Construction in Japan Runs on ‘Dango’ : Collusive Inner Circle Hurdle for U.S. Firms Despite Recent Pact
After more than 30 years of slugging away on the fringes of Japan’s construction market, PAE International still had trouble hiring local subcontractors, so strong was the taboo against collaborating with foreigners.
When a PAE executive complained about the dilemma in an interview televised here last year, however, he was quickly surprised by telephone calls from several sympathetic Japanese subcontractors. It seemed that a major shift in attitude was afoot. They were actually asking for work.
PAE, a subsidiary of Los Angeles-based Pacific Architects & Engineers, struck a deal with one of the suitors, but only after agreeing to an odd condition: At the construction site, the subcontractors’ workers would have to disguise themselves as regular PAE employees in PAE uniforms and hard hats. The subcontractor feared possible retribution, if identified, from its Japanese associates.
Despite the high-profile trade dispute with the United States, change comes slowly in the insular world of Japanese construction--or maybe not at all.
An agreement announced in Washington last Tuesday is aimed at prying open the Japanese market by making it easier for U.S. companies to bid on public works projects and, ostensibly, allowing them to gain enough local experience to compete effectively in the future.
But companies managing to get a foothold here may never have opportunities even remotely comparable to those enjoyed by Japanese contractors in the United States, industry sources say. Moreover, any successful participation is likely to be a result of the very behind-the-scenes fixing that U.S. officials have criticized, rather than the fruit of fair bidding and free-market competition.
While the U.S. market is essentially open, Japan’s construction industry is a rigid and arcane pyramid of insiders. Bid rigging on public works contracts is acknowledged to be routine, even though it technically violates Japanese antitrust law. Informal deal making among competitors is the rule, not the exception.
“Japanese are open and honest about these arrangements,” said Tokunosuke Hasegawa, executive director of the Research Institute of Construction and Economy in Tokyo. “There’s a concept of what’s fair and unfair in the United States, and there’s a different concept here. This has evolved out of a long experience.”
The prevailing business ethos is commonly described by the word dango , which literally means “consultation” but might be more accurately rendered as “collusion.” Dango is the means by which an already overcrowded field of players--Japan has 520,000 licensed contractors--carve up the pie and mutually ensure survival.
‘Tough Decision’
Critics say the collusion extends to bureaucrats, who put public works up for bidding and eventually retire to jobs in the private sector, and to politicians, who rely on the industry for funds.
“You still have to deal with the local construction environment, even when there’s an agreement between governments,” said James A. Merchant, a director of Irvine-based Fluor Daniel’s marketing and sales group in Tokyo. “Each company has to decide for itself whether it can come over here to provide services, compete and make a profit. That’s a tough decision.”
The major stumbling block in the protracted negotiations that led to Tuesday’s agreement in Washington was, in essence, dango .
U.S. officials had complained that the list of public works projects proposed by the Japanese for special bidding rules, aimed at allowing greater foreign access, did not include the advanced design and engineering work at which U.S. companies excel. In particular, airport terminals were not covered because these concessions had already been awarded to private companies, over which the Japanese government insisted it has no legal control.
But the Japanese side made it known that the government has enough informal power to influence the business practices of private concerns involved, according to authoritative sources. With the wink of an eye, the Japanese could virtually assure that qualified U.S. companies would get a piece of the action. But this was to be a tacit understanding, not to be put in writing in an international agreement.
Ultimately, the agreement called euphemistically for the Japanese government to “encourage” the private companies to treat American suppliers and contractors without discrimination. The language stops short of guaranteeing that contracts will be awarded, but it appears to be a face-saving compromise, meaning that U.S. firms will be treated favorably, even at the risk of angering European and South Korean rivals.
An array of problems remains for foreign contractors hoping to perform within the system. One key question is whether they can effectively hire subcontractors and work with local suppliers of material and labor, who risk ostracism for trying to break loose from their bonds with regular patrons.
Military Contracts Dominated
“Behind the scenes, they’ll support us, but they’re still not willing to take that step forward and work openly with foreigners,” says Theodore C. Ury, the PAE International vice president whose televised complaint led to the surreptitious arrangement with a subcontractor last year. “Anyway, we got the job done.”
The job? PAE underbid Japanese competitors for a contract to install two toilets at a U.S. military base in Yokosuka. It was the first construction contract that the company had bid on in Japan since shady characters roughed up workers commuting to a PAE roofing job at Yokosuka 10 years ago. U.S. military contracts are purportedly dominated by dango cartels, much like public works projects put to bid by Japanese government agencies.
Add PAE’s tiny plumbing contract to the five cookie shops that the company has built for the Mrs. Fields chain, and that is the sum total of construction work performed by American companies in Japan during the past several years. In contrast, Japanese companies did an estimated $3 billion worth of work in the United States in 1987.
Historically, major U.S. engineering and construction firms have kept procurement offices in Tokyo to support jobs in the Middle East and elsewhere, but they have not seriously pursued work in Japan--on the assumption that the market is nailed shut.
“They’ve heard all the horror stories about Japan, and they’re not willing to take the risk and put the money up front,” PAE’s Ury said. “They haven’t come here; they haven’t really set up offices; they haven’t tried.”
Fluor Daniel, an engineering, construction and technical services subsidiary of Fluor Corp., broke the pattern when it posted Merchant in Tokyo on a full-time basis a year and a half ago. Merchant said his mission is to study how to penetrate what he calls “Japan Inc.” In January, Fluor announced a strategic tie-in with the Ohbayashi Corp., a major Japanese contractor, and its immediate prospects center on building facilities for U.S. manufacturers investing in Japan.
Fluor is not interested in the heavy construction jobs involved in the billions of dollars worth of public works projects that Japan is planning over the next several years, Merchant said. Neither, apparently, are the other major U.S. firms, most of which specialize in high-technology engineering and construction management, rather than moving dirt.
PAE Unusual
“Japan has a big construction market, but a small market for construction management,” said Hiroo Kosaka, an official in the Ministry of Construction. “When you consider all the factors involved, it’s not going to be easy for foreigners to sell their services here.”
PAE is a somewhat unusual case. The parent firm was founded by an American in Tokyo 33 years ago as a military contractor primarily engaged in architectural design. The privately held concern later incorporated in California and grew into an engineering and construction services company with offices around the world.
Although PAE has largely subsisted here on design and building maintenance contracts for the U.S. military, it is one of three foreign companies so far licensed for construction work in Japan, along with Overseas Bechtel Inc. and General Electric Technical Service Co., a subsidiary of General Electric.
Since PAE is the only foreign contractor with anything resembling a track record, it is held out as an example by Japanese industry officials to show that if a foreign company tries hard and long enough, it can succeed.
As if to prove that point, several major Japanese construction companies have approached PAE to discuss working together on projects such as the Kansai International Airport, now under construction in Osaka Bay. But PAE’s imminent reward may have more to do with outside pressure than the virtues of perseverance.
A U.S. Commerce Department campaign to open bidding at the airport two years ago snowballed into the current trade dispute. Congress has already barred Japanese contractors from federally funded public works projects in the United States, and the Reagan Administration had threatened Japan with sanctions under Section 301 of the 1974 U.S. Trade Act after construction talks recently stalled.
Prime Minister Noboru Takeshita has, to an extent, staked his credibility on resolving the issue, having promised when he visited Washington in January to “open” Japan’s public works market.
But the success of the construction agreement will likely depend on the ability of U.S. firms to break through a kind of cultural Catch-22, industry and government officials say.
Foreign influence could help rationalize the dango system, yet the system tends to keep foreigners out. Ultimately, any foreigner wishing to make inroads will have to forgo pretensions of American-style openness and competitive bidding and learn to play by local rules.
“You can change government policy and procedures, but there’s no method to change business culture,” said the Construction Ministry’s Kosaka. “Nothing can change until the foreign firms actually are in here and start working. But eventually, if you look toward the 21st Century, Japan’s industries will all have to liberalize. Construction can’t continue to be the exception.”
