Beware of Japanese when they are bearing ‘gifts’

Press, 31 January 1984, Page 19

Beware of Japanese when they are bearing ‘gifts’

CHRISTOPHER LORENZ,

of the

London “Financial Times,” examines the risks facing Western partners who enter joint ventures and licensing deals with Japanese companies. It is not always a two-sided collaboration.

The heroic Westerner marches into battle shoulder-to-shoulder with a tough Samurai warrior, nervously glancing over his shoulder lest his “ally” should stab him in the back.

The image will be familiar to anyone who read James Clavell’s epic novel, “Shogun,” or saw the television dramatisation, starring the übiquitous Richard Chamberlain as the reluctant Western hero. Yet it is no mere seventeenth century fantasy. It describes exactly one of the growing realities of modern industrial life: the uncomfortable position of enforced collaboration with a strong, unpredictable Japanese partner into which many Western companies are being forced in order to survive — not just in distant foreign markets, but also on their own front doorsteps. Such relationships can take the form of licensing agreements, “original equipment” (0.E.M.) deals, or “joint ventures” (many of which amount to little more than licensing). A decade ago they were confined to a few types of product, notably cameras, cheap and simple consumer electronics, and “professional” electronic equipment such as copiers and cash registers. Now there is an almost endless roll-call of Western companies which rely on Japanese technology, and often on outright Japanese-made products. The range spans high-techno-logy items as diverse as robots, cars, integrated circuits, video recorders, computers, and telephone exchanges. It grows almost by the week.

This is no mere matter of using Japanese equipment to plug small gaps in one’s product range, tactics carefully practised for some years by the likes of John Deere and Caterpillar. The deals are often more far-reaching. Some are arranged to cover yawning gulfs which have already opened up in the Western company’s basic product range; among the most dramatic examples has been the desperate need of Thorn/EMI Telefunken and Thomson for video cassette recorders, which resulted in their agreement to build European plants to make JVC’s design, using many of its Japanese-made components. Another such deal is the proposed General Motors collaboration with Toyota on small cars, which will be sold as “Chevrolets.”Others embrace a Western company’s attempt to exploit a technological innovation which is about to burst upon the market, but which it failed to spot in time, or in which it did not invest enough. Here, the clearest case so far was Kodak’s announcement three weeks ago that it plans to pioneer the market for “camcorders” — combined Bmm video cameras and recorders — with machines bought in from Matsushita and tape from TDK,

but sold under the Kodak brand.

In almost every case, the Western companies in these deals now have to live with the fear which stalked the Westerner in Shogun: that they will wake up one morning, or turn round on the battlefield, to find their backs neatly skewered by the sword of their friendly oriental partner. In more down-to-earth language, they will discover that they have allowed their distribution networks to be used by the Japanese partner as a low-cost way of testing the market, and of building a reputation with dealers and consumers. Having also perhaps generated enough volume to justify the politically useful step of opening a local factory, the Japanese company has decided to break loose and sell under its own name, leaving its erstwhile partner in the lurch. To mix one’s cultural analogies, the Samurai has used his Western partner as a Trojan horse. For GM, Kodak, and particularly the skoals of smaller and less hardy fry who have entered into such deals, the fear must be that they will share the bitter experience of several European electronic cash register companies, notably Sweda, which were told in 1980 by their Japanese supplier, Omron, that it had decided to go it alone and establish its own distribution network.

“You’ve been relying on Omron for years without even realising it,” the company declared in noisy trade advertisements, before going on to undercut the selling prices of its Western dependants and grab a sizeable share of the fast-growing market.

There is nothing uniquely Japanese about these tactics. Mr Michael Yoshino, a JapaneseAmerican who is professor of general management at the Harvard Business School, points out that European companies used to complain about Americans doing precisely the same thing. But he admits that the problem has become “particularly acute” with the emergence of Japanese prowess in so many sectors of industry; not only because of the plethora of such deals, and their importance to the frequently weaker Western partner, but “because of cultural differences in how the contract is viewed.”

“Neither party is willing to bring up the problem at the outset,” he says. As a result the two sides tend to have conflicting expectations from the word “go.”

The most basic difference of view, and also often the most potentially damaging to the Western side, concerns the likely length of the partnership. In yet another example of the West’s now notorious failure to match the Japanese ability to think and act in terms of long-range strategy, many Western partners seem to be caught short when their agreements collapse or

simply fail to be renewed. “We in the West still think only of filling short-term gaps rather than about the long-term consequences of such deals,” complains Mr Tino Puri, one of McKinsey’s most experienced international consultants.

Mr Lawrence Franko, professor of international business relations at Tufts University in the United States, goes further: “While the Japanese see joint ventures only as a first step, Western companies use them as a substitute for independent development,” he claims. “All the deals tend to break down,” says Mr Puri, pointing to a host of examples, including Mitsubishi’s successful break-away from Chrysler since 1980 in the United States car market.

Virtually the only lasting agreement Mr Puri can cite is the 16-year-old robotics link between Kawaskai and Unimation, which has developed into a successful joint venture in research and development, with each side continuing to make a substantial contribution.

Only when joint ventures are so far-reaching do they stand much chance of survival, Mr Puri maintains. This is the sort of collaboration between equal partners which motor and electronics companies, in particular, are beginning to develop as part of a new international division of production, but which has not yet been achieved on any great scale. So how can European and United States companies ensure that their many less ambitious, shorter-term collaborative deals are turned to their advantage? From all quarters, the message is remarkably consistent. When negotiating the deal, the Western company should: © Try to ensure that design of the product is not abnegated to Japan. Hugin Cash Registers even owns the tools which are used by its Japanese supplier. @ Not underrate the competitive value of its own distribution channels, which are the one thing its Japanese partner lacks. Thorn-EMI and other Western electronics companies have been accused repeatedly by their Dutch rival, Philips, of “giving away” their most precious asset — sometimes actually paying for the privilege — in exchange for very little except a flow of products and the creation of a few local jobs in an assembly plant. Philips has provocatively dubbed them as “little more than screwdriver factories.”

Once the agreement is in force, the Western company should not sit back and direct its attention and resources to other parts of its operations, but should use the breathing space wisely, by: • Reinforcing its marketing strengths, and particularly the “barriers to entry” which its distribution system poses to potential competitors. It should not only emulate the astute cultivation by

Japanese importers of dealer loyalty (by offering bigger margins, better advertising support, and so on), but should try to copy Caterpillar’s model support — financial and logistical — of its dealers, with which it preserves their exclusivity against arch-rival Komatsu. ‘lt would be suicide for a dealer to leave Cat,” says one observer. ® Above all, it should redouble its technological efforts in order to come bouncing back with the next generation of products. That is how the French and Germans caught up with the United States in nuclear technology, how the Japanese themselves exploited Western technology in the 1950 s and 19605, and how Philips has fought back in such products as small TVs and batteries.

There are drawbacks on every count. It is difficult to reinforce “barriers to entry” in distribution at the best of times, especially in the growing number of sectors (such as low-cost copiers and personal computers) where technological advance, product reliability, and sheer competition are reducing the competitive value of dealerships and after-sales service. Few markets operate like British TV and video, where Thorn enjoys considerable protection through its control of an unusually rentalorientated distribution system. It is equally hard for a company to reinforce its technological strengths if it no longer has any, if it is short of resources, or if (like Kodak) it is entering territory which is new to it. Yet many Western “joint-venturers” with Japan suffer precisely these problems.

McKinsey’s Tino Puri admits that “it’s desperately late” for many European and American companies to start taking these steps. But he warns that there is no other way out of the impasse into which they have got themselves. They need not always try to compete head-on with the Japanese, he argues, but because of the risk and cost of diversification, many companies may be condemned to fight on ground that they already know. Whether in new territory or not, it is hard to build a distribution advantage if your technology is weak. “It comes back every time to your own technological effort,” maintains a senior executive at Philips. Mr Cor van der Klugt, the Philips board member in charge of consumer electronics, is emphatic that however widespread international collaboration may become — and Philips is involved in a welter of deals — “we must continue to make significant technological contributions to our products.” Unless companies do that, he says, “they simply become middlemen for someone else.”

Nowadays that “someone” is most likely to be a Japanese Samurai.