Fighting It Out

By Charles P. Alexander

Competition at home leads to success abroad

Some two miles north of the glittering lights of Tokyo's Ginza district is a lesser-known commercial enclave that, in its way, is every bit as dazzling. Called Akihabara, it is a booming bazaar that spills over 20 blocks and is probably the world's most fiercely competitive market for electrical goods. In hundreds of sprawling stores and cubbyhole shops festooned with brightly colored banners proclaiming bargains, customers can buy almost any type of vacuum cleaner or videocassette recorder, refrigerator or radio, humidifier or home computer. Familiar brands such as Sony and Sharp are surrounded by scores of less familiar names: Nakamichi, Denon and Oki. At one store can be found 205 varieties of stereo headphones, 100 different color television sets and 75 kinds of record turntables. While some stores are relatively sedate, others flash lights, blast out rock music and station salesmen on the sidewalk to pitch for patrons like French Quarter strip-club touts in New Orleans.

The bedlam at Akihabara goes a long way toward explaining why Japan has conquered consumer electronics markets around the world. For Japanese companies, competition begins at home. To survive and prosper, they must turn out products with exceptionally low prices, outstanding quality and innovative features. If Japanese firms can outpace their local rivals, foreign competitors often prove to be pushovers. Says a top Japanese electronics executive: "Our target is not some other country; our target is ourselves."

The electronics business, bursting with 580 companies, is just one of many Japanese industries, both old and new, that are hotly competitive. More than 7,000 firms manufacture textiles, and 114 make machine tools. The fledgling robotmaking business already has 200 entrants. Even in heavy industries dominated by giant corporations, competition is comparatively strong. Japan has nine auto manufacturers, while the U.S. has only four domestic ones.

Japan's, internal rivalries have gone largely unnoticed in the U.S. and Europe, where attention has focused on the aid and guidance Japanese industries receive from the government. Western commentators talk of Japan Inc., implying that business and government have banded together to form a monolithic powerhouse bent on overrunning world markets. Critics such as Senator Donald Riegle Jr. of Michigan and W.J. Sanders III, chairman of Advanced Micro Devices, a California semiconductor company, complain that Japan's Ministry of International Trade and Industry (Mill) encourages the formation of cartels and also targets promising industries for special research grants. Some economists, businessmen and politicians are calling for a U.S. industrial policy to counteract Japan's government planning.

More and more American experts on Japan, however, are challenging the notion that industrial policy is the main force behind the country's economic power. Government assistance has helped some Japanese industries, such as computer chips and machine tools, but has had little impact on many others. Economics Professor Hugh Patrick of Yale points out that the auto and consumer electronics industries, two of Japan's greatest triumphs, have received no special breaks from the government. Says Philip Trezise, a senior fellow at the Brookings Institution in Washington: "The Japanese have had success in foreign trade because of their competitiveness at home."

MITI has sometimes put its money on the wrong horses. During the early 1950s, when a young company that was later to become known as Sony was getting excited about a new invention from the U.S. called the transistor, MITI chose to help two other firms engaged in making soon-to-be-obsolete vacuum tubes. MITI also had no say in Sony's decisions to market Betamax videocassette recorders and Walkman portable stereos, two of the company's fastest-selling products. Japan is the leading manufacturer of industrial robots, but MITI played no role in financing their development.

Contrary to the popular perception,

Japan is not unusually dependent on exports. The country ships out only 13% of its gross national product, while Britain exports 20.5%, West Germany 26.7% and Canada 29%. Among the major non-Communist industrial countries, only the U.S. exports less of its G.N.P.: 6.9%. For most Japanese companies, the biggest sales and greatest competitive challenges come in the domestic marketplace. Hitachi, Japan's largest manufacturer of electronic goods, exports only 27% of its production.

Competition can be as rough-and-tumble inside Japan as anywhere else in the world. Price cutting is relentless and often ruinous. A Casio digital wristwatch that cost $120 five years ago sells today in Japan for only $12 to $15. Since 1975 the price of a simple hand-held calculator has decreased from about $25 to $10. That drop has forced more than 30 Japanese companies out of the calculator business, leaving six firms at the moment. Says Kenichi Ohmae, manager of Tokyo operations for the McKinsey & Co. businessconsulting firm: "By no definition can this fierce rivalry be construed as rational long-term planning. Even the winners look less like planners than participants in a demolition derby."

The contestants cannot sacrifice quality to slash prices, because Japanese consumers are famous for their fussiness. When shopping for refrigerators, they feel the surface of the units to make sure that screwheads do not protrude and that the corners are round and smooth. Picky customers also slam the doors to find out how noisy they will be. Auto buyers check the upholstery for the proper stitching, open the hood to look at the welds and examine the paint job inside the trunk. Any company that does not meet the prevailing quality standards is soon in trouble.

Japanese companies are renowned for copying Western products, but they devote just as much energy to imitating and topping one another. Since Sony brought out the successful Walkman in 1979, twelve other firms have marketed competing models. To stay ahead of copycats, Sony has had to upgrade and refine the product continually to give it distinctive features. The company now has eleven different Walkman models, the latest being water-and sand-resistant for use at the beach. Camera manufacturers leapfrog one another with advanced equipment that is progressively easier to use. Minolta has just brought out a 35-mm automatic-focus camera with a voice synthesizer that announces when a flash is needed or the film has run out. The nine Japanese companies that make videocassette recorders unveiled 54 new models last year. Says Sony Co-Founder Akio Morita:

"The nature of business is to make your own product obsolete. If we don't do it ourselves, we know our competitors will do it for us. That's why we always try to come up with something new. That is our incentive, our driving force." Sony is one of many Japanese firms that established their reputations overseas before being able to make much headway in the formidable domestic market.

While American corporations tend to focus on short-term profits as the best gauge of success, Japanese companies are more concerned about market share and are often willing to sacrifice immediate earnings to enlarge their piece of the market. Only eight years ago, Canon was languishing with an 18% share of Japanese camera sales, putting the company in third place behind Asahi (Pentax) and Nikon. After rolling out a series of new models backed by heavy advertising, Canon now ranks first, with more than 30% of the market.

Breakneck competition makes information a precious commodity. Japanese companies comb mountains of scientific literature for hints of technological advances. Engineers are as familiar with the opposition's product line as with their own. Whenever a firm puts out a new model, rivals immediately disassemble it to analyze its parts.

This thirst for information has served Japanese companies well in their international forays. Before leaping into a foreign market, they painstakingly reconnoiter the competition, consumer tastes and cultural pitfalls. They like to know everything about the people and companies they do business with. Says San Francisco Banker Gardner Jacobs of his dealings with the Japanese: "They kept my pedigree in a little black book. They knew how many kids I had and where I lived. I always maintained they knew what color shorts I wore."

Sometimes, however, this information gathering turns into espionage. Last year several employees of Hitachi, a major computer manufacturer, were snared buying IBM trade secrets from FBI agents. Inside Japan, companies go to great lengths to keep confidential information from one another. Some firms provide employee-only nightclubs, where workers can have a drink and unwind without fear that a competitor's spy is listening from the next stool.

The Japanese learn to compete early in life. Starting with kindergarten, they run a brutal educational gauntlet that gradually separates winners from losers. Young Japanese who join large corporations learn to set aside that kind of competitiveness in favor of cooperation and consensus. Members of the team share information and skills for the greater good of the company. As a result, the workplace becomes like a harmonious home.

The competitive spirit does not disappear, however. It is merely redirected toward competing corporations. Most Japanese spend their entire careers with a single company and develop an intense loyalty that can be even stronger than family ties. A Japanese diplomat in New York recalls what happened when his brother joined Mitsubishi Corp., the giant trading company: "Mitsubishi's competitors became his enemies, even more so than the Soviet Union." The desire to beat the opposition for the glory of his company is a powerful force that motivates the Japanese worker.

For many years, MITI has tried to keep competition within bounds. The agency generally believes that an industry functions best if it is dominated by a few big firms that can reap the benefits of large-scale production. Nonetheless, Japanese businessmen have frequently ignored MITI'S philosophy and advice. In the early 1960s, MITI tried to persuade the then ten Japanese automakers to merge into two companies: Toyota and Nissan. Only one complied, joining Nissan. Later in the decade, MITI wanted to keep Honda, the motorcycle firm, out of the auto business But Soichiro Honda, the company's legendary founder, who was known as Old Man Thunder, defied the government, brought out his minicars and built the firm into Japan's third largest auto manufacturer behind Toyota and Nissan. In industries that are growing, MITI has been unable to curb competition. "It's a free-for-all," says James Abegglen, vice president of the Boston Consulting Group, "like a barroom brawl with no mercy shown."

MITI has had more success with dampening competition in declining industries. In many cases, the government has been willing to bend its antitrust laws to permit cooperation among companies. When the shipbuilding business started to sag in the 1970s, MITI allowed the firms to form a cartel that would share orders. In that way, the decline was evenly distributed. The strategy gave the companies time to diversify, while gradually reducing their production. MITI is now encouraging the formation of similar cartels in the paper, petrochemical and aluminum industries.

The Japanese attitude is quite different from what AFL-CIO President Lane Kirkland and other advocates of a U.S. industrial policy suggest when they call for government aid to smokestack America. While Kirkland and his allies seek to strengthen ailing industries, MITI'S goal is to shrink them slowly but steadily so that resources can be shifted to more promising fields.

MITI'S policy may sometimes prolong the life of large corporations, but it does not help the thousands of tiny firms that battle one another in fragmented industries like textiles. Small businesses account for roughly 70% of all Japanese output, vs. about 40% in the U.S. In that part of the economy, competition is unfettered, and the death rate is high. Last year in the middle of the worst recession since the Great Depression, the U.S. had 25,000 bankruptcies, but Japan had 17,000, even though its economy is only a third as big and was actually growing at 3%.

Japan's trading partners complain that the country allows little competition from foreign intruders. The government, critics charge, blocks most imports with tariffs, quotas and subtler barriers like arbitrary inspection procedures. In addition, many foreign companies say that they have had trouble breaking into Japan's complex distribution system and overcoming a "Buy Japanese" attitude.

Without question, Japan long pursued a consciously protectionist policy. In recent years, however, the country has been opening up, particularly under the new government of Prime Minister Yasuhiro Nakasone. Since early 1982 the Japanese have cut tariffs on 323 items. The average Japanese tariff on mining and manufacturing products is now 3%, compared with 4% in the U.S. and 5% in the European Community. The country has also eliminated quotas on 134 items and dismantled scores of nontariff barriers. American-made appliances, for example, no longer have to be inspected in Japan if they have already been approved in the U.S. by Underwriters Laboratories.

Some irritating obstacles remain. Japanese inspectors still reject American plywood if the knotholes are too wide. Nonetheless, Larry Snowden, president of the American Chamber of Commerce in Japan, sounds confident when he says that the barriers are coming down: "I know some of our oldtimers say that they've heard it all before, but I am convinced this government means business and that genuine change is taking place right now."

Indeed, many American companies are flourishing in Japan. Examples: Schick, with 70% of safety-razor sales; IBM, with about 40% of the computer business; Xerox with 20% of the copier market. The Japanese argue that other U.S. firms could have the same success if they worked somewhat harder at it. American firms have often refused to adapt their products to suit Japanese tastes. Because they drive on the left side of the road, most Japanese like their autos to have steering wheels on the right, but as yet no U.S. company has been willing to build such models for shipment to Japan.

The rivalry between the U.S. and Japan is sure to grow increasingly intense. The Japanese have set their sights on America's premier growth industry: computers. Already, MITI has poured $375 million in research money into the computer industry.

In the end, however, the amount of money that the Japanese government spends is not likely to be the decisive factor in who wins the computer race. In fact, Thomas Hout, a Japan expert at the Boston Consulting Group, suggests that Mill's aid might actually hurt Japanese companies if it dulls some of their individual initiative. The strength of the Japanese computer industry is its competitiveness. Some 30 manufacturers, for example, are battling it out in the market for word-processing equipment.

American companies are understandably eager to study Japan's management style, and U.S. politicians are looking at the Japanese industrial policy. But the main lesson of Japan's success is actually very simple and already well known. It is merely that competition in a tough marketplace usually produces spectacular results. --By Charles P. Alexander.

Reported by Edwin M. Reingold/Tokyo

With reporting by Edwin M. Reingold This file is automatically generated by a robot program, so viewer discretion is required.