Trading Places: Are America and Japan Locked in a Trade War?
It is a weird war, the Japanese-American trade war: Its weapons are products; its legends are written in statistics. If there are people involved, they are leaders of giant corporations, heads of state, the field marshals of a great struggle. The human scale in missing somehow, a crucial dimension on both sides of the Pacific, where personal ambitions are played out, destroyed, or fulfilled, and where feelings may run as high as they did in the real war 40 years ago.
Last spring, INC. invited four Japanese and three American executives, most of them chief executive officers of small entrepreneurial companies, to sit down together at Yamaichi Securities Co., a leading investment bank in Tokyo, to discuss this human dimension of the trade war. The Americans were all members of SoCalTEN, the Southern California Technology Executives Network (see "Networking: A Little Help from Your Friends," June); some of the Japanese belonged to the Nikkei Venture Business Center.
The panelists' discussion ranged over the broadly cultural, as well as the narrowly economic, circumstances of their business lives. They discussed, sometimes heatedly, whether American executives were lazy -- and whether the Japanese were afraid of failure. They talked about how young American engineers often prefer to work for a start-up business, whereas their Japanese peers prefer the status, and the security, of working for a huge corporation.
The encounter was revealing, often in surprising ways. Americans stereotypically pride themselves on their blunt forthrightness, the Japanese on their unflappable civility. The participants coolly upset this comfortable assumption. Few American executives, for example, are so blunt -- or at the same time so courteous -- as Shigenobu Nagamori, the 40-year-old president of Kyoto-based Nippon Densan Corp. (Nidec), which, with more than $100 million in sales and 1,150 workers, is one of Japan's most successful entrepreneurial companies. No less outspoken on the Japanese side was Hiroshi Kato, 55, a director of Yamaichi's $70-million venture capital fund and the author of several books and articles on Japanese entrepreneurship. Zenjiro Sano, age 47, founder of the Tokyo-based Zax Corp., is one of a new breed of Japanese venture businessmen who are determined to prove that Japanese creativity isn't a contradiction in terms -- even if this means opening a research-and-development facility in Irvine, Calif., and staffing it mostly with Americans. Rounding out the Japanese panel was Masakatsu Makino, president of Creative Systems Corp., a fledgling Japanese software company in Kanagawa, an hour's drive southwest of Tokyo. With last year's sales of slightly more than $1 million, Makino, like many entrepreneurs on both sides of the Pacific, is beset by more established companies in his struggle for market share and capital resources.
The Japanese, too, may have been pleasantly surprised to discover that their American counterparts could be polite, even formal, without in the least abandoning their notorious candor. Rod Hosilyk, for example, co-founder and president of Rosscomp Corp., a $1-million Irvine manufacturer of tape drives, has been doing business in Japan for 20 years -- and he freely expressed his frustrations with Japanese business practices. Equally courteous, equally forth-right, was his fellow Orange County executive, Alpha Micro System's president Richard Cortese, age 42, who showed a connoisseur's appreciation of the possibilities of international commerce and cooperation. Steven Panzer, the 39-year-old co-founder and executive director of SoCalTEN, was the third and final American panelist.
The roundtable was held in Yamaichi Securities's conference room. Two stenographers and two simultaneous translators were on hand to capture the discussion, as were two Japanese journalists, Ikuo Umebayashi of the Nikkei Industry Research Institute and Kenichiro Takahashi, senior editor of Aspect magazine. The roundtable was conducted by INC. editor George Gendron and Joel Kotkin, INC's West Coast editor.
INC.: We hear a good deal about how hard it is for a small, non-Japanese company to do business in Japan. How true is this?
HOSILYK: I have been doing business in Japan now for probably 20 years, always in joint activities, true joint activities, in which we have tried to match the capabilities of a U.S. company to a Japanese company. And I must say that they've all been successful, at least to the extent that they satisfied the requirements that were placed on them. Furthermore, I found that the only precaution that we had to take over here was to use the same, normal, good business judgment that you would use doing business in the United States or anywhere else in the world. Japanese companies don't have any more secret weapons than anybody else.
However, I can say that the most frustrating part of our doing business in Japan is government regulation. You have what is called the Fair Trade Commission (FTC) in Japan, which imposes very strict requirements on the agreements we attempt to negotiate. We don't have this in the United States, so agreements tend to become one-sided. In addition, the banking industry in Japan imposes its own requirements on contractual arrangements, which we also don't have in the United States. Just recently, we structured a tripartite agreement among our company and two large Japanese companies. By the time we considered all of the regulations of the FTC -- which I call the UTC for "Unfair Trade Commission" -- we had to remove a lot of the business points that we originally negotiated in the deal.
CORTESE: I agree. Japan is viewed as a particularly difficult place to do a joint venture that's beneficial to both parties. And the reason is the restrictions placed on it by government agencies -- by what we perceive, rightly or wrongly, to be a certain protectionist attitude. This perception reduces the willingness of American companies to do joint ventures. Of course, that's why I am here: to learn. But you should know that many other Americans don't even try to learn. They see easier opportunities in other parts of the world, countries where government policies or cultural conditions make it easier to put together fair and equitable joint ventures.
I am curious to know whether you believe Japanese business should push to get less government involvement in these business deals.
NAGAMORI: These government restrictions and regulations you refer to -- you shouldn't assume that they are directed only at American companies. We Japanese are also shackled. The Japanese government, I believe, is in some ways like the government of a developing country. A venture business, when it grows to a certain level, is faced with a lot of interference from the government. For example, once we have what the government calls a "sufficient capital foundation," we are required to pay whatever bills we owe to outsiders quickly. Then, too, regulations get changed by the whim of bureaucrats; they can construe the regulations in whatever way they want to. I have had a lot of quarrels with government people. I'm known as "Quarreling Nagamori." Normally, we don't want to quarrel with them, because they could put us at a disadvantage, but unless we do, the system won't improve. In contemporary Japanese society, however, all younger entrepreneurs have to fact this difficulty.
Now, changing the subjects a little bit -- Japanese companies may be difficult to deal with, but I would say that there is no one in the world with whom it is more difficult to deal than Americans. Let me cite one example.Six years ago, we established a joint venture, a 50/50 joint venture in the United States. One Friday, we faced a fairly big problem in terms of corporate management. Now in Japan, we can work over the weekend as well; we don't care whether it is Saturday or Sunday. But that Friday afternoon our American counterpart said, "Oh, have a nice weekend," and left the negotiating table. We were told that the guy went off on a date with a girl. After this, I began thinking that we were in for some serious with these Americans. The cultural differences were just too much. So, instead of 50/50, we purchased 100% of the company. Of course, we left management to the Americans, and we now completely trust our Americans; but we still feel very much irritated. Americans leave at five o'clock, whatever serious problems may be left hanging. I wish I could learn to do that. We cannot fall asleep at night, we can't even enjoy weekends. But Americans enjoy tennis, enjoy the weekend. Saying, "Have a nice weekend," they leave easily. I wish I could learn that for once in my life.
One other thing: We are not a really big company; we have only about 1,000 workers. But we have people who can speak all languages. I think that's something that American businessmen have been neglecting. American businessmen still tend to believe that English can be spoken everywhere.
CORTESE: Well, if you want to do business with a company that doesn't go home on Friday at five o'clock, call Alpha Micro. But seriously, I would be very concerned, if I were you, about your joint venture with someone who goes home on Friday at five o'clock. And I certainly would recommend buying them out immediately or dumping them.
As to the American's continual litany of complaints about government interference, be comforted by the fact that we also complain about our own government interference, and that our bureaucrats' languages are not that dissimilar to the ones you described. They also say things and do nothing. And they are equally as vexing.
About the language problem, it is just a fact of life. There has always been enough leverage in American money, technology, or muscle to have people acquiesce to our language. Now, I would totally agree that this is neither fair nor just, but I am not sure that it's material.
We are a small company -- 450 employees with more than $50 million in U.S. sales. We have to be very, very careful with our assets, and where and how we invest them. At the same time, we are eager to participate in the world market, and we do participate in almost all parts of the world except Japan. But as the difficulty quotient rises in foreign markets, the incentive to invest decreases; and it is significantly less expensive for an American company to pursue business in the United States than in foreign locations. This doesn't mean we are not interested. It means that we must make a business decision as to the cost of developing the marketplace.
It is now a world market. And it is important to compete in multiple markets, not just because of return on investment and sales value, but for knowledge. I still want to do business in Japan, and I still want to understand better the way you do business, your culture and economic environment.And I don't believe that language is truly an insurmountable problem. You just have to recognize it.
MAKINO: We are going into the American market next month. I am one of the younger generation, born after World War II. We are interested in creating something. That's the wish of the younger generation. We are not interested in manufacturing personal computers or any other products that have reached the stage of maturity. We want to create a new market, a new field. Many American companies have approached us with offers of an alliance, but what they say is that the Japanese are good at manufacturing, producing high-quality goods cheaply. We say no to those offers. We tell them that we would be interested in something in the R&D field, the creative field; not merely producing something on behalf of others. This is the key to my decision to go to the American market: to see if we can add something creative.
And I have found some Americans who are interested. Some Americans have noticed that the Japanese have creativity, too. That's the way to internationalize our business, I feel. There may be barriers and obstacles, like languages and so forth, but I am not concerned with that, perhaps because I am young.
CORTESE: You should know that there is another great concern among many American businessmen about joint-venture arrangements with foreign countries, especially Japan. You are seen as very fierce competitors, and the concern is that the joint venture would be a short-term relationship, in which the Japanese partner will acquire the American technology, then sell it back to America, competing against American companies. When we first met in California to discuss coming to this roundtable, some of my colleagues advised me to be very careful about what I said, what I revealed. it wasn't clear to me why I needed to be any more careful in dealing with Japanese businessmen than I am with American businessmen, but the fact is that this suspicion is prevalent in the United States, particularly in high-tech companies, particularly with respect to large Japanese companies. Are you aware of this stereotype? How accurate do you think it is?
SANO: In some cases it is accurate, and in some cases not. My company has some joint-business relationships with a certain American company, so let me speak from my experience, if I may. First, we think that any technology that can be copied is not a true technology. Our company is based on high technology: We develop tools to develop microprocessor-based systems. Since the day we founded the company, we knew that our technology, by its very nature, could not be easily copied.
But that said, it is still very important to choose the right partner. You have to choose a company that's not in the same field you are. For example, we had an alliance with a software company in the States, a small company in Silicon Valley. The two of us are in different fields. We are not interested in software, and they are not interested in developing tools to make microprocessors. We are, in a sense, complementary businesses.
Another example. We are talking with a company in Oregon at the moment. In the first stage, we are going to have joint marketing; in the second stage, joint manufacturing. The third stage will involve joint engineering.But once again, we have made sure that we don't have head-on competition, that we're going to be complementary to each other.
NAGAMORI: I agree with all that, but let's look at Japan proper and ask who it is that we should have the greatest misgivings about. And the answer is: large Japanese businesses. They have a tendency to steal technology from medium-size and small companies in Japan. We know this from experience. We established our company, and came up with a very outstanding product at the outset. But we were very small, and although we should have applied for a patent, we didn't have the capability. So we put our product on the market, and suddenly the big companies began producing the same things; most people, in fact, probably think that it was we who copied the product from the big companies. So I would say to you Americans, when you think about doing a joint venture in Japan, beware of big Japanese companies. You shouldn't be suspicious of the small companies. We are proud of our own technology; we would never be so cheap as to steal technology from you.
KATO: Over the past 30 years, I have dealt with three of what might be called joint ventures. In terms of numbers, they were successes, but in terms of mentality, they were failures. For the American side, they were successes, but for the Japanese side, they were failures. Let me explain why.
The American manager who shook hands on one of the ventures was a man of very high standing. He could speak and read Japanese, and he knew Japanese Bushido, the Japanese discipline of the samurai. But in the next 30 years, the presidency of the U.S. company changed three times, each time for the worst with respect to their understanding of Japan. Meanwhile, 10 years ago, the Japanese partner was on the brink of bankruptcy, with the result that the U.S. partner acquired a majority interest in the venture. This was most unfortunate, for the American managers proved to be very shortsighted. They were myopic. Revenues of the joint venture were registered on a consolidated basis, so that despite the Japanese losses, the American company could show a profit. Each president had a short-term investment in that profit: It would improve his stock options during his tenure in office. But this also meant that they did not want to invest in the Japanese company for the longer term; indeed, each president seemed to quit as soon as he had maximized his stock options.
INC.: Myopia is also causing problems in U.S. venture businesses. In the past six to nine months especially, we've seen many venture businesses going under because of just that sort of shortsightedness. At the same time, larger companies in the United States are becoming more aggressive, leaner, much stronger competitors. They've learned a lot from the venture businesses. It may even be true that, in a sense, we are seeing the end of the venture business boom in America. Is this happening in Japan as well?
KATO: Japanese venture business is still in its embryonic stage, the boom having started in Japan only in 1980 or 1981. So, yes, there are people in this country who say that venture businesses are not working out, that the big businesses are on the counterattack, and that the venture businesses will soon disappear. I don't go along with this. It is much too early to tell. I would like to stress that point.
NAGAMORI: This is perhaps off the point, but earlier I made some provocative remarks about American businessmen, and I'd like to correct them. I am very grateful to the Americans. I was born in 1944, and I was able to grow, literally, because of the powdered milk that was supplied to us by Americans. It was also thanks to Americans that I was able to grow my business. I established my company in 1973. We started with only four people, and I used my house as the office. Japanese big business never accepted our products. Big businesses in this country are always very particular about your past achievements, your performance, your age. They didn't trust us, which is why we went to the United States. And the American big businesses were very warm to us. We told them that we were a new company, that we hadn't any history, and they simply said, "We praise your courage." More importantly, they bought our products. This would have been inconceivable in Japan. In Japan, even if it was me sitting on the opposite side of the desk, even I would probably say, "I won't buy those products." But American businesses were very open-hearted: They provided us with indispensable support. So you see, I started out feeling that the United States was a wonderful society, which is why I so regretted the problems I ran into later. I just want to qualify, somewhat, my earlier statements. I also want to make sure some of our American deals don't get canceled. [Laughter]
INC.: One of the things we have heard is that smaller Japanese growth companies, as a rule, seem to have a much more difficult time recruiting talented managers than their American counterparts do. Is that true?
NAGAMORI: Yes. For a growing company in Japan, it's not easy to recruit people as you do in the United States. It's not easy, because of the limited labor mobility in Japan, and because competent human resources tend to spend their whole lives working for the same big companies. This is changing, but not all that fast.
In the case of our company, for example: Over the past 10 years, we have been growing at a pace of 60% to 100% per year. This means that we will inevitably run short of human resources. We want to grow our company; want to push the growth. We try to scout competent people as fast as possible, but we can't seem to keep up with the growth of the company. So this is a big headache for us.
KATO: Labor mobility has begun to speed up in Japan, but only in the past few years. Our country went through long years of turbulence after the war, and people wanted to have stable jobs in big and stable companies. In this decade, however, the traditional managerial system of lifelong employment and seniority-based wages has been gradually breaking down. There is now an increasing tendency among elite students, who once had eyes only for companies of 1-billion yen capitalization, to jump into venture business companies. The trend is only a couple of years old, but I think it will increase.
INC.: I think the Japanese may have a false sense that somehow every brilliant MIT engineer is just pounding the doors to get into Alpha Micro. What about the human resource problem in the States?
CORTESE: Well, there are some differences. Most of the technically educated people in our marketplace look for security in the industry as opposed to the company. They assume that they can transfer their skills easily from one company to another. So we operate with some advantage in that respect.
But the negative side of this shows up very quickly: If you believe you can transfer easily, you do. We have less trouble finding people than you Japanese do. But we have a second problem that it appears you don't face: Our people leave us almost as quickly as we can recruit them.
Our industry, for example, operates on a 30% per year turnover. You all know the value of continuity in technical development and support. We lose that. So, I believe that as you gain in your labor-market mobility, you will face a whole new challenge, which is finding methods for maintaining and retaining your people. In our industry, we attract people by giving them equity participation. We retain them by giving them both equity participation and special incentives for performance. We break our own internal rules to keep the really key contributors, but this causes people to leave who view themselves as equal in terms of skills but less rewarded. So we are in a constant battle to find people, as you are; trying to keep them, having them leave, trying to find other people.
Perhaps the only advantage we have in this area is that Americans are not as sensitive to the size of the company. In fact, I would say they are more interested in joining smaller companies. They perceive that there is less discipline, that creativity is better accepted; or, second, they think that they can participate in an equity sense and gain significant independence in a relatively short business life in a small company. They cannot get this in a large company. Last, they perceive that they can move to senior positions much more quickly, because there is a flatter hierarchy to move up in. In a larger company, there are many more levels in which they must put in their time.
But let me ask the Japanese a question. Do you have the tools to retain and attract your people that we have in our smaller companies? Equity? Financial markets giving multiples to stock valuation? Bonuses, and so on? Are those available to you? And are they effective? And do you use them?
NAGAMORI: First, I think there is a basic difference between the United States and Japan that we have to consider. In the United States, the emphasis is on monetary incentives. Not in Japan. Of course, deep in their minds, people may want more money. But they don't ask for it. Money is secondary to prestige.
I will tell you a story. A certain student was interested in joining our company. But then he told us that his mother wanted him to join a company that was being publicized in TV commercials. So he chose Toyota. Is he designing Toyota motorcars? No, no. He is working as a service engineer in a local city. He is nearly a salesman. But the mother is proud: He is working for the great Toyota. She can spread it around the neighborhood that her son works for Toyota. The neighborhood is impressed: "Oh, your son works for Toyota!" So, if a Japanese mother feels she has a good son, she wants him to join a company with high visibility and prestige. Generally speaking, someone who has graduated from a top-notch university wants to join the very top company, which means the very large company in Japan. That's the easy way to high social status.
Yes, we have employee equity in our company, and we encourage the employees to own it. But, remember, some of our employees don't even have any idea what stocks and equity are; they are not interested in that sort of thing as an incentive. So even if we publicize stock options as an attraction, it doesn't have much of an effect as yet.
So, how do we recruit? We tell them our company is growing. We stress the point: "Our company is still small, but it's going to become a big company; and when it does, you are going to get the promotion." We tell them, "If you join Hitachi or Toshiba, you may not go to the very top. But if you join our company, maybe you will become the very top executive; maybe you'll enjoy an even higher status than your colleague who joined Hitachi or Toshiba."
UMEBAYASHI: I would like to ask a question of the U.S. side. When venture companies in the United States grow very large, what happens to them? Are they any different from conventional large companies? I feel that there must be something, some philosophy, that would make you different from other conventional big businesses.
HOSILYK: That's an interesting question, and it touches on a lot of the issues that we have been talking about. Should our company become very large, I think we will be the same as any other large company. However, it's important to understand the motivations behind venture capital-funded companies. In Alpha Micro's case, for example, the management is judged by quarterly results. What profits did the company make for the quarter, and how much did that increase the value of the stock? After all, why do venture capitalists invest in a company? To obtain equity at a reasonably low price, to have the company grow in size very rapidly; to have the equity appreciate very much, so as to be able to sell their stock and make a large amount of money.
I recently had a discussion till 2:30 in the morning here in Japan trying to explain why we don't give dividends in companies in the United States. The reason is that dividends are bad from a tax standpoint. So we look only for capital growth.
I think this answers your question.We are a venture capital-funded company. We want to grow very rapidly. The investors want to be able to sell their stock and recoup their original investment, plus a large profit. At that point, the company becomes a normal publicly traded company like any other -- and it has all the problems of any other large company.
NAGAMORI: If I may speak again, we started our company from zero, and we want to grow it into a big and stable company. In Japanese society, a smaller business cannot remain small or medium-size over the longer term. Big businesses come into our markets very aggressively, even small markets, in order to improve their profits. Only a very limited number of smaller businesses that really have their own, shall I say, captive market can remain small. So, of necessity, you have got to make your company big.
There is an expression "small is beautiful," and I am against that idea. Companies have to grow. For the larger they grow, in Japanese society, the easier it becomes for Japanese smaller businesses to operate in this community, because of relations with banks and so on. The smaller you are, the more unstable you are. Over the long term, venture business is too risky, too unstable. So I think you have to try and grow your company -- develop your company as quickly as possible, and then, think about the next stage.
MAKINO: I, too, would like to make my company a big company. But does that mean that inevitably we will introduce the same inflexible methods as other large companies? No. I believe there could be more flexibility as we grow larger; larger companies have more people, more human resources. The real question is, Are we going to be able to have some impact on the new market or society? If we are, then maybe we have to introduce some new tools from the outside in managing the company. Maybe we might have to spin off, so that we would become a group of companies, rather than be coming a big company under one roof.
KATO: I'm not sure about the flexibility of big companies. Let's say we have a brave samurai in a big Japanese company who would like to express his entrepreneurship, or intra-preneurship, as you put it these days. And let's say he challenges. Unfortunately, however, he fails. What happens? He loses his career in the big company. All right, let's say he succeeds -- does he get rewarded? Not necessarily. The bosses, the senior manager, or the president will reap all the credit, not he. This happens a lot in Japanese large companies, this is still the structure, the organizational setup we have in Japan. Consequently, for the next 10 years or so, you won't find strong entrepreneurial counterattacks by big business on small business. Japanese venture businesses are going to enjoy boom days in the near future. But in the long run, 10 years from now, with the coming of those changes I mentioned in traditional management practices, then I would guess that the larger Japanese companies are going to be a lot tougher than their American counterparts.
INC.: Do you think there's any hope that through this sort of networking we can blend the strengths of the two systems?
NAGAMORI: From now on, instead of thinking American or Japanese, we ought to think globally. Being involved in the world business for the past 10 years or so, I really feel that we should not be limited to the Japanese perspective or the American perspective. When we try to sell in the United States, we must bring products Americans want to buy. But if we think that because the Americans accepted these products then we can sell them to the Russains, we would be wrong. We have got to produce products that the Russians want to buy. And I think that through this sort of process, people in different parts of the world will tie up with each other. And by doing so, we would also be able to expand American venture business, Japanese venture business, and venture businesses in other parts of the world.
PANZER: I think it is inevitable that in 5 years, 10 years, 15 years, even 50 years hence, we are going to see a breaking down of national boundaries, more and more blending of cultures. As people work together in joint ventures, you sit across the table, maybe on the same side of the table, you take off your jacket, you roll up your shirt-sleeves, and you develop friendships, you get to know the individual. And naturally, you are going to see a merging of different approaches.