(FORTUNE Magazine) – ONE OF THE SOURCES of Japan's strength is that old industries never die. They don't even fade away. The Japanese textile, shipbuilding, petrochemical, and steel industries -- once presumed doomed -- suddenly look more alive than ever. They not only are profitable but are also once again setting the pace worldwide. The sunrise of Japan's sunset industries was not supposed to happen. In the early 1980s low-cost competitors in South Korea, Brazil, and China began making deep inroads. From petrochemicals to ships, Japan's vast production capacity far exceeded demand. When the yen nearly doubled in value, losses mounted. Factories closed and tens of thousands of jobs were eliminated. How did these companies revive? Helpful government policies, a roaring domestic economy, and Japan's continued devotion to the sweaty side of manufacturing all played a part. Most important, very patient bankers made sure that most of these companies avoided bankruptcy or a hostile takeover during the worst days, while docile shareholders kept quiet. Japan's steel output this year is the largest in a decade, and producers expect record profits. Shipbuilding is surging. Nearly half the world's orders for ships in the first quarter went to Japanese yards. Production of ethylene, the petrochemical building block, hit an all-time high in 1988 and should do even better in 1989. In textiles, profits are the best they have been in ten years. Even Japan's shipping sector, which had been the most bombed out of all, is expanding around the world and becoming profitable again. This is no temporary blip. Capital investment in all Japan's smokestack industries will be up an estimated 30% to 40% this year, compared with around 20% for manufacturing in general. The steel and chemical industries together plan to invest more than $9 billion in new plant and equipment. Mothballed factories in steel and shipbuilding are reopening. Construction of a new ethylene plant in southern Japan starts next spring. Though still based in heavy manufacturing, many companies are diversifying into businesses from amusement parks to biotechnology to scented underwear and socks. A visitor to any of these mature companies will hear as much about new corporate visions as about the latest improvements in productivity. The revival of shipping and shipbuilding is the closest to a Cinderella tale. Both were reporting mountainous losses as recently as last year, despite deep cuts in capacity. Nor were the Japanese alone. The worldwide business of building ships and carrying cargo seemed to be in an unending slump. Jiro Nemoto, president of NYK Line, Japan's largest shipping company, sums up his industry's reaction: ''We all felt it was a question of survival, ours and Japan's. Unless we can get goods in and out of this country, we can't survive.'' That may sound overstated. Plenty of foreign ships, after all, serve Japan. But his views fairly reflect the crisis mentality of shippers and shipbuilders for the past ten years. To save shipbuilding, competitors entered into what could be described as government-sponsored collusion. Managers of the companies sat down with government officials to hammer out who would close what. By last year 40% of Japanese yards had been shut. Shipping lines did much the same, scrapping vessels and allocating tonnage among themselves on the ruinous Pacific route. Dividends were suspended, and the seamen's union agreed to big reductions in crew sizes. None of this would have been enough in shipbuilding, however, if the South Koreans had not shot some bullets into their own feet. Only two years ago Korea's share of worldwide orders for new ships reached an all-time high of 30%, while Japan's fell to a 20-year low of 34%. Then labor troubles hit Korea's two major yards, Daewoo and Hyundai. After a series of strikes, wages rose some 60% over two years. At the same time, the Korean steel industry was making rich wage settlements with its workers, sending the price of Korean- made steel soaring. Korea's currency, the won, also strengthened against the Japanese yen. By early this year Japan had 45% of new ship orders, Korea 27%.

Suddenly the Japanese were competitive with the Koreans. Says Yoshio Miwa, a director of Hitachi Zosen, one of Japan's most depressed shipbuilders: ''Over the last few years, everyone believed shipbuilding would move to lower-income countries, as it did from Europe to Japan two decades ago. But now shipowners look at Japan and see similar prices to Korea's and better-quality ships.'' Will this boom just be Japan's last fling in shipbuilding before Korea solves its labor problems and China buckles down to serious industrial development? From Tokyo, at least, the answer is no. The Japanese believe they can sustain this expansion for at least another decade or maybe two. Shigeya Takayama, a deputy manager at Mitsubishi Heavy Industries, Japan's top shipbuilder, explains: ''In Europe you once had the supporting industries, the pumpmakers, the subcontractors, who depended on shipbuilding. Most of that has gone. In Korea they don't have it yet. Our supporting industries still survive. This is our backbone.'' The companies are diversifying with the hopes of luring young talent to their new businesses. MHI, IHI, and the other big builders are moving into aircraft components, engines, and assembly. Hitachi Zosen and others are going into electronics, biotechnology, and new materials. SELF-CONFIDENCE is returning to the shipping sector. Earlier this year Japan Lines and Yamashita-Shinnihon Steamship, both big money losers, merged to form one of the world's largest shipping companies. The Industrial Bank of Japan and Sanwa Bank, which had stakes in the companies, not only encouraged the deal, they also devised a scheme that eliminated the two companies' debt of about $535 million so that the new outfit, called Navix, could start with a clean slate. Though worldwide shipping is growing only slightly, Asian-based trade is expanding rapidly. Even those sectors that are declining, such as car exports from Japan to the U.S., are not daunting Japanese shippers. Says NYK's Nemoto: ''We'll be shipping Japanese cars made in the U.S. to South America. Triangular trade, we call it.'' Nemoto, an amateur oil painter, pulls out a pad to sketch his latest expansion project -- a line of cruise ships. The 50,000-ton luxury liner Crystal Harmony will be completed next summer. A fleet of 25,000-ton coastal cruisers is in the planning stages, as is a floating French restaurant to be tied up in Tokyo Bay. ( The steel industry's revival has been nearly as dramatic as the comeback of shipping and shipbuilding. In early 1987, Japan's major steel companies began slashing their work forces. Like shipbuilders, Japanese steelmakers had become uncompetitive against lower-cost producers. To export, the Japanese had to sell steel at painfully low prices. Losses climbed. Later that year, however, the Japanese government began an ambitious program of public works. The resulting construction boom, which is still rolling, sharply increased domestic steel demand. Sudden success has produced a certain smugness. Listen to Hiro Miyazaki, a director of NKK, a leading producer: ''Any statement that says steel is a declining industry is very wrong.'' Adds Toshio Kogure, a managing director at Kawasaki Steel: ''It's different than in the U.S. The Japanese don't believe there could be any sunset for companies.'' THE STEEL COMPANIES now have the money and time to lavish on productivity improvements and diversification, two vital forms of insurance against the next slump. Japanese technology, claims Miyazaki, will produce the world's first direct smelting operation within ten years. This process, he says, will use regular coal rather than coke, thereby eliminating blast furnaces and coke ovens, which saves energy and labor. Some diversification borders on the whimsical. Kawasaki asked Japan's hot designer Junko Koshino to create an evening dress in thin stainless steel to show the material's versatility. An engineer at NKK came up with an idea for artificial beaches with rolling surf. The first one, which has 150 feet of sand, opened last summer in Osaka. But NKK also has a joint venture with Battelle in Columbus, Ohio, to develop a vaccine for the common cold, and has launched electronics and biotechnology businesses in the past year. It plans as well to be one of Japan's leading housing developers. So far, diversification has produced few big winners for any of the companies. Kawasaki Steel soberly notes that the $85 million in sales from new businesses last year was a ''long way off'' from its goal of $4.3 billion by the year 2000. Takashi Imai, executive vice president of Nippon Steel, admits that the company's efforts to develop new materials have not been successful, although he claims its new plastic-resins business is thriving. And he says the company is excited about Space World, the theme park it is building on an abandoned factory site in southern Japan. For a glimpse of the future of Japan's steel industry, take a look at the country's textile companies. After two decades of battling lower-cost producers in other parts of Asia, they have become so diversified that it's sometimes hard to remember they still make cloth. Kanebo is better known for cosmetics. Others are deep into cancer research, plastics, and food. Yet they have stuck with textiles as a core business, even resorting to protectionism to shore it up. When the yen strengthened, knitwear from South Korea flooded in so fast that the industry sought and won a voluntary export restraint agreement. Sounds familiar, doesn't it? Managers justify these restraints on moral grounds. The major companies rely on a huge core of independent weavers and dyers based in central Japan's Hokuriku region, the traditional center of Japan's textile industry. Says Reiichi Yumikura, president of Asahi Chemical, a leading textile maker: ''Service industries are supposed to absorb the displaced workers from industries like textiles. This is just made-up, irresponsible thinking. I don't think these hamburger stands have enough jobs for our employees. We feel an obligation to keep this industry running.'' BIG PROFITS come from fancy new products, like Kanebo's Esprit de Fleur scented fabrics or Toray's Sway, which changes color with a drop in temperature. The fragrant cloth is made into scarves, neckties, and socks. One brand of pantyhose, called Casablanca, is said by Kanebo to have a ''romantic'' aroma. Another, the Seven Year Itch, is supposed to smell ''sexy.'' Sway is used in ski clothes. To develop these exotic fabrics, executives explain, they have to remain in the far less profitable commodity side of the business. Petrochemical companies also claim a kind of moral obligation for continuing in their cyclical business. They don't want to let down their customers. Yoshio Tokuhisa, a planning director for Mitsubishi Petrochemical, explains, ''The main chemical users -- electronics companies, carmakers, and textile producers -- are right here in Japan. Exports are important, but our domestic market is our most important one.'' The petrochemical industry remains dependent on imported raw materials. Can it survive over the long haul? The last oil crisis, according to Tokuhisa, killed Japan's aluminum and methanol industries. The next one, if it comes, could eliminate Japan's production of commodities like ethylene glycol and acrylonitrile, which are raw materials for textiles. But the bedrock chemical business, production of ethylene, will remain in Japan for at least another few decades. Japan's bureaucrats are hard at work on schemes to prolong today's good times. In an 82-page report titled ''Energetic Manufacturing,'' the Ministry of International Trade and Industry gives a multitude of suggestions on how companies can attract young talent to manufacturing. Companies should create high-profile stars out of their best workers, consider sponsoring TV dramas about the joys of manufacturing, and enhance the image of basic industry among women. It seems that Japan's smokestack industries have every intention of surviving well into the next century.