Do The Japanese Make Good Partners?
It wasn't very long ago that U.S. technology firms looked to joint ventures with the Japanese as the hot strategy for growth. To these young companies, an alliance with Japan's formidable industrial giants offered plenty of cash, efficient manufacturing capabilities, and eventual entry into the lucrative Japanese market.
For the most part, however, things haven't worked out as planned. Time and again, U.S. companies have transferred their technology to Japanese corporate partners only to find that those partners have used it to become some of their fiercest competitors. Just ask Ampex Corp., the one-time Silicon Valley wunderkind that licensed crucial videotape patents that have since formed the basis of Japan's domination of VCR technology. Or Varian Associates Inc., the high-tech manufacturer whose executives complained to the San Jose Mercury News that their longtime arrangement with Japan's Nippon Electric Co. has amounted to little more than the theft of its chip-making know-how. So often, in fact, have these arrangements turned out badly that the japanese may have done to the concept of joint venture what Petain and Quisling did for collaboration.
"The big Japanese companies are always hungry for technology and are willing to pay for it," notes Tadashi Saegusa, himself a former executive with Japanese companies who is now a venture business consultant in Tokyo. "The danger is that later on they end up swallowing you."
In assessing the trustworthiness of business partners, however, it's worth remembering that not all Japanese firms are alike. Saegusa says it is the zaibatsu, the Japanese industrial giants, that have given joint ventures a bad name. Instead, he encourages U.S. companies to look at mid-size Japanese businesses with sales of between $100 million and $300 million -- companies that are big enough to bring technical and managerial sophistication to a Pacific alliance without bringing the "engulf and devour" mentality characteristic of the Japanese giants.
The strategy being followed by California's Finial Technology Inc. may be a model for what Saegusa has in mind. "Technology-driven American firm seeks help and meaningful long-term relationship with Japanese manufacturer looking for new products to build," is how it might have been played in the personal columns. The quest ended when Finial made contact with Kuron Corp., in the mountains of northern Honshu. Starting with a tiny operation assembling television tuner parts for a minor Sony subcontractor, founder Nobuyuki Hoshino has built Kuron into a respected contract manufacturer for a number of Japan's electronic giants. The company now has four highly automated factories throughout Japan, with nearly 1,000 employees and sales in excess of $70 million.
Still, Kuron has been in a bit of trouble of late. Since the Japanese yen began its precipitous climb some 18 months ago, Japanese export firms have been severely affected, and at Kuron, new orders are down by 20%. At the same time, such key customers as Sony -- which account for 60% of Kuron's business -- have demanded, on average, a 20% reduction in price in order to stay competitive with hard-charging competitors from Korea and Taiwan.
"There is no future here," explains Hoshino in his headquarters in the small town of Nagaoka. "Psychologically and spiritually, we are stuck. All we do is worry about how to survive and meet our orders. There is no way to control our destiny."
This is the traditional way a Japanese businessman complains when sales drop and margins are tightened. And for him, gaining control of his "destiny" now means finding customers outside of Japan -- customers like Rob Reis.
In many ways, the problems facing Finial's Reis are a mirror image of those facing Hoshino. His company has just patented a new laser turntable that plays records without the risk of scratching or wear -- a way to switch to compact-disk technology without giving up the record album. But rather than look to the Japanese giants that are eager to put the laser turntable into production, Reis is determined to avoid the mistakes of others in his industry.
"Often you get marriages between companies of uneven size," he explains, "and the American company loses control of its technology. Our strategy is to find ways to maintain that control."
Reis's solution was remarkably simple: to manufacture the crucial laser record-reader himself while eventually contracting some of the assembly to a Japanese partner that would not -- and probably could not -- walk off with Finial's proprietary technology. Kuron seemed to fit the criteria precisely. "The fact that they are a great electronics-manufacturing firm but not in mechanical assembly, product development, or marketing makes them a less threatening partner," says Reis. While final details of the relationship are still being worked out, the terms of engagement essentially were sealed last summer when Finial sold some of its stock to Kuron for $300,000 -- seed capital that will help Reis finance manufacturing and marketing. Before long, Kuron is expected to perform some of Finial's electronic assembly, either in Japan or at the Japanese firm's new factory in southern California. And both companies look to other arrangements as Finial develops and patents new technologies.
Of course, the flow of technology need not be always from West to East. Although many Americans still regard the Japanese as merely skilled copiers and assemblers, Japan has very quietly emerged during the past decade as a technological power -- and net exporter -- in its own right. And in the vanguard of Japan's technological advance have been several small "venture businesses" that are looking for savvy partners to bring their wares to the American market. For enterprising U.S. firms, this is an unusual opportunity to turn the traditional technology-transfer arrangement on its head.
One such arrangement has been worked out between Connecticut's Superior Electric Co., which specializes in manufacturing motors, and Tokyo's Sawafuji Dynameca Co., which has perfected a plastic-magnet technology that is used in certain manufacturing processes.
Sawafuji comes to the alliance having fallen on hard times. Once one of the superstars in the Japanese venture business world, the company lost several million dollars last year on sales of about $10 million, largely due to problems related to manufacturing and marketing its ultrathin audio speakers. With hopes for a quick rebound quashed by the yen's rapid appreciation and competition from other Asian nations, Sawafuji sought a reliable partner with enough clout and experience to bring its technology to diversified markets.
"In Japan, all the major magnet companies are big companies," explains president Tetsuya Sawafuji, who feared that the giants might simply appropriate his company's hot magnet technology. "It's hard to make a good deal with them because they already dominate the market."
Instead, Sawafuji turned to Superior Electric, a $50-million company whose executives see the new technology as a potential "world beater." Peter Campbell, president of the Superior subsidiary involved in the venture, estimates that Sawafuji's plastic-magnet technology is every bit as good as the optical technology now used by manufacturers, but significantly less expensive. And when the technology is fully developed, Campbell predicts it will be used in products as diverse as machine-tool motors, computer peripherals, and automobiles -- with sales reaching $50 million within a few years.
A third model for collaboration has nothing to do with manufacturing and everything to do with breaking into the huge -- but often impenetrable -- Japanese marketplace. In the past, U.S. companies have looked to the sogo shosha, the giant Japanese trading companies like Mitsubishi Corp. or C. Itoh & Co., to handle distribution of their products to Japanese customers and consumers. But often the results have been disappointing.
"Large trading firms make their money by selling products that can sell in the millions of dollars and need little service," explains Takashi Nakagami, whose Ewig Corp. trading company booked $40 million in business. "To a large trading firm, something that can sell in the hundreds of thousands isn't really worth the trouble. But that's what a lot of American firms really have to sell."
Another problem in dealing with the sogo shosha is that these giants have links to hundreds of companies in all sectors of the economy, from finance to manufacturing to service. That makes it easy for them to sell to one of their own affiliated companies. But it makes it difficult to sell to ones that may be affiliated with a competing sogo shosha.
Cosmos Inc., a software firm based near Seattle, found it could avoid getting caught in the web of internecine conflicts of Japan's marketplace by joining forces with Japan Computer Science Co. (JCS), an Osaka company that last year posted roughly $100 million in sales. As one of Japan's leading software developers, JCS had the technical know-how to adapt Cosmos's products -- including the popular "Revelation" database program -- to Japanese hardware and language. The alliance also gives Cosmos access to a network of 400 independent software dealers throughout Japan that would never have been available to a U.S. company with only $8 million in sales.
The benefits of the alliance, however, flow generously in both directions. With the Japanese still far behind the Americans in the development of business software, and the strong yen tilting in favor of importing software rather than developing it, the money now is to be made in repackaging. Yasunori Tanaka, general manager of the JCS subsidiary working with Cosmos, estimates that Japanese sales of "Revelation" alone could reach $1 million within two or three years. And he believes that total sales of adapted U.S. software could easily surpass sales of JCS's own software throughout the next decade.
Undoubtedly, the Cosmos-JCS alliance, like all of these new arrangements, will be tested over time -- as currency values continue their unpredictable dance step, as national economies evolve, and as some American and Japanese partners begin to fight the way all partners fight. But these second-generation Pacific alliances start with an important advantage over the joint ventures of years past. For no longer are they built upon the shaky foundation of trust in the great Japanese zaibatsus, with their relentless drive to diversify and their voracious appetite for market share. Rather, these are partnerships built upon the complementary interests of relative equals -- smaller, entrepreneurial companies on both sides of the Pacific whose more modest goals are to turn a profit by doing what they do best. And should they succeed, the joint venture across the Pacific may once again be regarded as a viable growth strategy for American firms.
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