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|Japan Inc., RIP|
The Wall Street Journal - March 2005
The appointment of the first foreign-born chief executive to run one of Japanīs most famous companies, Sony, looks like a clear sign that something dramatic is happening in Japanese business. It isnīt. Instead, the arrival of Sir Howard Stringer at the helm of Sony is a sign that something dramatic has already happened.
Writing about Japan, especially about Japanese business, can be a frustrating affair. Nothing ever seems to happen. Despite hundreds of press conferences each year, every effort is made to avoid the occurrence of big, exciting and newsworthy events -- just the opposite of the desire of most American publicists, which is to try to create drama out of mundane reality. Big, dramatic events would be not only embarrassing to Japanese executives but also disturbing; this is a culture whose every ritual is dedicated to smoothing over uncertainties and avoiding discomfiture.
That does not mean that dramatic things do not happen. Sometimes they take place through sudden events, which in the 15 years since the Tokyo stock market began its collapse has mainly meant bankruptcies. Mostly, though, they take place through incremental change, a remorseless process of step-by-step reform and adjustment, none of which individually looks like much but which together, when you look back over several years, can look dramatic. That is what has happened in Japanese business.
Think of all the features that, 10, 15 or 20 years ago, were considered axiomatic about big Japanese companies. They had extensive cross-shareholdings with other firms, especially suppliers and banks. They used the promise of lifetime employment to keep their labor force loyal, paying according to age and seniority. They had strangely large corporate boards, stuffed with grandees and retired executives. They worried about sales and market share, not profits. Their top executives all came from within, and behaved more like bureaucrats taking their turn in the top seats for a few years than like corporate chieftains. The idea of foreigners on the board, let alone in senior management, was anathema.
Such generalizations were always a bit overdone, but not by much. Now, you can cross out every single one of them. Cross-shareholdings have largely been unwound. Lifetime employment, even in big firms, is now the exception not the rule thanks to changes in labor laws that have allowed workers to be employed on short-term contracts. Such employees make up 40% or more of the total at manufacturers such as Toyota. Many -- though not all -- corporate boards have been streamlined, with more independent directors and fewer placemen. The profitability of big Japanese firms has risen to record levels (when measured as a ratio to sales), thanks to restructuring, the aforementioned labor-force changes, and efforts to fatten margins. Falling wages leave Japanīs domestic economy still suffering from deflation and weak demand, but do wonders for corporate profits.
Executives remain primarily bureaucratic but there are now many more exceptions, sounding and behaving more like American CEOs and with senior management pay geared to performance. And foreign executives are no longer unacceptable. There have been plenty at the helm of the Japanese subsidiaries of foreign multinationals, such as Mazda (Ford) and Isuzu (GM). Carlos Ghosn, the Brazilian brought in by Renault to run its 44%-owned subsidiary, Nissan, has become a national hero for the way he turned round Japanīs second-largest, but long-ailing, car maker. And now Sir Howard, born in Wales but long prominent in the American entertainment industry, has been called in from Sony USA to run the parent company.
With Sony, the surprise should be that it has taken so long. This Tokyo-based firm has always been a maverick compared with its staid Japanese competitors, such as Matsushita in Osaka, parent of the Panasonic brand among others. Its founders, especially Akio Morita, were not afraid to act like showmen, conjuring up events for publicity purposes rather than smoothing them over. They liked profits, rather than just worshipping market share. Even in the 1980s and early 1990s, Sony gave powerful executive roles to foreigners, but only in its overseas operations. It was a pioneer in slimming down its board and using more independent directors.
The reason it has taken so long is that Sony, like Toyota in the car industry, continued to be successful even after the Japanese economy turned stagnant during the 1990s. It had built a powerful world-wide brand and a world-wide business, in both hardware and software. Its main problems were outside Japan rather than within, thanks to its huge but troubled acquisition of Columbia Pictures in the mid 1980s which added movies to its already large music business, the sorting out of which eventually fell to Sir Howard. Through its PlayStation games console, Sony continued to build its image as a cool, innovative and profitable business. Now, however, Sonyīs image is fading and its consumer-electronics business in particular has lost its shine: hence the elevation to chief executive of the firmīs currently most successful and impressive executive. The fact that he is a foreigner is almost secondary.
Well, it isnīt entirely. The novelty of Sir Howardīs appointment is that he is the first foreigner to run a big Japanese firm that is not (like Nissan) a multinationalīs subsidiary -- though 40% of Sonyīs shares are, in fact, held by foreign institutions. What he mainly represents, though, is two things: first, the striking fact that Sony felt under pressure from its shareholders to make changes; and, second, a willingness to be ruthless, to do whatever it takes to solve corporate problems. Choosing a foreigner is a symptom of that willingness -- but also of the fact that Sonyīs entertainment business, which is centered on the United States, is doing far better than its Japan-centered hardware divisions.
How this foreigner will fare is going to be the stuff of future business journalism. It wonīt be easy, but then he wouldnīt be getting the job if it were. What can already be said is that Japanese business is unlikely again to be capable of being summed up in a simple paragraph of standard business practices. The watchword now is diversity, not conformity: diversity in who runs companies, how they are owned and governed, how they handle their workers, and much more. Just as it makes little sense to describe P&G, Dell and Amazon as all belonging to a standard American way of doing business, so it no longer makes sense to put Toyota, Sony, Canon, Nissan and Matsushita under one collective label.
The element of change that is still relatively scarce, however, is entrepreneurship -- the very thing that created Sony in 1946. It is not entirely nonexistent: New firms have been notable in recent years in retailing, telecoms and financial services and, of course, the Internet. So far, however, they have struggled to make a big impact. The reasons lie, in part, in regulations that discourage new business formation, in part in the very sluggishness of the Japanese economy, in part in the still slow pace of divestment of poorly performing divisions at older companies.
There are signs of change here too, however. Takafumi Horie, the youthful boss of Livedoor, an Internet-services company, is mounting a takeover challenge for Nippon Broadcasting Systems, a venerable radio broadcaster. Such a newsworthy event will probably join the long list of past failures at rocking the Japanese boat in this way, for the bid has been rather wild in every way. But the fact that a young Japanese entrepreneur was willing to try it, and to shrug off the opprobrium that has inevitably come his way, could nevertheless be a clue that gradual, incremental change is coming in this aspect of business, too. It may prove hard to spot the rise of a new class of entrepreneurs until it has already happened.