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Rising Sons

The success of American growth companies has inspired the first generation of japanese entrepeneurs in the past four decades.
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Twelve years ago, feeling like an itinerant peddler, Shigenobu Nagamori got off a plane in Minnesota, his luggage stuffed with electronically controlled motors. The slim 29-year-old engineer had come to the United States risking everything -- his career and the future of his fledgling Nippon Densan Corp. (Nidec) -- on the hunch that he could sell his newly designed product to St. Paul-based Minnesota Mining & Manufacturing Co. (3M).

Not that he had any choice. Although formerly a top electrical engineer at both Teac Corp., a tape-deck manufacturer, and Yamashina Seiki, a machine-tool maker, Nagamori had little hope of selling his small, high-technology motors to the great, diversified electronics giants of his native land. "There are ceilings all over Japan," he said, "and to break through them is almost impossible. In Japan everyone wanted to know the background of the company, its connections and affiliations -- even the age of its president. All these irrelevant things are more important in Japan than the product. But in America, land of entrepreneurs, I thought maybe if the product was right, they would buy it."

Nagamori's search for a market took him to Lee Pastor, engineering manager for 3M's Mincom Division. Unpacking his heavy bags, the young Japanese entrepreneur laid out samples of the small (three and a half inches in diameter) motors he had designed.

"Here comes Nagamori walking into the factory saying, 'Does anyone want my product?' " Pastor, now retired, remembers. "I never saw anyone so nervous, trying so hard to communicate. But when I asked for specifications, he told me them on the spot. I knew when I met Nagamori-san that I had met a creator of a company, a real inventor."

Although 3M's initial order was for only 1,000 motors, it was a beginning. Since their meeting, Nidec has grown into one of Japan's leading "venture businesses," as these new and growing companies are known in Japan. Building on its orders from 3M, which now buys the motors in batches of tens of thousands for its line of Wollensak 2770 high-speed cassette duplicators, the company currently sells to over 300 major corporations, ranging from domestic giant Hitachi Ltd. to such leading foreign companies as IBM, Digital Equipment, and Ing. C. Olivetti. Twelve years after his trip to St. Paul, Nagamori has built Nidec to sales of more than $36.3 million (8.5 billion Yen).

Nidec is one of a growing number of entrepreneurial companies which, inspired by the American model, are now challenging the entrenched power of Japan's corporate giants. But the prospects remain uncertain. Although eager to emulate the example of such American success stories as Apple Computer, Tandon, and Federal Express, these Japanese venture businesses face obstacles unimaginable in the American context. The hierarchical business and social culture of Japan has traditionally relegated small companies to the role of subcontractors for the nation's largest businesses. Start-up capital is severely limited. And support of the business giants remains the cornerstone of national economic policy.

As such entrepreneurs as Nagamori take on the corporate status quo, however, they are also perpetuating an enduring Japanese business tradition. From its inception, Japanese capitalism has been characterized by the continuing transformation of outsiders into insiders, of businesses that began by fighting the established power structure and ended up as its pillars.

Japan's oldest and most established financial empires, like Mitsui & Co., the $70-billion international corporation, were the progeny of 17th-century samurai who chose to lower their class status in order to enter the business world. Other established giants, such as Mitsubishi Corp., founded by the Iwasaki family, started out as modest peasant shopkeepers. By the 20th century, however, those shopkeepers had become the great Japanese zaibatsu, or "money cliques," whose interlocking financial and industrial empires enjoyed a predominance perhaps even greater than that of turn-of-the-century cartels and trusts.

With the defeat of Japan in World War II, however, the zaibatsu were broken up; many of their leaders were jailed or proscribed from business by the "creative destruction" imposed by American occupation authorities. "The new freedom kindled many fires," wrote British historian G. C. Allen, opening up a new realm of possibilities for entrepreneurs and middle-level managers who had traditionally lived under the shadows of the zaibatsu. Many of the new businesses were spun out of the old conglomerations, including Toshiba Corp., which broke out of the Mitsui orbit, and Hitachi, a former satellite of the Nissan empire, both of which would grow into world-straddling electronics giants. At the same time, new empires were being carved out by formerly obscure businessmen. Akio Morita and Masaru Ibuka were creating Sony Corp. Konosuke Matsushita was building the Matsushita empire. And Soichiro Honda, a one-time Toyota Motor Corp. subcontracter, was creating his own automobile giant.

Like today's venture businesses, Honda Motor Co., Sony, and the like were often forced to hurdle severe obstacles set in their path by the already entrenched corporate, financial, and governmental bureaucracies. But by the early 1970s, these once fledgling companies had grown into giant corporations themselves, and, like the zaibatsu before them, they often flexed their muscles to limit the horizons of new ventures. In contrast to the entrepreneurial explosion of the early post-war years, only a handful of major new entrepreneurial companies emerged in the 1960s. With the exception of such companies as Kyocera, whose founder, Kazuo Inamori, is a close adviser of Nidec's Nagamori, Japan's recent surge to economic power has been drama played out among already entrenched giant corporations.

Japan's governmental and financial establishment has supported the tendency toward giantism. Faced with the prospects of rebuilding a shattered economy after the war, bureaucrats at the Ministry of International Trade and Industry (MITI) and the Ministry of Finance steered scarce credit and material resources to those major production industries -- such as automobiles, steel, and consumer electronics -- considered crucial to the national economy. Even today, some .1% of all Japanese companies receive nearly 50% of corporate loans. Deemed worthy of only a minor supporting role, even outstanding small companies often find themselves unable to raise the requisite equity capital to break out of the narrow niches government bureaucrats, corporate chieftains, and bankers assigned them. Ministry of Finance regulations, for instance, have traditionally imposed almost insurmountable burdens on new entrants to the Tokyo Stock Exchange. Even Japan's tiny over-the-counter market, with only 134 registered companies, requires new members to show two successive years of paying dividends. Regulations have also stood in the way of anyone interested in starting a new financial institution.

"The Ministry of Finance and the major banks are like father and children," maintains Masasuke Ide, a leading expert on Japanese financial systems and associate dean at Tokyo's Nomura School of Advanced Management. "The Ministry protected the big banks and the big industrial groups from competition. The system was regulated to protect the status quo, and made it very difficult for entrepreneurs to start something but easy for one of the big groups to launch new businesses."

Although Japan's 830,000 small and medium-size manufacturing companies boast 70% of the workers and 57% of their industrial output -- compared with only 47% of the workers and 38% of the output in the United States -- most of those companies remain stuck in a subcontracting relationship in which the large corporations dictate the company's production, marketing, and sometimes even its finances. While such a relationship would appear feudalistic by American standards, it is the only system with which many Japanese small business owners feel comfortable.

"Sometimes I come to the president of a small company and ask if he's a venture businessman and he says, 'No, don't say that. It will disturb the customers," explains Tatsuo Shimizu, an MITI official who works closely with small companies in the Osaka area. "In Japan, being an independent venture business can be regarded as being too venturesome and untrustworthy. It makes it harder to get a loan or even acceptance in society. Tradition, respect for the powerful in Japan, maintains a very strong hold."

Some large companies use these elements of Japan's semifeudal business culture to expropriate innovations developed by their subcontractors. Although there were twice as many patents applied for in Japan last year as there were in the United States, few small companies have been able to leverage their inventions into independence. In the industrial back alleys of Osaka, for example, subcontractors speak darkly about such companies as Matsushita, whose penchant for taking over small companies' innovations has led them to be jokingly referred to as maneshita, for the Japanese word "to copy." "The big contractors like Matsushita control everything, even the ideas of the small companies," admits one knowledgeable Osaka banker. "But the small companies are afraid to say anything, because they'll get thrown out if they do."

Despite their often unpleasant relations with larger companies, however, many subcontractors are justifiably proud of the part they have played in making Japanese industry the envy of the world; their devotion to detail and quality plays a crucial role in the superiority of many Japanese goods. At Uchida Ironworks, where parts of Toyota frames are made, for example, the intelligent use of the latest Fanuc Ltd. machine tools and an advanced Hewlett-Packard Co. computer assure that iron castings come out with a minimum of defects.

"We do well here," explains company president Suo Uchida, dressed in drab workman's clothes, as he shares some cake with guests in his small house adjacent to his Osaka foundry. "One always hopes to upgrade and get from third- to second-level subcontractor. But one has to admit that it is the first level that sets the tone and makes the final decisions."

Not all small businessmen are as content as Uchida with their place in the industrial pecking order, however. Recent setbacks at such onetime superstars as Yamaha and Akai Electric have caused consternation among subcontractors, usually the first to bear the brunt of any setbacks suffered by the parent company, and there is a growing lack of confidence in the ability of any single giant company to serve as a steady and increasing source of orders. "I know I am indebted to [the main contractor], tremendously so, but I must think first of my own people," said one highly successful electronics industry subcontractor. "My engineers want to work on their own products. They say the economy is changing rapidly, and who knows if the parent company will do as well as it had in the past? We are small and quicker than the parent and should not let its mistakes wipe us out. I don't want to fail that way. We want to find our own destiny."

But to establish one's own "destiny" while still remaining a trusted subcontractor can be tricky business. The electronics subcontractor uses his profits to finance the development of proprietary technology. But to throw the parent company off, the subcontractor works hard to convince the parent that his company barely has enough excess cash to meet its essential obligations. For instance, whenever he meets with officials from the main contractor, he always wears the same ragged suit he wore the year before, although he could easily afford a closet full of new and expensive suits.

In the future, such subterfuge might become less necessary. The success of American entrepreneurial companies, particularly in the area of high technology, has led some government officials at such agencies as MITI to develop new programs to aid technologically oriented venture businesses. And even the hidebound officials at the Ministry of Finance have recently loosened some of the restrictions governing the Japanese stock market, a move that could hasten the growth of a venture capital industry. Over the past few years, in fact, venture capital has become a near obsession at Japan's two largest investment banks, Nomura Securities Co. and Yamaichi Securities Co. Mindful of the high profits of American underwriters of new issues, both are investing millions of dollars in successful venture businesses in the expectation of eventually taking them public.

"The old establishment channels, like the lifetime employment system, are slowly coming to an end," maintains Hiroshi Kato, a 29-year veteran of an MITI affiliate and now an adviser to Univen, Yamaichi Securities's $39.3-million (9.2 billion Yen) venture-capital limited-partnership fund. "Everyone knows the old companies can't keep up with technological change, and the small businesses are our best hope to take up the slack. The bureaucracies are choked with people, and the young, aggressive executives will be forced to become independent."

This quest for independence stands at the core of the strategies adopted by such new-wave venture businesses as Shigenobu Nagamori's Nidec. Even after Nidec's reputation was such that he could sell on the domestic market, Nagamori continued to press his overseas business -- accounting today for a full 65% of company sales -- largely in order to keep his business free from the controlling tentacles of Japan's electronics giants. Having already supplied their most important overseas competitors, Nagamori says, Nidec can approach companies like Hitachi with the leverage of an exclusive supplier of a critical component, rather than as a traditional subcontractor, totally dependent on a single dominant customer.

"The key for any Japanese entrepreneur is not to let the big companies control or subjugate you," Nagamori claims, relaxing in his modest office not far from the 17th-century palace of the Tokugawa shoguns. "The history of Japan tells us that for small companies it's easier to work with big companies if you let them control you. To beat that, you have to be very determined to be independent, to be number one on your own."

Nagamori's almost fanatical desire to be number one has been the driving force behind his success. Progeny of a 17-generation Kyoto family, Nagamori has long rebelled against the cultural values of conformity and allegiance to authority that so dominate Western perceptions of Japan. Like many of Japan's increasingly obstreperous entrepreneurs, Nagamori chose to follow other Japanese traditions, some dating back to the feudal period, which stress individualism and self-determination. Even as a child, playing chanbara the Japanese equivalent of " Cowboys and Indians," Nagamori always insisted on playing the role of heroic, solitary samurai, one man taking on many in defense of right and honor. And as his friends opted for more secure careers inside the womb of such companies as Fujitsu Ltd. or NEC, Nagamori plotted his own separate path.

"Since high school, I wanted to be an entrepreneur," Nagamori recalls. "It was very unusual, and in college my friends thought I was crazy, a dreamer, even worse, a liar. But I wasn't satisfied with small dreams. If I couldn't own my own company, I would have become a labor boss, or if that didn't work, a boss of the yakuza [Japanese mafia]."

It isn't surprising that these attitudes didn't serve Nagamori well in the world of Japan's consensus-oriented giant corporations. At Teac and, later, Yamashina Seiki, the strong-willed engineer developed a less-than-flattering reputation as a lone wolf, a brilliant technologist driven more by individual challenge than by the objectives of his superiors. So when Yamashina's financial problems threatened his particular research projects in 1973, Nagamori broke away and, taking three top engineers with him, formed Nidec.

At that stage, their prospects for success were hardly breathtaking. Not only did Nidec face colossal barriers breaking into the highly competitive Japanese electronics market, but Nagamori's company barely possessed enough capital to pay the salaries of its small staff. Working at first out of his home, Nagamori paid calls on the six major banks in Kyoto, but the reception, he recalls, was "quite cold." Only voluntary pay cuts by Nidec's workers saved the company. But even as the banks were brusquely turning him aside, Nagamori was laying out an ambitious, long-term growth strategy. Unwilling to limit himself to the modest success sought by traditional Japanese small businesses and subcontractors, Nagamori fixed his gaze on the billion-dollar successes blazed by such highly successful American entrepreneurial companies as Digital Equipment Corp. and Intel Corp.

"As I traveled, I realized there was a real market for motors like mine in the high-tech industries," Nagamori explains. "They need motors that are light, slim, and small. The old companies can only come up with heavier, old-style motors. Our goal has been to make the product so advanced that there is no number two." Working ceaselessly to improve and expand his line of small motors, Nagamori soon targeted such lucrative new high-tech markets as manufacturers of computer disk drives and laser printers. Today Nidec's reputation for superior engineering design and reliability has helped garner what Nagamori estimates to be 88% of the world market for motors for hard disk drives, 20% for floppies, and virtually all the laser-printer motors. Characteristically, Nagamori pegs the company's future growth on ambitious plans to develop new lines of motors for such still-developing markets as optical disk drives and such biomedical devices as artificial kidneys and hearts. Nidec's ability to widen its technological lead -- the company now boasts 85 original patents -- has been further bolstered by its increasingly easy access to capital. Backed by letters of credit from such major customers as 3M, Nagamori now is considered an honored customer at the very banks that once spurned him. In addition, Nagamori recently sold off 8% of Nidec to Japan Associated Finance Co., Japan's largest venture capital firm, adding another $2.1 million (500 million Yen) to the company's coffers.

"Now that I am making money, of course, everybody wants to give me money," he says acidly. "But they are all very conservative. Even the venture capitalists think like bankers. They take no risks. Now we are flooded with offers. I wish they had been here five years ago."

Rather than capital, Nagamori's most pressing problem today is what he calls "the development of human wares," particularly luring top technical personnel to the company. For years, even successful small and medium-size Japanese businesses have been stymied by their inability to attract first-rank engineering and managerial talent. Most top Japanese engineers and managers are reluctant to join what are commonly seen as overly risky venture businesses, preferring the security and comfort of a hierarchy. This is particularly true among experienced personnel at large companies such as Hitachi or NEC, who often feel bound by ties of loyalty and peer pressure to their highly prestigious employers.

To break down these barriers, Nagamori now spends as much as one-third of his time training and recruiting personnel. In his pitch to new recruits, Nagamori uses the Silicon Valley formula of offering stock -- Nidec is 33% employee-owned -- and the lure of large capital gains if the company, as planned, goes public. And Nagamori's own example nurtures an atmosphere of almost fanatical dedication among his workers. Arriving as early as 7 a.m., Nagamori often works with his young staff, most of whom are under 25, until 11 at night. "My children are fatherless," he admits. "I only come home to eat and sleep."

Like many other Japanese companies, Nidec also struggles to give its employees a strong sense of belonging and group identity. Nagamori has written a little green booklet for his employees laying out the various characteristics of the model "Nidec man," including such things as a belief that the company must be number one in terms of product quality, technological excellence, and growth.

Efforts like this, Nagamori claims, have substantially improved Nidec's ability to recruit top engineering and managerial talent -- nearly 160 of the company's 600 employees are engineers -- from both Japan's leading universities and such major corporations as Matsushita, Toshiba, and Sony. To some extent, Nidec's increasing attractiveness for top talent also reflects the slackening pace of promotion within many large Japanese companies, as well as the relative lack of caution among younger Japanese brought up in the prosperity of the post-war era.

"I analyze their feeling and realize that in big companies there are many anomalies which make people unhappy," Nagamori says. "There are many talented people in big companies whose paths are determined not by talent, but by seniority and politics. If we develop the right human values here, we will attract the best talent. Maybe not as much as in the USA, but things are changing here."

Although Nagamori may point to change, it remains unclear whether Nidec, or any of the current crop of Japanese venture businesses, will ever merge to challenge Japan's entrenched industrial establishment. Even among many Japanese entrepreneurs themselves, there remains a strong conviction about the limitations to growth under the existing business system.

"There is a zero possibility of an Apple Computer in Japan right now," asserts Kazuhiko Nishi, executive vice-president of Ascii Corp., a successful Tokyo software and publishing company. "There isn't the money or the talent available. Maybe you could get to $100 million, but getting to $500 million would be almost impossible. In 10 or 15 years it might change, but I think it will always be very tough for companies to get big."

Much of the problem, Nishi and other entrepreneurs believe, stems from the strong conservative streak throughout Japanese government and business circles. Even those government leaders eager to help entrepreneurs are fearful of the disruptions that might result from any major challenge to the current industrial establishment. Indeed the entire program of loosening restraints on venture businesses, explains one top MITI official, is designed to encourage only high-tech companies, not to nurture future full-bore competitors for the established giants. "Our MITI wants to encourage venture business to help keep the economy dynamic. But when the conflict becomes too great, it threatens our whole Confucianist social system," the MITI official explains. "If venture businesses go too far, Japanese business and pubic opinion will turn against the entrepreneur. Then the pressure will be again to start limiting the field."

Nor are the recent increases in venture capital likely to offer entrepreneurs the funding necessary to mount a challenge to Japan's vertically integrated giants. The relationship between the large companies and Japan's major banks, developed during the post-war era, are often incestuously close. With banks frequently holding the largest blocks of stock -- and even board control -- of many top Japanese companies, they are unlikely to supply capital to outsiders who might threaten their own holdings.

Atsuyoshi Ouchi, senior executive vice-president of the $4.7-billion NEC Corp., argues that these financial realities, plus the lack of technical and managerial talent for small companies, could make it virtually impossible for entrepreneurs to move effectively into such highly capital-intensive areas as computer hardware, biotechnology, or semiconductors. "In fields such as software, yes, you will see start-ups, but not producing large systems or products like semiconductors. The Japanese capital market is still very hard on small business, and you won't see top executives spinning off like they do in the States."

"It would be difficult even for me to start a company here," Ouchi admits, breaking into a rare smile. "Now if I were younger and spoke better English, maybe I would go to California and try it."

But Nagamori and others like him are convinced that they can succeed in their homeland. They remember when Morita, Honda, and Matsushita were considered upstarts. "Come back here in 20 years, and you'll see me as big as the biggest," Nagamori predicts. "There might be a lot of ceilings for entrepreneurial companies in Japan, but we will break through them all. I am going for the limit."

Last updated: Apr 1, 1984




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