The New Japanese Mythology

May 1 1998 3:30 AM

The New Japanese Mythology

By forgetting what we've learned from Toyota and Sony in the past, we may be overestimating our strength for the future.

Up-and-coming challenger to undisputed champion to complete basket case in the span of two decades: The saga of the Japanese economy looks more and more like a late-1940s boxing melodrama--though one imagines that if this were Hollywood, the producers would demand that Japan ultimately get up off the canvas and retake the title. Where's John Garfield when we need him?

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While that narrative may be accurate enough in broad outline, on the level of actual companies it tells the wrong story. The current stock market's infatuation with all things Internet has led to indefensible overestimation of the actual strength of most Net companies. So too has the prevailing picture of Japan as a sclerotic economy of tightfisted oversavers and corrupt politicians led to a dramatic underestimation of the crucial role the best Japanese companies still play in the global economy.

There's no denying the short-term macroeconomic picture for Japan is dismal, though it's hard to resist the thought that if the Bank of Japan just ran its printing presses and dumped piles of yen out onto the street, things would be OK. But it's probably true that the Japanese who picked up the yen would immediately bank it, instead of buying a brand-new suit or power mower as any patriotic American would. As a result, until the long-promised overhaul of Japan's financial sector is complete and its web of subsidies and regulations is simplified, it's hard to see the country getting the dose of creative destruction it sorely needs. The impact of domestic stagnation on large Japanese companies has, of course, been dramatic. In the auto industry, for instance, sales have declined to nearly half their 1990 peak. The same is also true, albeit to a lesser extent, of the consumer-electronics market.

Japanese corporations have also been hit much harder than their U.S. counterparts by the crisis in Asia. While much of U.S. business relies on Asia for sales growth in the future, most important Japanese corporations have been relying on it for growth in the present. Japanese companies own more than 80 percent of the Asian car market, excluding Korea, and are dominant players in most other industrial categories. As a result, when Thais and Malaysians are forced to slash purchases of new cars or investment in earth-moving equipment, Japan feels it long before the United States does.

Add to this the fact that, for most of this decade, the cost of capital in Japan actually went up, as bank lending was cut back, stock prices declined, and Japan began to dismantle its elaborate system of cross-institutional shareholding. In real terms, that means it has cost Japanese companies more to do business--to expand plants, develop new products, and market. Even with near-negative interest rates, the cost of capital in Japan is now much closer to what it is in the United States and Europe.

N onetheless, the best Japanese corporations still occupy places in the global economy remarkably similar to those they held in the 1980s. Toyota, for instance, continues to be the pacesetter in the world auto industry, and most other Japanese car makers and parts producers are thriving as well. (Click for more details.)

Sony is, if anything, more influential than ever. Its successful integration of its entertainment operations into its core manufacturing business--in stark contrast with Matsushita's experience with MCA/Universal--has made it one of the only companies that can be plausibly described as horizontally integrated. Sony makes not only the televisions and the Discmans but also the movies and music that play on them. Given the track record of most diversification experiments, Sony should have a "do not try this at home" label attached, but its adaptability and innovation belie the traditional critique of Japanese corporations as hidebound and conformist. The same might also be said of Nintendo's rise from the dead and of Canon's emergence as a key player in what's now called the "imaging" market, thanks primarily to its aggressive introduction of new technology and its relatively unusual alliances with U.S. companies.

The fact that successful Japanese corporations have not rolled over and died with the rest of the country's economy is hardly a revelation. After all, these companies were able to export cars and televisions to the United States even when the yen was trading at 85 to a dollar. Now that the dollar is worth half again as much, and Japanese goods are correspondingly cheaper in U.S. markets, business is that much easier. Still the companies are suffering guilt by association with the generally failing Japanese economy just as the Net stocks are prospering for precisely the opposite reason.

An important consequence of this dismissal of Japanese business is the dramatic revision of our understanding of what has happened to U.S. corporations--especially manufacturing--in the past decade and a half. In the 1980s, American businessmen were beseeched to adopt "the art of Japanese management," to pay more attention to quality and market share, to push authority down to the factory floor. Of late, that whole phenomenon has been the subject of considerable mockery, along the lines of "Remember when we thought we should emulate Japan? How foolish we were!" Dramatic improvements in U.S. manufacturing productivity, as opposed to simply corporate profits, are attributed to greater emphasis on "shareholder value" and improved cost consciousness, not to the impact of Japan.

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W hat's ironic about this revisionism is that it's easy to dismiss the 1980s vogue for Japanese strategy and techniques only because so many of those techniques have become part of the fabric of everyday life at many, perhaps most, U.S. industrial companies. The cords that assembly line workers can pull to stop the line are now ubiquitous, as are Japanese quality control standards. Continuous improvement, which compels workers to look for ways to make their jobs more efficient, is de rigueur at companies ranging from Polaroid to GM. And just-in-time production is not simply the goal to which all manufacturing companies now aspire. It has also spawned an entire new business model, exemplified by Dell Computer, that is reshaping the entire personal-computer industry. Much that was said about Japanese management style in the 1980s--with its supposed Zen focus and greater sense of process than outcome--was pure buncombe. But the value of Japanese manufacturing practices was, if anything, understated.

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