Japan business community seeking a change af tack

By Chris Barrie

KYOTO: Yasuo Nishiguchi rests his hands palm down on the low table top and pauses before answering. The geisha, resplendent in kimono and obi, waits just behind the seated executive to serve him with the mushrooms still scented by the pine tree in which they were grown.

He says: "If there is no extraordinary change in Japanese customs and the system, then Japan's (loss-making) companies will get into an ever worse situation."

The economy was in a far worse situation than it seemed on the surface. Without a fundamental reform of the financial system and Japanese management practice, the country's position could only deteriorate.

Pausing to sip from his cup of warm sake, Nishiguchi, vice president of electronics and telecoms company Kyocera Corporation, added with studied anger that the entire Japanese population was in effect bailing out the country's banks for their indiscriminate lending. With interest rates for depositors now at just 0.2 percent in a bid to revive the disintegrating economy, it was a "crazy" situation.

Until the current economic crisis hit Japan, such outspoken criticism of the system would have been rare indeed. Nishiguchi's determination to break with the past was accentuated even further by the setting: he was contemplating the future while seated in one of Japan's most elegant symbols of its imperial history, the tatami floor of a company guest house in the most prestigious quarter of Japan's most historic city, Kyoto.

The town, made famous in the West by the best-selling novel, Memoirs of a Geisha, is home to Kyocera (Kyoto Ceramics), one of the few Japanese corporations quoted on the New York and Tokyo stock exchanges and, as a result, subject to remorseless pressure from Western investors. The company, like town and nation, is now engaged in self-scrutiny on a scale never before conceivable. And the top managers are coming to uncomfortable, if rather confused, conclusions.

Nishiguchi and Kyocera's chief financial officer Hideki Ishida have in effect concluded that the traditional way of doing business in Japan is no longer viable. At the risk of using an overworked phrase, they are looking for a "third way" between the Anglo-Saxon version of capitalism and its Japanese counterpart which relies more heavily on consensus, relationships between companies and banks, and long-term priorities.

Their route map is based on two principles: a new relationship with financiers, and the development of new technologies. Kyocera is not alone in this reappraisal. Speaking from the British embassy in Tokyo, a British official said anecdotal evidence suggested Japanese companies were cutting their R&D budgets as they focused on product development at the expense of pure research.

The embassy believes this cut in spending has come about only recently. A survey published in Japan Dec. 4 suggests private sector industrial R&D was still rising in the 12 months to April 1998, up 6 percent. The cuts have begun since then.

But it has to be put in perspective. Japanese firms still spend more than British companies. And the belt-tightening is more than offset by the 38 percent rise planned for government spending on R&D. This massive increase, ordained in the government's supplementary budgets, will run until April 2000 and see the state taking on the burden of basic research. In short, product development is likely to continue unabated.

The financial pressure is affecting more than R&D budgets. Some electronics companies are struggling to unwind their involvement in an over-complex range of businesses. Others, such as Hitachi and Fuji Electric, are struggling to stem losses by cutting jobs or "parking" unneeded employees in associated firms where the costs will remain hidden from investor scrutiny.

Like other Japanese executives, Nishiguchi now finds himself at the center of conflicting demands. Japanese society still expects a large group to safeguard employment, invest in R&D, and to work with suppliers and bankers in a harmonious way. But to satisfy Western investors, he is under pressure to improve the group's return on capital. If he will not slash jobs and sell off businesses, what will he do? The Kyocera strategy revolves around three areas. First, the group is trying to defend its staple business in commodity markets such as printers and semi-conductor parts. The core business -- ceramic components used in electronics assemblies - is under threat from plastics alternatives. While proclaiming its adherence to ceramics technology, the group is swiftly investing in plastics like its rivals.

Second, the group is hanging on in key consumer markets hit hard by the domestic recession. Sales of Kyocera's upmarket cameras and jewelry have dropped, and the company is expecting the recession to worsen before it gets better. The indications in Japan support that assumption. There are, for example, many readers' letters in local newspapers opposing the government's decision to issue coupons to children, the elderly and the bed- ridden to encourage them to spend money. Kyocera's profits in key businesses have been falling sharply as a result.

Thirdly, the group is trying to expand its business in high technology products and fast-growing markets, such as telecoms, while investing heavily in solar power for the longer term. Even for a Japanese company, Kyocera appears to be pinning a lot of faith on future demand for energy conservation.

Two hours by bullet train to the south-west of Tokyo is the company's Shiga plant. Access to the driveway is controlled by a solar-powered set of traffic lights. The street lights are also powered by solar panels. Even a clock near the gatehouse has a solar panel attached.

The company makes photo-voltaic cells here, and plans to double capacity next month from 900,000 cells a month. The company believes it will then have the largest facility of its type in the world.

The investment seems optimistic, given that the plant is producing at below capacity -- 700,000 cells a month -- and that Japanese households are proving reluctant to spend on solar energy in these difficult times. But Nishiguchi reckons the state subsidies for solar power will create a viable home market to underpin the company's sales effort overseas.

Back in the tranquil surroundings of the company guest house, Nishiguchi acknowledges that Kyocera can no longer invest in long-term research projects without having a much closer eye on the pay-back. Gone is the view that investment for the long term has to be good of itself. So while Nishiguchi argues that "the way investment is handled by American companies is not good", he admits in the same breath that Japanese companies will have to be more opportunistic in their development, picking off products case by case in the way the British Embassy indicated.

Kyocera is twinning this tighter control of budgets with an attempt to recast industry's relationship with banks. Finance director Ishida believes Japan must dismantle the old way of doing business, with bank and company locked in embrace for life, and instead embrace sweeping reforms. But it is unclear what will replace the traditional Japanese model. Ishida talks about how Kyocera will have to be more imaginative about funding in future. And he warns that companies must "stand alone" and face up to the realities of their predicament. But there is little detail on how this financial-industrial relationship will be recast. For many young employees, managers such as Nishiguchi and the company founder, Kazuo Inamori, are beyond reproach. They built an international giant out of the ruins of the second world war. Now they face an equally tough challenge: to recast Japan's financial, industrial and technological system.

Seated at the low table on the tatami mats, Nishiguchi recalls the company's mission statement. It is anything but Western: "Respect the Divine and Love People." Kyocera's managers want to preserve that spirit while satisfying Wall Street investors.

That mission requires integrity and a fresh Japanese vision. They may have the first, but they have yet to clarify the second. Japan's way of life depends on the success of people like them in establishing their alternative way forward.

-- Guardian News Service