Do Japan’s High Tech Failures Open Doors for Western Firms?
Foreign firms must understand evolving infrastructure.
Japan’s technology woes will impact U.S. business practice as technology trade increases.
Should U.S. companies concern themselves with the prolonged recession in Japan? If so, what are the opportunities and challenges firms should consider? Arguably, the growing interconnections between advanced economies require firms to navigate the economic complexities of critical trading partners. As Japan remains the United State’s number-one trading partner, there is no question that the economic situation there has a considerable impact on business practice here. This being the case, what is the current climate and which industrial sectors should we consider most carefully? Many firms are reluctant about involvement now that Japan’s economic bubble has burst, but there are trends creating business opportunities in the midst of these struggles. (Click here for data on Japan’s GDP and investments for the period 1955 – 1999.)
The last year of the century was an extremely difficult one for Japan. The country was shaken by a series of accidents and failures in high-technology fields. The ever reliable shinkansen or bullet train railway experienced infrastructure failures. A major accident took place at the nuclear-fuel processing facility in Tokaimura, and the H-2 rocket failed twice. These mishaps fed lagging Japanese confidence in its high-tech system and created an impetus toward a careful analysis of Japan’s science and technology policy. The collective opinion in both government and the private sector is that, in order for Japan to continue to grow economically, socially, and politically, it must continue to focus on science and technology despite these setbacks.
However, structural problems in Japanese society (in the educational, economic and political systems) must be resolved in order for science and technology to flourish. The resulting changes would provide not only a different business environment but emerging opportunities as well, particularly in sectors that are thriving amidst the difficulties. In order to find these opportunities, businesses must first understand Japan’s measures for dealing with its ongoing technology struggles and then identify the commercial sectors that are moving ahead.
Dealing with High-Tech Failures
Tokaimura: Many believe that cost-cutting measures and efforts to compete more efficiently with overseas rivals were the ultimate causes of the accident that occurred at JCO’s Tokaimura uranium processing facility. However, others believe there would have been no accident if management had conformed to sound economic principles. The company had survived only because of the government’s policy of protecting the domestic nuclear industry, a policy that seems to have allowed a company to survive that could no longer ensure safety. JCO was unable to compete on cost due to its outdated processing facilities. The accident occurred when it tried to create fuel for the government’s experimental test-breeder reactor using old equipment that was not adequate for the job. The accident itself was therefore linked to efforts to improve nuclear reactor capabilities.
The difficulties in the nuclear realm resonate with other high-tech problems of 1999. Structurally, Japan is struggling to develop a sophisticated science and technology policy that stimulates research and development in the private sector, maintains strong academic and basic research capabilities in key areas, and still encourages market dynamism. In the meantime, firm R&D in most sectors is down, and licensing of overseas technology is on the rise.
Difficulties in the Space Program: The successive failures of the H-2 rocket have forced Japan to rethink its space development program as well as the potential commercial rewards in this sector. Prior to these setbacks, the National Aeronautics and Space Development Agency (NASDA) had a 30-year history of tremendous success in developing domestic rockets and satellite technology, even if the rockets were not commercially viable. However, two satellite and two launch failures have seriously marred the agency’s reputation, particularly in a culture where failure is not tolerable.
The real issue is to understand why the mishaps are occurring. One key is that while the NASDA budget has increased 50 percent over the last decade, staff numbers have risen only 14 percent, suggesting the agency is trying to do too much with too little. The problem is not isolated to NASDA. There has been a decline in science and technology graduates in Japan, particularly those with advanced degrees. While the focus is still on developing internal technology capabilities, businesses are suffering in terms of R&D funding and application.
Railway Issues: The famed shinkansen or bullet train had trouble with slabs of concrete falling from tunnel walls on the Sanyo Shinkansen and other lines. It was subsequently discovered that the concrete used in the tunnels was made with improperly desalinated sea sand and consequently lacks sufficient strength. Japan’s railway system has long been a symbol of the country’s success in techno-economic development. The structural issues in the railway system are now seen as symbolic of issues currently facing Japan’s science and technology policy system.
The old Japanese National Railway (JNR) system used to be regarded as the pinnacle of Japan’s civil engineering pyramid. Contractors who took part in JNR construction projects were said to have demonstrated 10 percent or even 20 percent higher performance than required by contract specifications. The situation began to change during the period of high economic growth, however, when more and more contractors met only 70-80 percent of requirements. Government control loosened, but the private sector failed to solidly establish itself. The myth that the shinkansen was ‘perfect’ prevailed even though quality control was hindered by the structure of the Japanese construction industry which involves complex, and often shady, relations among general contractors and myriad subcontractors.
These complex relationships characterize much of Japanese industry and are one of the critical challenges Japan seeks to address. However, institutional changes of this magnitude are both difficult and time consuming, particularly in a society driven by consensus-style decision-making. Deregulation seems to be a key issue, but institutional capacity to avoid cronyism during the transition remains elusive.
Addressing the Challenges
Prime Minister’s Initiative on Improving Industry’s Competitiveness: In order to address the circumstances described, Prime Minister Keizo Obuchi has organized the Industrial Competitiveness Council to improve Japan’s international competitiveness. This Council consists of all the Ministers from relevant portfolios, including International Trade and Industry, Science and Technology, Education, Posts and Telecommunications, and Finance. It also includes chairmen of leading firms. This Council was intentionally created to resemble the council in the Reagan Administration that published the ‘Young Report’ and the ‘New Young Report.’
A draft strategy was released in December 1999 designed to enhance linkages between universities and industry, with universities (rather than industry) taking the lead in disseminating innovative technologies into the marketplace. The new plan attempts to completely alter the traditional Japanese Science and Technology structure. In addition, significant administrative reform is underway throughout the Japanese government. R&D institutions are becoming independent entities managing their own R&D programs.
It is important to understand this administrative reform in the context of deregulation. Deregulation, or kisei kanwa, has required the Japanese to rethink their extensive network of formal and informal controls imposed on the economy. However, the emphasis is still on administrative reform (gyosei kaikaku) rather than wholesale deregulation. Consequently, change has been incremental at best. In many industrialized nations, the emphasis in deregulation has been on increasing competition to provide benefits to consumers. In Japan, the concept of deregulation means the ‘relaxation of regulation,’ a much less ambitious goal. It refers primarily to selective market opportunities based on a combination of strategic concerns, the political clout of certain business factions, market factors, and pressure from foreign governments. In contrast to reform based on expanding consumer welfare, Japan’s initiatives are based on the need to strengthen Japan’s international competitiveness. Therefore, the focus of deregulation in Japan is the selective relaxation of regulations when this increases the competitiveness of Japanese business.
Private Sector Prospects – IT Diffusion and Capturing the Momentum of the Digital Revolution: Another key area on which businesses are concentrating is information technology penetration in order to capture the momentum of the digital revolution. Even though Japan is a leading producer of Information and Communication Technology (ICT), it has a relatively low-level of ICT diffusion. The number of Personal Computers (PCs) per 100 white-collar workers is among the lowest in the OECD, and the average number of PCs per 100 inhabitants in Japan is far below that in the United States. While at least 50 percent of U.S. households are now online, only 10% of households in Japan even own a PC.
In response, the Japanese government is promoting three key reforms: liberalization, internationalization and informatization. Liberalization involves the deregulation of telecommunications and related markets, where they have made a slow start. The focus in internationalization is on international movements related to electronic commerce as well as the global trend of integrating telecommunications and broadcasting. Informatization has been centered on PCs and the Internet.
Preliminary results of these policy changes are encouraging, although Japan still lags the U.S. and Europe. Internet commerce in both the products and services markets doubled in 1999. A serious problem, however, is the cost of connecting to the internet. Internet service providers (ISPs), though much more expensive than their overseas counterparts, are relatively inexpensive compared to other services in Japan. The real issue is the cost of actually making a phone call to connect to the ISP, implying that the effects of deregulation policy (lowered service costs) have not yet reached the level desired. Furthermore, the Ministry of Posts and Telecommunications does not anticipate that local telephone rates will be comparable to international rates until the end of 2001. These costs are also born by R&D institutions, scientific laboratories, and the private sector, impacting the desired network effects for enhancing science and technology.
One area of particular strength related to the Internet is Japan’s growing capabilities in mobile Internet services. While PC penetration is lower than in many OECD countries, mobile services are amongst the world’s highest. Largely due to Japan’s adherence to popular formats such as Wireless Application Protocol and WideBand CDMA, some innovative companies such as Mobilephone Communications International (MTI) are world leaders in developing internet content for digital phones. This content is specifically designed to facilitate transmission and reception of web pages adapted for the smaller screens characteristic of mobile devices. While most content is still geared toward the ‘seedier’ side of the Internet and not yet integrated into the larger, more legitimate business-to-business e-commerce environment, there is tremendous potential in these other e-commerce areas.
Interestingly, this Internet strength in the mobile area in Japan highlights the U.S. weakness in its lack of standardization in the mobile phone market. The very deregulatory cacophony driving low telecommunications prices and booms in certain sectors has also tied the technology (particularly in business-to-consumer e-commerce) to personal computers rather than mobile phones.
Some issues related to these technology choices are cultural. Japan is a cash-driven society where credit card use is relatively small. This being the case, different structures for electronic business transactions are established. In the mobile communications market, as in the rest of the telecommunications market, payment for services is usually deducted from a designated bank account with advanced arrangements or paid monthly along with the phone bill. This arrangement is significantly different from the U.S. market where the transaction is made at the point-of-sale by credit card. Consequently, the structures in Japan lend themselves more easily to the provision of content driven services (easily facilitated by phone) rather than online purchases (more easily facilitated by PC). The dramatic growth in mobile communications in Japan bodes well for ongoing strengths in this technological area, particularly as mobile phone systems and services advance globally.
Opportunities and Lessons for U.S. Firms
While R&D in Japan is diminishing in some mature manufacturing sectors, many of Japan’s leading IT firms continue to power ahead. Areas of continued global leadership include video games (both hardware and software) and the extensive growth in mobile-based Internet services. This new mobile platform for e-commerce bodes well for economic growth in Japan, with opportunities emerging for net-savvy U.S. talent. Of particular note is the growing trend of licensing U.S. computer software to Japan. International royalties paid to U.S. firms are growing at 17 percent annually, and Japan licenses most of this technology. As the digital economy continues to grow in the U.S., opportunities for expansion in Asia continue to similarly increase as infrastructure there expands. However, smart involvement necessarily requires a close understanding of the evolving infrastructure, changes in government policy and Japan’s technological struggles.
References and supporting data are available from Professor Charla Griffy-Brown at Charla.Brown@pepperdine.edu
About the Author(s)
Charla Griffy-Brown, PhD, is an associate professor of information systems at the Graziadio School of Business and Management. In 2004, Dr. Griffy-Brown received a research award from the International Association for the Management of Technology and was recognized as one of the most active and prolific researchers in the fields of technology management and innovation. A former researcher at the Foundation for Advanced Studies on International Development in Tokyo, she has also served as an associate professor at the Tokyo Institute of Technology. Dr. Griffy-Brown graduated from Harvard University, is a former Fulbright Scholar, and holds a PhD in technology management from Griffith University in Queensland, Australia. She has worked for NASA at the Kennedy Space Center and has taught innovation/technology management courses in Australia, Singapore, Indonesia, Malaysia, and Japan. She has also served as a consultant for the United Nation's Global Environmental Facility and the European Commission.