IP: Holding the Right Cards In Japan

[Dave Farber <farber () central cis upenn edu>]

From: pkirby () mail st rim or jp (Peter Kirby)
Subject: Holding the Right Cards In Japan


This piece that Jim Abegglen and I wrote appeared on the Editorial page
of the March 4, 1996 edition of Asian Wall Street Journal.  I post it here
for those in the US and elsewhere who do not see the AWSJ.




Holding the Right Cards In Japan


By James C. Abegglen and Peter S. Kirby


   Foreign companies that have set up wholly owned subsidiaries in Japan in
the last 15 years and have kept control of their technology have met with
spectacular success.  But you wonユt hear much about them.  The winners in
Japan's competitive environment quietly bank their earnings; the losers whine
that the Japanese government is to blame for their own failures.


   The top 100 foreign-owned companies in Japan have total sales of $155
billion, a sum equivalent to the entire gross domestic product of Thailand or
Indonesia.  Foreign manufacturers and marketers have major positions in
nearly all sectors of the Japanese economy.  More than 40 have over $1
billion in annual sales each.  The contrast with the picture of Japan as
"mercantile" or "closed" could hardly be more dramatic.


   IBM is the largest of the foreign-owned companies, with sales of more
than $14 billion and ownership of 31 separate Japanese companies in which
its average equity ownership is 92%.  Indeed, the strategic high-technology
sector is one where foreign-owned companies stand out.  Philips, Texas
Instruments, Motorola, Apple Computer, Hewlett Packard, Unisys, Samsung
Electronics, Intel and Digital Equipment are all members of the not-so-
exclusive billion-dollar-sales club.


   In almost all of these cases, foreign equity ownership of the Japanese
company is in the 90% to 100% range.  If Japan's ministries have been
seeking to protect their high-tech sector, they have not been doing a very
good job of it.  For the foreign companies, hanging on to their technological
edge has been key.  Companies like TI used their technology as a weapon to
obtain a wholly owned operation in Japan.  If you sell off your technology,
what do you have left as an entry lever?  Not people or money.  Japan has an
ample supply of both.


   A recent study by Gemini Consulting (Japan) on foreign companies in Japan
provides an interesting perspective on trade disputes.  For all of Detroit's
loud complaints about how the Japanese economy is closed, Ford has the
second largest position in Japan, larger even than the oil majors.  Ford holds
equity in seven Japanese companies, with total sales of more than $28 billion
in 1994.  However, Ford has taken minority positions in, for example, Mazda,
and on average owns only 39% in these seven Japanese affiliates.  Adjusting
for this limited ownership, Ford still has total sales in Japan of more than
$11 billion.


   Similarly, General Motors has sales in Japan of more than $6 billion,after
adjusting for equity position.  These are certainly not the trivial amounts
one might expect after all of the political posturing against Japan by
Detroit's auto executives.  Chrysler sold off its equity position in Mitsubishi
Motors and has not rebuilt a major sales position in Japan.


   The true auto successes in Japan, however, are the Europeans - BMW,
Daimler-Benz, Volkswagen and Volvo - whose governments have been rather
quiet while these companies set up sales channels in Japan and became
overwhelming leaders in Japan's fast-growing import car market.  BMW's 1994
sales - all imports - were well over $2 billion and Daimler's over $1.7
billion.  Detroit's automakers sought to buy their way into Japan through
equity in existing producers, seemingly the easy way.  This approach has
largely failed.  The Europeans invested instead in merchandising, distributi
on and after-service, controlling their Japan operations directly.  They are
the winners.  And their governments had nothing to do with it.


   Again, while semiconductors are back on the U.S.-Japan trade agenda as a
contentious issue, chip sellers racked up some attractive numbers.  Texas
Instruments' sales in Japan totalled more than $2.1 billion, Motorola $2
billion and Intel more than $1 billion.  These are companies that husbanded
their technology, rather than selling it on the cheap, and used that technology
to stake out a major position in the Japanese economy.  These corporate
successes do not support the view of a closed market, nor do they argue for an
extension of the market-rigging semiconductor agreement, in which the Japanese
have committed to giving foreign markers 20% of the chip market.


   U.S. congressional hearings on trade issues, however, feature the losers,
not the winners in Japan's market.  And perhaps Washington finds it
politically useful to focus on the losers' complaints and ignore the
successes.  Unfortunately, U.S.-Japan relations are the worse for it.  An
in-depth understanding of the real competitive situation in Japan for foreign
companies could greatly change policies and positions in trade negotiations.


   The case of Eastman Kodak in Japan is another current trade issue.
Eastman Kodak has a total of five subsidiaries in Japan that can be identified
from public sources.  It holds and average of 72% of the equity of these
companies:  They are controlled subsidiaries.  The combined sales of these
Eastman Kodak subsidiaries in Japan in 1994 was $1.2 billion, and Eastman
Kodak is 43rd on the list of the largest foreign companies.  Whatever its
complaints, Eastman Kodak has a major position in the Japanese market.  It has
not been closed out.


   The Kodak trade complaint has focused on the color film market, where
Kodak's share in Japan is about the same as Fuji Film's share in the U.S.
market.  Kodak was not aggressive in the Japanese market, allowing Fuji to
establish a dominant position in color film.  For its part, Fuji has been late
into Kodak's U.S. turf, and has a small share position still.  It is hardly the
business of either the Japanese government or the U.S. government to seek to
remedy the competitive problems of a particular company in a particular
product, Kodak in Japan or Fuji in the U.S.


   The most important lessons from this study of foreign companies  in Japan
are highly positive.  Technology is to be employed as an entry lever, not
sold off to highest bidder.  Management control is critical to competitive
success, not to be shared or diluted.  Success may require patience, but quick
wins are also entirely possible.  Amway in consumer products, bypassing
conventional channels, moved in 15 years from nothing to 28th place among
foreign-owned companies, with $1.5 billion of highly profitable sales.  Procter
& Gamble waged a long fight through massive losses to its current $2 billion-
plus position.  At the other end of the technological spectrum, Sun
Microsystems in less than a decade had gained a sales level of $800 million by
1994.  Microsoft (No. 79) and Compaq (No. 95) made their first appearance in
the top foreign 100 in 1994, through wholly owned operations.  These companies
and the other winners often source product locally and elsewhere in Asia, so
their success is not all reflected in U.S. or European trade figures.


   In the early postwar years, foreign companies formed joint ventures in
order to gain market access; the average ownership position of Exxon, Shell
and Mobil in their Japanese affiliates is only 58% even now.  The 20 computer
and electronics companies in the top 100, however, have an average foreign
ownership of 85%.  And unlike the earlier generation of heavy industry
companies in sectors like energy, chemical and machinery, they are fully able
to control and leverage their technologies and brand names in the Japanese
market.


   It should be noted, too, that the leading foreign-owned companies are by
no means all from the United States.  Thirteen countries are represented in
the top 100 list, with a third of the firms Europe-based and eleven from
Asia.  An intriguing sign of the times is the appearance of eight South Korean
companies, a suggestion that the Japanese and South Korean economies may be
drawing closer together than political rhetoric would suggest.  Samsung
Electronics had Japanese sales of over $1 billion and Samsung Corporation
over $2 billion in 1994.


   The bottom line of this review of foreign companies in Japan is the
conclusion that Japan's is a complicated, competitive, expensive economy, and
also one that is huge, profitable, strategic and accessible.  It is a full two-
thirds of all of the economy of East Asia, not to be bypassed by any company
with ambitions to be a world-class competitor.  And the best of the world's
competitors are doing very well in Japan already.


--------------------
Mr. Abegglen is chairman of Gemini Consulting (Japan) and author of Kaisha:
The Japanese Corporation.  Mr. Kirby is a principal at Gemini Consulting.




Table:
Locked Out of Japan?
The top 10 foreign companies in Japan, by equity-adjusted sales:


Company              Nationality      Equity-adjusted sales
 1. IBM              USA              US$13.2 billion
 2. Ford             USA                 11.16
 3. Exxon            USA                  9.95
 4. Mobil            USA                  8.67
 5. Shell            UK/Netherlands       8.42
 6. Caltex           USA                  6.87
 7. General Motors   USA                  4.2
 8. Xerox            USA                  4.2
 9. Alcan            Canada               3.03
10. Nestle           Switzerland          2.52










-Peter
----
Peter Kirby                                pkirby () st rim or jp
Shibuya-ku, Tokyo  Japan