Japan Must Open Door to See New Dawn

Is it morning in Japan? Thanks to an encouraging outlook for political reform and growth in Japan’s domestic market, stock prices are rising once again in Tokyo and analysts are re-evaluating the attractions of Japanese companies.

Sony, Matsushita, Hitachi and other global companies are selling at near record prices. But Japan’s economy remains in the doldrums and so do the earnings of the major companies. Moreover, Japanese business faces a critical date Feb. 11 when Prime Minister Morihiro Hosokawa meets President Clinton in Washington.

If Hosokawa comes with little to offer by way of opening Japan’s markets to U.S. competitors, particularly its new cable and communications fields, Japanese companies could have trouble in the U.S. market and those high stock prices could fade like false hopes.

In truth, Japan’s companies, hailed as awesome in the 1980s, face many challenges today. And a look at Sony, among the most international of Japan’s major companies, provides a good illustration of those challenges.

Sony is especially fitting because its co-founder Akio Morita, 73, had been making speeches--before he became ill in December--exhorting Japan and its industries to open up to the rest of the world. Morita had a stroke, is recuperating and has lost none of the mental acuity that has served his company and Japan for almost five decades.

The ‘90s have not been gentle for Japan’s companies. They no longer have the benefit of loans at 1%, as they did in the ‘80s. And because they missed a technological turn or two, Japan’s companies are having to play catch-up in computing and telecommunications. So they’re reaching out for help.

In fact, a big reason for high stock prices for Sony and Matsushita, both owners of Hollywood movie studios, is that analysts anticipate deals with U.S. telephone and cable television companies that would bring the Japanese firms up to speed in multimedia.

Sony stock, which dipped $1.25 to $58.25 on the New York Stock Exchange on Tuesday, has risen 80% in the last year partly on speculation that it will sell a 25% to 40% interest in its entertainment assets--Columbia and TriStar Pictures and Sony Music (formerly CBS Records)--to a regional Bell telephone or a U.S. cable television company.

Michael Schulhof, the head of Sony’s U.S. operations, has admitted to holding inconclusive talks with every major U.S. phone company.

A Sony deal, similar to Time Warner’s venture with US West, could bring Sony $3 billion to $4 billion in cash, according to analyst Barry Dargan of the Tokyo office of S.G. Warburg Securities. And Sony would welcome cash to pay off some of its $10 billion in debt, says Dargan.

But the main advantage for Sony would be video distribution of its movies and music productions and training in cable TV and telephone services. The latter are important because Japan’s Ministry of Posts and Telegraph is preparing to allow more competition with government phone and television networks. One reason Japanese companies lag in multimedia is that the home market doesn’t have the variety of U.S.-style cable TV.

Most important, such a venture might bring Sony out of the doldrums, mental and financial, it has known along with much of Japanese business in recent years. Sony, of course, practically invented consumer electronics with portable radios in the 1950s, and it hit the big time with the universally popular Walkman tape player in the ‘70s.

But now the business of TV sets, CD players and tape recorders, which gives Sony 80% of its $34 billion in sales, has become a quagmire. Its electronics sales and profit have declined in the last few years--profit by more than 70%--because of recession in Japan and competition from South Korea, Taiwan and other countries.

And Sony’s once-great ability to bring out successful new products has faded since the Betamax videocassette format failed in the early 1980s. In fact, after Betamax failed--because more movies were put on VHS--Sony became obsessed with the supposed need for synergy between software and hardware, of using Sony movies to sell Sony TV sets and other ancillary products.

It was a policy that failed spectacularly with “Hook” and “Last Action Hero” and which was misguided at any rate in an age in which software of any kind--from computer games to business programs--comes from a multitude of small businesses.

Yet for years Sony’s attempts to form joint ventures with small software suppliers have resulted in failure because of the big company’s overbearing attitude--a fault large companies everywhere are struggling to correct.

On the other hand, Sony’s studios can make fine, successful movies--such as “Sleepless in Seattle” and “In the Line of Fire”--and its music business is doing very well. The entertainment assets bring Sony half its profit on only 20% of its revenue. Morita clearly saw the future when he paid $2 billion in 1987 to buy CBS Records, even then a global business that couldn’t be duplicated for many times that purchase price.

Another far-sighted move Sony made was to put a lot of production and research in the United States--roughly $12 billion worth of consumer goods production today in San Diego; Terre Haute, Ind.; San Antonio, and elsewhere.

Moreover, Sony may be regaining its flair with new products. The Sony MiniDisc, a device that both plays and records on compact discs, could evolve into a superior “mobile multimedia product,” veteran technology analyst Kathleen Wiegner writes in Upside magazine.

If it can find a partner for its entertainment business, Sony could achieve growth and success in the new field of telecommunications.

Add it all up and Sony, like much of Japanese business, has made some mistakes, learned some lessons and now has a chance for a comeback.

That’s why political reform, the expansion of a consumer economy, cable channels, open communications and success in the Washington talks Feb. 11 are so important.

If it’s morning in Japan, the country will open as Morita has advised, and Morita’s company--and many others, both Japanese and American--will prosper.