Changing for the Better

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JAMES C. ABEGGLENJapanese companies are under great pressure to change. Deflation, recession, global competition and the emerging information technologies have combined to force a wave of restructuring. While some of these pressures are new, the fact of change is not. Japan has not been a static mercantile monolith. As the country moved from poverty to wealth and from peasant agriculture to industrial prowess, change has been continual, with outmoded industries disappearing entirely as new ones dominate--and with corporate winners and losers jostling one another in a fiercely competitive economy.

Important basic industries like coal mining and aluminum smelting have simply disappeared. Mature industries like autos have gone through wrenching change. Rapid market growth leads to a large number of producers; mature markets force concentration. The losers go to the wall, with badly managed Nissan a basket case and troubled Mitsubishi Motors looking for foreign partners. The winners--like Toyota and Honda, world powers by any measure--increase their investments at home and abroad.

Auto industry restructuring is nothing new in Japan. As early as 1971, General Motors bought into Isuzu, which was going broke in the car business after success with trucks. In the auto wars of the 1970s, Ford bought into Mazda. Neither move saved the day: Isuzu gave up on cars, and Mazda remains in trouble. The notion of selling out to foreigners was in its time a new idea (though a dubious one); industry restructuring is not.

What's happening now, however, is indeed new. Giant, over-diversified companies--especially those in electronics, like Hitachi, NEC and Toshiba--need to sharpen their focus. In the past you had only to be in a growing sector and somehow you made a profit, says Toshiba president Taizo Nishimuro. Now you have to rank high worldwide in each sector or you cannot survive. Nishimuro is as good as his word, divesting low-market-share businesses--automated teller machines to Oki Electric, small motors to Densan--and forging alliances for others: with Carrier for air-conditioning, with General Electric for turbine blades. Most spectacularly, he combined his company's large-motor business with that of arch-rival Mitsubishi Electric in a worldwide joint venture. Competitors like Hitachi are following this lead. Here is a new type of restructuring, one that will accelerate with the legalization of holding companies, making it easier for a firm to reorganize its businesses.

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Also new is the impact of deregulation. With Japan's recent dismantling of barriers to petroleum imports, for instance, the country's inefficient oil industry is closing refineries, merging subsidiaries, shutting nearly half of all filling stations and, most happily, reducing gasoline prices by a third. And for the first time in 35years, new airlines are allowed to spring up--and airfares to Hokkaido are down by more than half.

But the most dramatic deregulation has accompanied Japan's Big Bang, the opening of the financial sector. It's no secret that Japanese banks, brokerages and insurance companies are inefficient and in need of restructuring. Bank mergers have a long history in Japan, but the current crisis will bring many more. Some of the failures are being bought by foreign companies, led by GE Capital. Can they turn the sick institutions around? Certainly the foreign share of the finance sector is increasing and will add to the cost pressures driving the entire industry to restructure. It's likely that, as with autos, the survivors will emerge as world-class competitors.

Restructuring affects people. Here too change is underway, as performance replaces seniority in determining pay and promotion. Many companies are shrinking their swollen boards of directors and reducing personnel costs by slashing overtime, cutting part-time workers and forcing full-timers to take early retirement--though this has long been the practice in declining industries and companies, even in Japan.

Despite all this change, the social contract between company and employee endures. The Japanese corporation is not simply a collection of physical and financial assets but also a social organization. The company belongs to its employees and the community, and its workers are its primary concern. Directors tend to come from management ranks, within the company community, and outside directors are a rarity. The peculiar Anglo-American notion that a firm is the exclusive property of its shareholders still has little currency in Japan. The shareholder as investor is entitled to a return on investment, but the company operates primarily for the well-being and security of its employees. There are no Neutron Jacks or Chainsaw Als among Japan's business heroes. Despite all the current problems, there have been no mass layoffs.

This is a testing time for Japan. Its competitive strength remains, as exports to the world's most demanding markets continue to increase. Japanese industry has been challenged before and has restructured before--in the mid '70s after the oil crisis, for instance. As they did then, the best of Japan's companies will emerge from all these problems and changes with values intact and competitive strength increased.

James C. Abegglen is chairman of the consulting firm Asia Advisory Service in Tokyo

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