Latest Tokyo Scandal May Be Truckload of Trouble : Japan: A fraud and payoff case involving the nation’s second largest delivery firm has implications for U.S. firms that are trying to break into the Japanese market.

On the northeastern edge of Tokyo, in a district of low-rent public housing crisscrossed by murky canals and dusty freeways, is a maze of warehouses and parking lots the size of several football fields.

Here, even past 6 p.m. on a Saturday night, the well-lit complex is a beehive of activity. Every few seconds, trucks driven by young, clean-cut men in blue and white striped jerseys back into the warehouses to unload.

Inside, packages are sorted and reloaded into smaller trucks that then supply Tokyo’s tens of thousands of wholesalers and retail outlets with everything from Hitachi televisions to boxes of BVD underwear.

This is the Tokyo center for Sagawa Kyubin, a Kyoto-based package delivery company that--with more than $7 billion in sales--is now the second largest in the nation.

Once, Sagawa was best known as the upstart company that challenged entrenched competition and won. Today, it is better known for having made billions of dollars in fraudulent loans and alleged political payoffs in what pundits are calling Japan’s biggest corruption scandal since World War II.

Sagawa was an innovative company: Its aggressive management practices and progressive employment policies broke Japanese business taboos. But observers say that in order to grow, the firm virtually was forced to buy into “Japan Inc.,” the elite group of politicians, bureaucrats and businessmen that rules the nation.

“The fact that Sagawa was new to the (trucking) business may have been a factor” in its alleged generous payments to politicians, says Mutsuki Kato, an important parliamentary leader and chairman of the All Japan Trucking Assn., a trade group.

Among those tainted by alleged links to Sagawa money are at least three former prime ministers, including Yasuhiro Nakasone, whose nonprofit Institute for World Peace was recently reported to have received $4 million from Sagawa. Last week--as the case escalated with reports of payoffs to more than 200 politicians--two top officers were arrested on charges of breach of trust.

Sagawa’s story--that of a nonconformist company trying to get ahead in a highly regulated industry--has implications for American companies that lack access to the Japanese market and don’t have the cash to buy their way in.

“There is no way Americans can succeed in the transport business in Japan,” says Hisashi Kikuchi, author of numerous books and a political columnist close to Kiyoshi Sagawa, the founder of the trucking firm.

Indeed, some American companies already have discovered the difficulties of penetrating Japan’s delivery business. Not only do firms face high land prices for building terminals, but they also confront a regulatory maze that, in Sagawa’s case, may have proved an irresistible invitation to payoffs.

“We are planning to provide direct service, but it is very difficult to deal with the Japanese government,” says David Wong, a senior executive of Federal Express’ regional operation. “It isn’t easy to get domestic trucking licenses.”

Although Federal Express has a license to operate in certain areas of Tokyo, it is forced to use a Japanese company to deliver its packages to most parts of the capital and to the rest of Japan.

Kiyoshi Sagawa, 69, the wiry, tough-talking founder of Sagawa Kyubin, was born and raised in the country region of Niigata. He worked at construction sites and other odd jobs until 1957. Then, at the age of 35, he began his own delivery company.

From the beginning, he focused on the delivery of high value goods, such as kimonos, where the profits were highest. As he grew, he targeted the commercial trade--which could offer high-volume, high-profit business--and eschewed the booming but less profitable home-delivery business.

In his autobiography, “Before I Knew It I Was Making 300 Billion Yen,” Sagawa writes of the long hours he worked--first on the road and then in the office, building his business.

He introduced management practices that were innovative for Japan. He paid his drivers well, hiring young, athletic men whom he believed were best able to handle the strenuous work and long hours that he demanded. The starting salary for a driver today is $8,000 a month in most parts of the country, about six times the national average.

And Sagawa turned his drivers into salesmen, giving them a commission for business they drummed up to make sure trucks didn’t return empty from long trips.

To speed up the development of a nationwide delivery network, he broke taboos against takeovers and aggressively sought acquisitions, sometimes using the influence of friendly politicians to overcome obstacles. To keep the company lean, Sagawa kept his new regional units autonomous, taking a minority share in each business and a chunk of earnings, but otherwise allowing them to operate independently.

In 1974, Sagawa purchased Watanabe Transport, a Tokyo-based trucking company, and made company founder Hiroyasu Watanabe his right-hand man. When Sagawa grew ill in 1985, Watanabe took over the company’s operations--and the political payoffs, as well.

But Watanabe went a step further, channeling company money into shell companies that speculated in stocks and golf course development projects.

Last summer, when police uncovered Watanabe’s fraudulent loans and alleged political payoffs, Sagawa cut him off, forcing Watanabe to resign and charging him with breach of trust. Insiders believe that Sagawa felt threatened by Watanabe and wanted to get rid of his rival. Watanabe was one of the men arrested last week.

(The Japanese press recently reported that Watanabe moved all his assets into his wife’s name and divorced her to prevent the funds from being confiscated from him in the event of a conviction.)

One result of the power struggle between Sagawa and Watanabe has been a series of leaks concerning the company’s payoffs to politicians.

“When expanding like that, you need contacts to make the introductions to customers and business partners,” a former associate of ex-Prime Minister Nakasone says. “If you are a young company that is difficult, so politicians help.”

Observers say politicians can intervene with the Ministry of Transport, which is in charge of enforcing about 2,000 regulations that govern everything from the number, size and weight of trucks used to the routes they travel and the size of their terminals.

The ministry has issued warnings to Sagawa Kyubin on several occasions for operating an excessive number of trucks along certain routes and for working its drivers too hard. However, the company has never been fined more than a nominal sum.

Although there is no direct evidence yet of bribery, few believe that the company’s contributions brought no return.

The Mainichi Shimbun, a national daily newspaper, reported last week that Fumio Kyuma, a member of the ruling Liberal Democratic Party and chairman of the parliamentary Transport Committee, was also a director of a Sagawa Kyubin affiliate in the southern island of Kyushu.

The paper reported that Kyuma’s secretary had been trying to help Sagawa Kyubin persuade Nagasaki city officials to give the local Sagawa affiliate an exemption from zoning regulations to allow the company to build a truck terminal in a district where a “beautification” scheme was under way.

Reports of wide-ranging company ties to gangsters are also spreading.

Former company drivers, for instance, have claimed that they were able to drive full speed through narrow town streets because Sagawa Kyubin was “backed by gangsters” who would resolve any conflicts arising from traffic accidents.

Newspapers have also reported that of the $4.1 billion in questionable loans and loan guarantees made by Sagawa Kyubin, about one third went to front organizations for organized crime. Police have revealed that Sagawa Kyubin provided much of the funds that gangster boss Susumu Ishii used in his effort--in concert with Nomura Securities--to manipulate shares of Tokyu Corp., a Japanese railroad company.

Police believe that Sagawa Kyubin may have received kickbacks from the gangs in exchange for the loan guarantees, money which was then used to pay off politicians.

Recently, Japanese newspapers reported that Jun Saotome, former executive director of Sagawa’s Tokyo operation, channeled more than $20 million to West Tsusho, a company that hired Prescott Bush, President Bush’s brother, for advice on its U.S. investments.

Saotome was present at a Chinese dinner in Prescott Bush’s honor in 1989. He also helped organize a reception at the 21 Club in New York City, hosted by golfer Gary Player, aimed at wining backing for a planned golf course on land reportedly purchased on Prescott Bush’s advice.

Saotome was also arrested last week.

Even as the scandal unfolds, Sagawa Kyubin’s ties continue to reach into the heart of the ruling Liberal Democratic Party.

Shin Kanemaru, the kingmaker believed to have helped Sagawa expand into his home district of Yamanashi prefecture, west of Tokyo, may once again be working on the trucking firm’s behalf. According to Seikai Orai, a political gossip sheet, Kanemaru called Sanwa Bank last August to ask it to help out the then-financially troubled trucking company.

In December, Sanwa announced that, along with Sumitomo Bank and 12 other banks, it had agreed to extend $240 million in loans to the firm to help it cover debts resulting from its loan guarantees.

Sagawa hopes to use the money to restructure its debt by consolidating six of its 13 semiautonomous units into a single company. But if disclosures continue at the recent pace, financial restructuring could be the least of the firm’s problems.