Keiretsu dynasties give way

By Michael Kanellos
Staff Writer, CNET News.com
December 7, 2004 4:00 AM PST

TOKYO--Staring out the window from the heights of NEC's corporate headquarters here, a visitor is flooded with impressions: oceans of skyscrapers extending in all directions, thousands of trains and taxis, the looming mass of Mount Fuji in the distance--and countless rows of desks of quiet employees toiling deep into the night.

The Japanese corporate work ethic, instilled during the country's postwar industrial rise, remains firmly intact despite the economic gyrations of the last two decades. Employees arrive each morning between 8 a.m. and 9 a.m. but typically stay well past the official closing time of 5:30 p.m. or 6 p.m. Leaving at 9 p.m. or later is fairly common, as is blowing off steam over beer or sake at a yakitori grill before finally taking the train home.

Despite outward appearances, however, companies are grappling with major changes that could forever alter the composition and philosophy of Japanese business.

Large corporations are fusing historic strengths in engineering with leaner and faster Western management concepts. That's a dramatic reversal to anyone who remembers the lionization of Tokyo conglomerates only a couple of decades ago, when U.S. businesses experimented with such distinctly Japanese practices as morning calisthenics.

The keiretsu way is fading
These efforts are part of a once-unthinkable shift in Japanese corporate direction that's questioning the relevance of the system of business that evolved from the country's feudal roots: keiretsu, an oligarchy that encouraged subsidiaries of a conglomerate to give contracts to sister companies. As recently as five years ago, nearly 70 percent of contracts were awarded to related subsidiaries, according to the Japan External Trade Organization. But that figure is closer to 20 percent today.

"The long-term business relationships, once considered a distinction of Japanese business, are dramatically declining," said Naoyuki Haraoka, chief executive director of the trade organization's San Francisco office.

Changes in corporate relationships have been made necessary by tectonic shifts in the global economy. Japan can no longer confine its business dealings to domestic companies as China, South Korea and other countries increasingly find ways to produce competitive products with more efficiency and at much lower prices.

A significant reason for such gains by foreign counterparts is the prolific production of engineers from their university systems, an area once dominated by Japan among all Asian countries. Because of this technological brain drain, economists say, Japan's relative number of engineers and scientists has fallen considerably below what it needs to support a graying population in a growing world.

"It is a very serious problem. The government recognizes the situation and is making polices to encourage students to go into the sciences," said Jun'ichi Sone, general manager of the Fundamental and Environmental Research Laboratories at NEC. "Otherwise, we have no future in Japan. We have no natural resources."

Radical changes for 'salarymen'
The changes sweeping Japan's business and technology landscape are being felt on a very personal level by the legions of white-collar workers known as "salarymen" who have driven many of the country's industries for decades. One of the more controversial experiments involves the Western-style concept of pay raises based on merit, not just seniority.

"Nenko joretsu," the seniority system in which companies gauge compensation by length of employment rather than by merit or ability, has widened the gap between engineers and management. For the past 10 years, several companies have tried to create merit-pay programs, but the idea still has not completely been accepted.

"In some cases, it has worked. In some cases, it has not worked as well as we hoped, so we are reviewing it once again to make it better," said Akira Yamanaka, corporate vice president of Fujitsu's server group. "We are trying to move to a more flat organization and to clarify what is each individual's mission or job."

Therein lies perhaps the most daunting challenge of all for those seeking to change the deeply ingrained culture of Japanese business: introducing a Western concept of self to a system that has historically emphasized institutions, not individuals.

Bigger not always better
Contributing to its sense of anonymity has been the size of Japan's conglomerates, which still tend to be far larger than those of other countries. Panasonic has 290,000 employees, and Hitachi has more than 300,000. By contrast, IBM has about the same number of workers but reports far higher profits. Hewlett-Packard employs about 140,000, while Intel and Dell have fewer than 100,000.

Starting in October, Fujitsu began a process to define a person's duties within a company more specifically, as well as to identify the supervisor to whom an employee reports. (In a development that might not be related, Fujitsu has seen its sales of servers to companies outside Japan grow 190 percent during this same period, albeit from a small base.)

"In Japan, it has been rather ambiguous what kind of mission an individual had," Yamanaka said. "They had a stronger sense of belonging to a company."

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