U.S. Looks to Talks to End ‘Sanctioned Collusion’ in Japan
Entrepreneur R. Terren Dunlap thought that he had an idea for a product that couldn’t fail: a dual-deck videocassette recorder, one that would allow America’s couch potatoes to tape two television programs at once or to dub their own movies.
When Dunlap tried to convert his brainstorm into reality four years ago, however, he ran into an obstacle that he calls “the Japanese.”
Dunlap claims that Japan’s VCR manufacturers, who dominate the United States and global markets and hold essential patents for home video devices, got together and decided that his dual-deck VCR would be bad for the industry. They shut him out in the process, he says, making it impossible for his Go-Video Inc., based in Scottsdale, Ariz., to obtain the technology necessary to start production.
Sensing collusion and injustice, Dunlap did what any indignant American might--he sued.
But where? Japan does have an anti-monopoly law that it inherited, reluctantly, from the U.S. occupation after World War II. But virtually no recourse exists for a private individual to petition for its enforcement. So Dunlap went to federal court in Phoenix, and there he sued a passel of Japanese electronics firms under U.S. antitrust law, alleging that they formed an illegal cartel that unfairly suppressed competition.
It might seem a mere nuisance suit going after deep pockets and treble damages, but Dunlap’s legal battle also underscores a serious gap in capitalist cultures that has lurked beneath the surface of more than a decade of U.S.-Japan trade friction.
An ethos of harmony and cooperation--and sometimes collusion--permeates the Japanese philosophy of fair competition, harking back to the prewar days of the zaibatsu conglomerates. Even today, in distribution, construction and manufacturing, price fixing and bid rigging are tacitly condoned by regulatory authorities for the sake of avoiding “confusion” in the marketplace.
“We operate under a free enterprise system,” Dunlap said in a telephone interview from Scottsdale, “while they operate under a cartel system.”
‘Sanctioned Collusion’
That view may be simplistic, but legal cartels have indeed been an important part of the government’s phenomenally successful industrial policy for the past 60 years, helping depressed industries such as steel and petrochemicals restructure and bounce back into international markets.
Kozo Yamamura, an economist at the University of Washington, summed up the situation when he wrote that “many segments of Japanese export-oriented industries have been shielded from the vagaries of market forces by sanctioned collusion.”
Now that Japan has emerged as a fearful economic juggernaut, however, its propensity for collusion is starting to attract critical attention from trading partners, particularly Americans, who are concerned about the lack of a level playing field.
Early next month, U.S. and Japanese officials will begin a new round of talks called the “Structural Impediment Initiative,” aimed at resolving trade imbalances by looking at structural problems in the economies of each country.
High on the agenda for the American side will be Japan’s lax enforcement of its anti-monopoly law, with the view that cartels and exclusive business ties can block imports and foreign investment.
Under mounting pressure from abroad, Japan’s moribund Fair Trade Commission, the agency charged with enforcing the Occupation-vintage anti-monopoly Law, has recently shown some inconclusive signs of stirring to life. In July, for example, it warned the Beef Importers Council to disband a cartel suspected of parceling out allocations of controlled beef imports without competitive bidding.
Last December, the commission imposed penalties on a cartel of 70 construction companies found to have rigged bids on nearly $16 million in contracts at the U.S. Navy base in Yokosuka, south of Tokyo, between 1984 and 1987. It is probing allegations that eight builders conspired to make illegal subcontracting arrangements for landfill work at the Kansai International Airport, a project that has become a symbol of the U.S. government’s attempt to pry open the closed public works market.
Cartel Denied
And earlier this month it was leaked to the Asahi newspaper that Fair Trade Commission investigators are gathering information on a suspected cartel of VCR manufacturers who allegedly agreed in secret to fix prices in the domestic market and coordinate a reduction in production volume.
Electronics industry sources vehemently deny that any such arrangements have been made, just as they have denied Go-Video’s unrelated cartel allegations.
“There’s absolutely no truth to it,” said Akira Nagano, a spokesman for Matsushita Electric Industrial Inc., the top producer of VCRs. “The situation now is that competition is so fierce that there’s no way we could get together for such a discussion.”
Indeed, with exports declining after the yen appreciated dramatically three years ago, the domestic market has been flooded. Last year it absorbed nearly 50% more Japanese-made VCRs than in 1984, according to data released by the Electronic Industries Assn. of Japan. The average factory price per unit declined by 52% in yen terms during the same period.
But it is precisely under such troublesome conditions that Japanese industries have repeatedly shored themselves up with informal agreements aimed at defusing “excess competition,” critics say. Just as “confusion” in the domestic market is a euphemism for competitive pricing, the evil of “excess competition” implies that there will be winners and losers.
Cultural Differences
“I try to tell companies that the whole concept of ‘excess competition’ is wrong,” said Shogo Itoda, deputy secretary general of the Fair Trade Commission. “In a free economy, there’s either competition or there isn’t.”
Itoda laments, however, that it is extremely difficult for his agency to gather evidence of collusion in price cartel cases. It lacks the subpoena powers used by investigators in the U.S. Justice Department’s antitrust division. It also must contend with the powerful economic bureaucracies, such as the Ministry of International Trade and Industry, which sponsor legal industrial cartels.
“They are a well-meaning bureaucracy that doesn’t have much pull in the Japanese government,” one knowledgeable foreign observer in Tokyo said of the commission.
Most daunting, perhaps, the commission must deal with a cultural group dynamic that was not anticipated or fully understood by the American drafters of the 1947 anti-monopoly law.
“There’s a Japanese style, a mood of tacit communication,” Itoda said. “When two people of the same industry get together, the first thing they do is form an association, and they quickly become very intimate. But we think it’s still possible to compete within that framework.”
The native instinct to form cartels during uncertain times was manifested when the government got ready to implement, at the beginning of April, a 3% consumption tax on all goods and services. The first thing that it did was take steps to avoid “confusion” in the marketplace by allowing small businessmen to form temporary cartels--4,533, at last count.
The concern was that a lack of coordination among vendors might result in volatile prices, perhaps even cut-throat competition. As a sop to the outraged consumer, the Fair Trade Commission installed a “cartel hot line” to take reports of opportunistic price hikes. Makers of tofu , or bean curd, were admonished to clean up their acts under the agency’s non-legally binding “administrative guidance” procedures.
By coincidence, Setsuo Umezawa, chairman of the Fair Trade Commission, is a former career bureaucrat in the Finance Ministry’s tax division who assumed the top trust-busting post in 1987, when the ministry was drafting the package of tax reforms containing the highly controversial consumption levy.
Sanctions Decline
Umezawa took office declaring his commitment to more aggressive enforcement of the anti-monopoly law. But so far under his tenure, the agency has continued a trend toward less frequent activity. In fiscal 1988, which ended March 31 of this year, the commission initiated 178 investigations, compared to 329 in fiscal 1983.
Formal and informal sanctions taken by the agency also steadily declined during the six years. Last year it issued six legally binding recommendations, similar to cease-and-desist orders, and settled 82 cases with informal warnings and cautions.
The agency has filed only one criminal complaint in its 42-year history, against participants in a cartel found to have rigged gasoline prices after the first oil shock of the 1970s. In that case, the Supreme Court eventually upheld convictions and suspended sentences for 13 company executives.
Nor is the agency making full use of the enforcement teeth granted by a revision of the law in 1977. Although it has taken advantage of the power to levy surcharges on cartels, it has not once exercised its expanded authority to order the break up of monopoly enterprises.
$2-Million Settlement
Umezawa, in a speech last month, attributed the decline in anti-monopoly investigations over the past decade to more stable economic conditions, effective deterrence and better attitudes among companies, not lax enforcement. Asked if he is sympathetic to calls to toughen the law, he said “there’s no need to strengthen it beyond this.”
Dunlap of Go-Video, meanwhile, has found a way around the alleged VCR cartel while pursuing his antitrust lawsuit. He has settled out of court with several defendants for a total of about $2 million and has worked out an arrangement with Samsung, one of South Korea’s zaibatsu -style conglomerates, to manufacture his dual-deck machine later this year.
Samsung was originally named in the suit for abiding by a Japanese “voluntary restraint” agreement not to make dual-head VCRs. Dunlap’s lawyer, Joseph Alioto of San Francisco, contends that this was part of a “conspiracy” aimed at keeping American companies out of consumer electronics.
“The name of the game of the Japanese isn’t market share, it’s market control,” Alioto said. “They want to have it all.”
