How to Succeed in Japan

TRIAD POWER: The Coming Shape of Global Competition by Kenichi Ohmae. Free Press,$19.95.

As THE UNITED STATES has grown accustomed to eating Japan’s dust in economic competition, a “Remember Pearl Harbor” spirit has been stirring in the American breast. In part, Japan is merely a handy target for America’s general exasperation about competing against the low-wage, hard-work quarters of the world. First the Japanese underbid us on steel and cars, then the Koreans and Taiwanese got into the picture; God knows what will happen when a billion Chinese enter the world labor market, willing to work for pennies a day. But there is also a specifically antiJapan aspect to the indictment, which emphasizes the many well-publicized tricks through which the Japanese deny a market to perfectly worthy American wares. Somewhere in our collective unconscious we seem to be rerunning all those Second World War movies, in which fiendishly grinning Japanese soldiers are always either launching kamikaze raids or laying traps for the squaredealing GIs. Even if American producers were to pick their way through the tariffs and trade barriers that encircle Japan, they would (according to the current Pearl Harbor mentality) find no favor among Japanese consumers, who are always willing to pass up foreign bargains as part of their personal sacrifice for the greater good of Nippon.

Kenichi Ohmae, a Japanese business expert who directs the Tokyo office of McKinsey & Company, a consulting firm, has written a book that puts the competition between the United States and Japan in quite a different light. The implications of his findings could not exactly be called cheering, but at least they are a change from the most familiar arguments about economic warfare and world trade.

The “Triad” of the book’s title refers to the three powerhouses of the world’s economy: the United States, Western Europe, and Japan. Ohmae might just as well have used a more familiar term, such as “industrialized democracies” or “rich countries,” because his starting point is to show that these countries are becoming more different from the rest of the world while they are becoming more similar to one another.

The most obvious similarity among these nations is the convergence of their consumers’tastes. People in Tokyo, Los Angeles, and Milan—especially young people—are likely to be driving, wearing, and coveting the same things. “Except for the language and hair color, you can’t tell the nationality of a youngster in Tokyo’s Harajuku who walks around in Nike sneakers, L.L. Bean shorts, and an Izod sport shirt,” Ohmae says, in one of his numerous illustrations of the internationalization of brand names. But the more fundamental similarity among the industrialized societies is that despite their obvious social inequalities and impoverished classes, on the whole they are quite rich. Not only do many of their people have the cash to spend on Sony Walkmans and IBM Personal Computers but the cultures themselves are set up in such a way that a continual stream of new products makes economic and cultural sense. Everyone has a telephone; everyone has been to school; everyone is busy and craves convenience, stimulation, and fast food. People expect to have new desires aroused and satisfied.

The affluence of the industrial nations obviously leads them to consume the lion’s share of the world’s goods. But Ohmae goes on to say that the same characteristics that foster consumption—the highly refined communications and transport systems, the advanced level of education—also give the rich nations a tremendous edge as producers. For that reason, he says, the flow of assembly plants to the Indonesias and Haitis of the world may be drying up. The main force working against poor countries is that low-wage, low-skill labor matters less and less to the fastest-growing industries. “True, labor costs in developing nations still are only one-third as high as in developed nations,” Ohmae says.

However, now that the direct labor content in competitive companies represents less than 10 percent of total manufacturing costs, the advantage gained by using cheap labor is offset by the costs of transporting critical components to the production site from developed countries . . . and the costs of insuring the finished products and transporting them to major markets.

Even worse, from the developing countries’ point of view, as the pace of innovation has stepped up, companies have placed greater emphasis on having their production facilities close at hand, where they can control the quality and quickly shift production. Ohmae says,

James Fallows is the Washington editor of The Atlantic.

Consumer and office electronics has become largely a fashion industry, where “booms” are normally shortlived, and certainly a production location remote from the location of the core engineering group has become very inconvenient. As a result, the attractiveness of producing goods in developing countries . . . has almost disappeared.

At the same time that the Triad nations are widening the gap between themselves and everyone else, Ohmae says, they are evolving an informal entente about dividing productive labor among themselves. The American nightmare is that someday soon every car in the world will be made by Toyota and every computer by Nippon Electric. But Ohmae demonstrates that there are severe limits on the inroads that foreign producers, especially those from Japan, can make on other countries’ markets.

This idea may seem a little hard to swallow when you consider that last year the flow of goods from Japan to the United States was worth at least $30 billion more than the goods going the other way. But, according to Ohmae, Japan’s spectacular successes in a few very visible areas—cars, stereos, watches—give a distorted idea of its productivity and potential. Because of the likes of Honda, Sony, and Seiko, “the Western world has the false impression that all Japanese industries, and therefore management, are competitive and generally successful.” But Ohmae says that only about one seventh of the Japanese work force is employed in industries that are competitive by international standards.

They are mainly assembly industries, characterized by mass production, with the possible exception of steelmaking, Thus, overall, Japan’s “power” is limited to a few industries. This structural weakness of Japan, which has existed all along, is not well understood either by foreigners or by the Japanese.

Even in these competitive areas Japan’s penetration has not been so great as is usually assumed. The nine Japanese automakers can produce small cars at about half the cost of such cars to American and European manufacturers. Still,

the highest [foreign] penetration achieved by any of the nine companies has been Nissan’s 6 percent in the United Kingdom, only one fifth of its share at home. Toyota’s biggest success is in the United States, where it [also] has 6 percent of the market. One of the reasons that Toyota has been stuck at six percent of the U.S. market, of course, is the “voluntary quotas” of 1.68 million cars a year that the Japanese manufacturers agreed to in 1981, as a way to keep the U.S. Congress from enacting more-stringent involuntary quotas. Ohmae hardly endorses protectionism, but he takes it as a business fact of life that rich and poor nations alike will put some limits on the flow of foreign goods. The inevitability of at least mild protectionism is one reason that, according to Ohmae, successful companies must learn to become “insiders” wherever they operate. But he says there is a more important reason: the increasing volatility of technology, tastes, and markets means that companies must burrow themselves into the culture and distribution system of each Triad society if they hope to succeed. American companies must become insiders in Japan—and he claims that it is perfectly possible for them to do so, if they stop whining about unfair rules of play.

FOR AMERICAN readers, the most surprising material in Ohmae’s book will be his account of the many American companies that have become insiders and flourished in Japan. The Shaklee pharmaceutical firm, for example, perceived that vitamin pills, which in Japan had traditionally been sold at drugstores, were not legally classified as drugs, and could therefore be sold directly to the consumer, through the door-to-door approach the firm had relied on in America. The Japanese drug companies watched, seemingly paralyzed, as Shaklee cornered the vitamin market. They were reluctant to imitate its direct-sales approach, for fear of offending the distribution chains on which they still depended for sales of prescription drugs. Schick razors crushed their established Japanese competitors and, according to Ohmae, “succeeded in changing the shaving habits of the nation—from evening in ofuro (bath) to the morning with their spray foam.” Japanese grocery stores now feature products from Del Monte, Nabisco, and Beatrice Companies. IBM has 15,000 of its own employees in Japan, and it recently moved its Pacific region headquarters, along with several hundred staff members, to Tokyo from the United States. Coca-Cola dominates the Japanese softdrink market, and the proliferation of successful food chains—McDonald’s, Kentucky Pried Chicken, Shakey’s, Mister Donut, and 7-Eleven—has led some Japanese to argue that the United States is bent on debauching the Japanese palate through junk food. “If one looks at the unprecedented speed of change in dietary habit of a nation as big as 120 million in population, one might be led to believe in the ‘American conspiracy’ theory,” Ohmae writes.

Nearly all the success stories involve companies that have taken the trouble to understand what the Japanese are like and what they want, instead of willing them to desire American-style goods in American styles and sizes. Ohmae says that American refrigerator companies initially ran into trouble, because their standard models seemed gargantuan when placed in tiny Japanese kitchens and because the exhaust fans blew at floor level, where most Japanese preferred to sleep. American automakers have traditionally pushed left-handdrive cars in Japan, as if in hopes that the Japanese would abandon their folly of driving on the wrong side of the road. Mister Donut and McDonald’s altered the sizes and formulas of their wares (gradually readjusting them toward the American ideal over the years). Barbie dolls took off only after their bustlines were reduced and their hair and eyes modified to look more plausibly Japanese.

A few foreign companies—IBM, Kodak, Nestlé—are big enough to try to become insiders on their own, but, Ohmae says, the great majority of the success stories involve partnerships with enterprises in Japan. General Foods allied itself with Ajinomoto, a Japanese food producer, and used Ajinomoto’s well-established distribution system to promote Maxwell House instant coffee, which by 1982 accounted for 25 percent of the Japanese market. Allstate Life Insurance was thwarted by the quintessential protectionist rule, a requirement that any new entrant to the business prove that its activities would not disrupt existing firms. The company evaded the rule by going into business with the Seibu Group. “Allstate not only acquired a powerful sales channel through this alliance with the retailer, but it also fulfilled the stringent entry requirements by bringing something new to customers—buying insurance over-the-counter.” Even the mighty IBM is involved in dozens of cooperative ventures with Japanese semiconductor and electronics companies. So is Texas Instruments, which has become the leading semiconductor producer in Japan and in the world.

When these partnerships and joint ventures are taken into account, Ohmae says, the trade balance between the United States and Japan looks less skewed than it usually appears to be. The official U.S. trade deficit—Japanese exports to the United States, minus U.S. exports to Japan—was $30 billion or more last year, a figure that seems even worse when you consider that total American exports to Japan were only $26 billion. But when the sales of American-owned affiliates based in Japan are included (along with those of Japanese affiliates in the United States), the imbalance is less than $10 billion—$67 billion for the Japanese versus $57 billion for the Americans. This still may not be ideal from the American point of view, but it presents a far less catastrophic prospect. Last year the average Japanese consumer spent $481, or five percent of his income, on goods imported from the United States or made by American-owned firms. The average American spent $287, just two percent of his income, on Japanesemade or-owned products.

TRIAD POWER is really a self-help and how-to book for businessmen, designed to preach the importance of joint ventures and consortia as means for companies to become “insiders” overseas. But like another how-to book, the legendarily successful In Search of Excellence, it also raises serious questions for non-businessmen.

One is about the seemingly inevitable growth of inequality between the Triad—the United States and its industrialized allies—and the rest of the world. The Triad companies that are now in the greatest trouble, Ohmae says, are those that wasted their time building subsidiaries in Latin America and Africa. The economies there are so soft and stagnant that the companies themselves, enervated like old colonial hands, have grown unfit for major-league competition. If Ohmae is right, what will it mean for the world’s politics and sense of ethical rightness when we accept as a settled fact, not as a painful transition stage, that most of the world’s former colonies (with the exception of several in Southeast Asia) will be places of comparative misery and privation through the lifetimes of everyone now born? The poverty in Guatemala and Mali is bad enough when their people can entertain the hope that someday it will end. What will we—and they—do when even the hope is gone?

A second question concerns an economic problem that cooperative Triad ventures will not solve, even if they work exactly as Ohmae prescribes. When Texas Instruments makes semiconductors in its marvelous plant in Miho, Japan, it adds to the health and prosperity of the American corporate community—but to someone looking for a job in Cleveland, not Miho, what’s the difference between a Japanese factory owned by TI and one more straightforwardly under Nippon Electric’s control? Both companies are paying wages to people on the other side of the globe. Yes, the profits that American firms earn through their subsidiaries and joint ventures may eventually be repatriated and help buoy the American economy. At a minimum, it’s better to have American firms sharing the profits from foreign production than to have no share at all. But does Ohmae’s vision of a Japan open and beckoning to “insiders”—even if plausible—really amount to a practical improvement over the closed, hostile Japan we more usually hear described?

I met Ohmae in Washington after reading his book and asked him this question. The first thing he said was that even now most Japanese would be amazed to hear that there was such a thing as a problem with displaced American workers. No one in Japan writes about it, no one cares or thinks about it. The situation is similar, he said, to Americans’ total indifference to the plight of Japan’s rice farmers—who represented almost half the Japanese working population only a generation ago and who now extort phenomenal price supports from the Japanese government (rice subsidies rank third in national expenditures, after health insurance and the national railway) by constantly threatening to throw their votes to the Communists. In part, the displaced-worker problem seems irrelevant in Japan because the Japanese have already boiled so many people out of their own heavy industries. All the Japanese automakers combined, who produce more than 13 million cars and trucks a year, employ only 670,000 people— which is less than the work force GM alone employed in 1983 to produce 7.7 million cars and trucks.

But Ohmae’s real point, made in behalf of himself and his country, was “Don’t blame us.” Our closed markets didn’t kill the steel mills and take away the auto jobs, he said; our “Japan, Inc.” cooperation between business and government didn’t give us an unfair advantage. You, he said, are the ones to blame: your executives, for giving up the fight and refusing to adapt and produce higher-quality products; your government, for tolerating ever-higher deficits, which have in turn run up the dollar and nearly priced American manufacturers out of the worldwide market. We Japanese should pay more attention to your political and social problems of readjustment—but no one can make your products competitive except yourselves.

No less than Americans, Japanese like Ohmae know the pleasures of pointing the finger at someone else. It’s so much less satisfying for us, as Americans, to think about balancing federal accounts or adapting to changing markets than to point at perfidious Nippon and yell “foul.”