter tour over Niagara Falls and went shopping in the fabled West Edmonton Mall. When their 10-day tour of Canada ended on Nov. 2, the weary group of 46 high-powered Japanese business executives, led by Mitsubishi Corp. president Shinroku Morohashi, had been entertained by all 10 provincial premiers, met with the Prime Minister and International Trade Minister John Crosbie and toured everything from a New Brunswick potato-processing plant to Toronto’s SkyDome. It will be months before Ottawa and the provinces find out if their hospitality paid off. In February, the visitors are scheduled to report on Canada’s investment climate, but a preliminary verdict has already been delivered—Japanese investment in Canada is climbing dramatically.

Japanese firms, including powerful banks and pension funds, have amassed a pool of $21 trillion in assets, which is now mostly available for mergers and acquisitions. Since that is more than even the buoyant Japanese economy can handle, Japanese firms are scouring Canada as part of its global search for investment opportunities. But not everyone is rolling out the welcome carpet. The recent Japanese purchase of two cherished United States icons—film giant Columbia Pictures Entertainment for $4 billion and Rockefeller Group Inc., which owns Manhattan’s famed Rockefeller Center office complex, for $990 million—has increased friction between the governments of the two countries. And last week, the latest round of bilateral talks aimed at solving the United States’ $60.8-billion trade imbalance with Japan ended without progress.

For Ottawa, which supports increased Japanese investment, the growing animosity between Japan and the United States is welcome in the short run—although tensions are evident already in Canada. Officially, Ottawa welcomes further investment. As federal Industry Minister Harvie Andre told the delegation of visiting Japanese businessmen: “I will be frank. We do not receive our fair share [of Japanese investment].”

Washington, in contrast, is deeply concerned by the Japanese investment wave. During 1988, direct Japanese investment in the United States soared by 52 per cent, compared with 1987, to $64 billion. In the past two months alone, Japanese firms have announced more than $12 billion in purchases in the United States, including Sony Corp.’s takeover of Columbia and Mitsubishi’s Rockefeller purchase. Other Japanese-driven transactions are reportedly in the offing, including a $ 1.6-billion bid by Tokyu Department Store Co.

Ltd. for Canadian Robert Campeau’s ailing Bloomingdale’s department-store chain.

And in an unexpected move last week, signalling acknowledgment of Japanese superior technological know-how, American computer-chip manufacturers agreed to work with Japan’s biggest electronics companies to produce critical components for high-definition television, the next generation of video technology.

But clearly, American resentment of Japan’s growing U.S. presence is building. According to a poll by the U.S. magazine Newsweek, 43 per

cent of Americans opposed the Sony-Columbia deal. Even some members of the Rockefeller family expressed regret about Mitsubishi’s recent 51-per-cent purchase of Rockefeller Group Inc., which was based on a decision by trust directors to diversify its holdings out of

real estate. At the same time, although Britain is still the largest single foreign investor in the United States, Japanese investments grab most of the headlines because it is the greater economic rival. For many Americans, the purchase of two famed U.S. architectural and cultural landmarks, including Rockefeller Center’s 22-acre office complex with such famous tenants as Radio City Music Hall, Exxon Corp. and Time Warner Inc., took on almost symbolic proportions.

These massive investments in the United States also are escalating the debate over Japanese trade practices. The U.S. government blames discriminatory Japanese trade policies, such as antiquated distribution and procurement systems, for its soaring net trade deficit with Japan, which stood at $60.8 billion at the end of 1988 despite efforts to cut the shortfall. As one economist with the U.S. department of commerce, who asked not to be identified, told Maclean’s: “By refusing to consume more U.S. imports, the Japanese are getting funds from us and then using these funds to buy assets in this country. It falls under the bailiwick of not playing fair.”

No truce is in sight. After two days of often heated talks in Washington last week, the latest round of trade talks between the two countries since September, there were no signs of finding a solution to the U.S.Japan trade imbalance. Commented one senior U.S. official involved in the negotiations, who asked not to be identified: “It

was disappointing, very disappointing.”

In Canada, where the federal government wants a bigger cut of Japanese investment, Japanese firms can count on a far warmer reception. Overall, direct Japanese investment in Canada rose to $594 million in 1988, up from $319 million the previous year and $82 million in 1978. That investment level puts Japan fifth among foreign investors in Canada, behind the United States, the United Kingdom, West Germany and the Netherlands.

But despite the record Japanese investment levels, Canada still receives less than two per cent of all Japanese foreign investment—compared with 46 per cent in the United States. But federal government officials said that the Canadian share should be closer to four per cent of the total, reflecting the fact that Canada is about one-tenth the size of the United States.

Still, the Japanese desire to invest in Canada is growing. Japanese firms have long sought access to Canadian natural resources to fuel both their domestic industry and North American operations. But now, they are starting to spread their investments into other industries such as high technology and manufacturing. One of the major reasons for the change in sentiment is the nearly one-year-old CanadaU.S. Free Trade Agreement. Canadian trade officials say that Japanese businesses increasingly see locating in Canada as a way to gain access into the U.S. under free trade. Concluded Michael Howard, director of Burns Fry Pacific Ltd., a subsidiary of Toronto invest-

ment house Burns Fry Ltd.: “It [the Free Trade Agreement] helped put Canada on the map for Japanese investors.”

Signs of the growing Japanese presence in Canada abound. The big Japanese auto companies—Toyota Corp., Suzuki Motor Co. and Honda Motor Co.—all have manufacturing facilities in Canada. And Sumitomo Heavy Industries of Tokyo’s $89-million purchase of Kanata, Ont.based laser-equipment manufacturer Lumonics Inc. last May shows that Japanese companies are even interested in investing in Canadian high-technology firms. Investment Canada, which must approve all foreign acquisitions, judges such takeovers on the basis that they be in Canada’s national interest. Since 1984, Investment Canada has not stopped any foreign takeovers.

But the forestry sector has drawn the most attention from the Japanese. In February, 1988,

Daishowa Paper Manufacturing Co. Ltd. began building a $500-million pulp mill at Peace River, Alta. Then, later that year, Daishowa spent another $631 million to buy the North American paper operations of London-based Reed International PLC, whose main operation is a newsprint mill at Quebec City. And Crestbrook Forest Industries Ltd. of Cranbrook, B.C., which is 64.5-per-cent owned by Japanese investors, is building the world’s largest pulp mill—a $ 1.3billion project in northern Alberta in Athabasca. Said Koichi Kitagawa, the Vancouver-born president of Daishowa Forest Products Ltd.: “We came here because there was an opportunity for a good investment, and because we were welcome.”

Hotels and other potentially lucrative pieces of Canadian real estate are also favorite targets. Last November, the Okabe Company Ltd. of Tokyo bought 13 hotels owned by the Vancouverbased Coast Hotels Ltd. chain. In April,

1989, Suns Enterprises of Japan bought the 400,000-square-foot Hong Kong Bank of Canada building in downtown Vancouver for $130 million. And last month, Japan Palios Developments Canada Ltd. paid $23 million—a Vancouver record of $175,000 per room—for the 130-room O’Doul’s Hotel in Vancouver.

A number of resorts in Whistler, B.C., and Banff, Alta., both extremely popular destinations with Japanese tourists, have seen Japanese ownership increase in re* cent years. During the past two years, Z Japanese interests have bought three I

major hotels in Banff—the Cascade Inn, Inns of Banff Park and, most recently, the Rimrock Inn—which account for roughly 30 per cent of the town’s top-level accommodations.

In Whistler, meanwhile, Japanese buyers purchased four hotels in 1988, including the Nancy Greene Olympic Lodge, which

was owned by the former Olympic ski champion. And earlier this month, a subsidiary of the Chotokan Group of Hamamatsu, which owns a chain of restaurants and hotels in Japan, paid $20 million for the posh Radium Hot Springs Golf Resort, about 80 km west of

the Alberta-British Columbia border.

At the same time, Japan is showing growing interest in the Canadian steel industry. Mitsubishi struck a tentative deal earlier this month with Stelco Steel that could see the Japanese giant become half owner of Stelco’s new $200million manufacturing plant in Hamilton, Ont. And Mitshui Corp., one of Japan's largest trading companies, has lent Dofasco Inc., another Hamilton steelmaker, $350 million to build a new cold-rolling steel mill.

Brian Chesnut, an analyst with Toronto-based investment dealer Richardson Greenshields of Canada Ltd., said that Japanese firms are likely to pour more money into the steel industry as they follow their prime domestic customers, the auto companies, to Canada. Added Chesnut: “The Japanese are no longer just interested in being bankers ï' to the Canadian steel industry. They want to have a presence here.”

But even in Canada, Japanese investors are facing criticism. Federal environment officials have criticized two Japanese-backed pulp megaprojects planned for Alberta and have called for a major ecological-impact study to be done. Earlier this year, the proliferation of Japanese businesses in Banff triggered resentment among locals, who voiced concerns that the natural beauty of the park would be sacrificed for a congested tourist mecca. And the decision by owners of the Banff hotels to market their rooms mainly in Asia prompted the Canada Parks Service to impose a 30-per-cent quota on beds that must be held for Canadian tourists.

Still, there has been a dramatic shift in mood since the first governmentsponsored delegation of Japanese executives came to Canada in 1976. At that time, the industrialists returned to Tokyo and reported that Canada was embroiled in labor problems and unreceptive to foreign investment. The latest Japanese delegation has said that Canada has made great strides during the past 13 years. And now, Ottawa is hoping that high grades mean that Canada gets a bigger share of Japan’s immense and growing wealth.

JOHN DeMONT with KARA KURYLLOWICZ and JOHN MULLINDER in Toronto, HAL QUINN in Vancouver, JOHN HOWSE in Calgary, DAVID LINDORFF in New York City, and WILLIAM LOWTHER in Washington

KARA KURYLLOWICZ

JOHN MULLINDER

HAL QUINN

JOHN HOWSE

DAVID LINDORFF

WILLIAM LOWTHER

BUYING NORTH AMERICA

Japanese Direct Investment in 1988