Motorola Is a Veteran of Japan Battles : Trade: Electronics giant scored an earlier victory for its pagers. Now it seeks a fair deal for cellular phones.

It started with pagers. Motorola invented them and by 1978 was the worldwide leader--except in Japan, where the Nippon Telegraph & Telephone monopoly refused to buy from anybody outside a cozy circle of Japanese companies such as NEC Corp. and Fujitsu Ltd.

So Motorola launched what turned into a protracted siege. It borrowed the battering ram of the U.S. government to weaken Japanese resolve, and after tortuous negotiations and the personal intervention of then-Secretary of State George P. Shultz, NTT agreed to let foreign suppliers bid on its business.

But that was just the beginning. New pagers had to be designed and built to NTT’s arcane specifications and stringent quality standards. Undeterred, Motorola built a new American factory line and a special testing facility in Japan. Defect levels in its pagers fell nearly to zero.

“We wanted to take away any excuse for why American companies can’t be successful in Japan,” says Arnold Brenner, Motorola’s executive vice president in charge of Japan.

Motorola finally managed to capture a large part of the pager market in Japan. Yet despite 16 years of effort and a remarkable record of success practically everywhere else, the company continues to face barriers at every turn in Japan’s cellular telephone market.

Such problems have led to a clash between the world’s two biggest economies over a balance of payments more lopsided in Japan’s favor than ever before. Should a trade war erupt between Washington and Tokyo, the spark in the powder keg may very well be Motorola, whose struggle culminated last week in President Clinton’s announcement that he would level sanctions against Japan for reneging on promises to give Motorola full access to its cellular-telephone market.

But Motorola isn’t just a catalyst. More than most companies, it has experienced the full range of the Japanese economic miracle. Thanks to Japanese competition, Motorola has transformed itself. The question now is whether, thanks to Motorola and its influence in Washington, Japan will do likewise.

*

For Motorola, the transformation was mostly positive. Driven from the television manufacturing business, Motorola remade itself as a cutting-edge technology company and bounced back to challenge Japan Inc. in one of its greatest strongholds--microelectronics.

Although Japanese companies like NEC and Fujitsu continue to make inroads into the U.S. market in such key sectors as cellular phones, Motorola remains the industry leader. It also excels in computer chips. Last year its earnings doubled to $1 billion from the year before, while sales climbed 25% to $16.9 billion.

But if Motorola has beaten a path into the Japanese market, it is a narrow path not many can follow. Few U.S. companies have the combination of technological leadership, financial muscle and diplomatic clout Motorola has. The company hires experts on Japan, including former U.S. trade officials, to advise it, and the official in the U.S. trade representative’s office most knowledgeable about Japan is a former Motorola executive.

*

In spite of all this, Motorola remains hobbled in Japan. Yet Motorola also knows that it can’t give up. Company executives say that unless American companies fight to build positions in the Japanese market, they will eventually face trouble at home.

Motorola was one of the first American companies to recognize this. In 1978, Bob Galvin, then Motorola’s chief executive, led the company’s senior executives on a retreat to assess the company’s prospects.

Things didn’t look good. Japan’s blitzkrieg attack on U.S. television markets in the late 1960s and early 1970s had so devastated the market that Motorola had been forced to sell its last defect-plagued television factory to rival Matsushita in 1974. Motorola’s CB radio business was also demolished by Japanese competition.

Motorola responded by moving up into such high-tech sectors as semiconductors, computers and telecommunications. But the Japanese government had targeted the same businesses, and Japan was already pushing American semiconductor firms out of the important computer-memory market.

The Motorola executives returned from the retreat with a clear goal: Stop Japan Inc.

There would be no more short-term thinking. Investments that would help win market share in Japan would no longer have to meet the return-on-investment criteria required for investments elsewhere in the world.

“We decided that if we allowed Japan to maintain the sanctuary (of its domestic market), they would be able to generate profits at home to put us out of business,” says Brenner.

The strategy paid off in spades. As a result of pursuing Japan’s pager market, for example, Motorola learned that its quality wasn’t what it thought.

“They thought their defect levels were world class,” says David Yoffie, who wrote a case study on Motorola for Harvard Business School. “They discovered Japanese defect levels were lower than they ever thought necessary or even possible.”

To catch up, Motorola launched a corporate-wide quality improvement program. Today Motorola is the leader in Japan in pager sales. Its extensive presence in Japan helped win the customer trust needed to put Motorola microprocessors at the heart of such Japanese products as Sony Camcorders and Canon cameras.

*

Motorola also strived to shore up its defenses. In the early 1980s, it moved aggressively to file dumping charges against imports of Japanese pagers and cellular phones. The moves resulted in duties of up to 106% on products from Japanese companies such as Matsushita.

Motorola went to work on public opinion, too. In controversial ads, it boasted of its improved quality and complained about unfair Japanese trade practices.

“They recaptured the old ‘What’s good for General Motors is good for America’ feeling,” says Michael Borrus, a researcher at the Berkeley Roundtable on the International Economy.

The most grueling confrontation has been over Motorola’s efforts to get a fair share of the market for cellular phones, an area where Japan has already made major inroads in the U.S. market.

The first barriers in the early 1980s were testing and certification standards that were designed to favor Japanese products already on the market.

*

By 1986, after years of pressure, Motorola’s cellular standard, which conformed to systems used in the West, was approved. Coincidentally, the Japanese government chose to allow competition in the cellular market--competition Japanese style.

When Motorola joined with a Japanese partner to offer alternate cellular services, it was only allowed to install its system in western Japan, which represents about 40% of the Japanese population. NTT’s system would operate throughout Japan. And a new carrier called IDO, made up of such well-connected corporations as Toyota Motors and NEC, was given a license to operate in the rest of Japan.

The results were even less fair than they appeared. Since IDO adopted the NTT system (built by NEC), its cellular phones could now be used anywhere in the nation. Motorola’s phones could not even be used in such key centers of business as Tokyo and Nagoya.

Again Motorola complained. Through the intervention of the U.S. government, the company won in 1987 the right to expand its territory. Still, the company could not offer its services in the Tokyo-Nagoya corridor. The Ministry of Post and Telecommunications (MPT) insisted there was not enough radio bandwidth for an additional system.

The following year, however, when the MPT quietly offered frequencies to a well-connected Japanese firm to offer cellular services on taxis, Motorola shouted foul.

This time, Motorola filed an official complaint, taking advantage of the new 1988 Omnibus Trade bill. That bill authorized the U.S. trade representative to retaliate against partners with persistent unfair trading practices.

Time was of the essence. Motorola has just introduced the MicroTac, a cellular phone smaller and a third lighter than any Japanese product available. It was a rare competitive advantage and Motorola wanted to move while it still held the lead.

Responding to Motorola’s complaint, the U.S. trade representative cited Japan in 1989 for limiting U.S. entry into Japanese markets. Duties of 100% could be applied on Japanese telecommunications equipment if negotiations failed to resolve the conflict.

Japan finally caved during last-minute negotiations in a Washington, D.C., hotel room between Japanese power broker Ichiro Ozawa and freshman U.S. trade representatives consulting repeatedly over the phone with Motorola executives on how to proceed.

IDO reluctantly accepted the compromise. But then the company dragged its feet when it came to implementation. The Japanese Postal Ministry, which had forced the compromise on IDO, told complaining Motorola officials that it was now a strictly private issue and the ministry could do nothing.

By last year, IDO still hadn’t built enough transmitters to cover even half of the Tokyo region. Few customers wanted to buy phones that could only be used in parts of the city. Consequently, while the Motorola joint venture in western Japan had a 50% share of the market, in Tokyo, Motorola’s share was a skimpy 1%. After months more of frustrating negotiations the U.S. Trade representative just last week set a Feb. 15 deadline for IDO to offer an acceptable plan.

The deadline passed. Coincidentally, it was the day after Clinton’s failed summit meeting with Japanese Prime Minister Hosokawa. Clinton used the opportunity to send Japan a message by threatening sanctions.

Meanwhile, Motorola says it is losing both time and money. From April this year, Japan will allow cellular phone makers to sell their products directly through retail stores instead of from carriers.

“We believe in April there will be a tremendous rush to purchase cellular phones,” says Brenner. Since Motorola covers only a small portion of Tokyo, “We will lose much of that initial thrust. Once a subscriber chooses a system it is twice as expensive to get him back.”

Motorola is demanding that IDO make the necessary investments to cover the Tokyo area within a year instead of the three years it plans.

Motorola’s decision to put itself once again in the middle of a potential trade war was not an easy one. Last year, Motorola’s sales in Japan totaled close to $1 billion. Many American companies would have chosen not to risk its relationships in Japan by becoming the center of a trade dispute.

“There is always the risk of a backlash,” says Brenner. “This is not the Japanese way.”

But the upside is also great. Brenner figures the company’s sales in Japan would be 250% higher if Motorola’s share of the Japanese market was as high as its share of other overseas markets.

Some U.S. companies “are willing to accept the scraps,” says Brenner. “When the market is this big, the scraps are juicy.”

But Motorola’s brash, in-your-face trade policies have won it respect, if not universal admiration. “In Japan, cowards die many times over while the valiant get respect,” says John Stern, head of the American Electronic Industry Assn.’s Asia office in Tokyo.

Whatever happens in this latest confrontation, says Stern, Motorola has established itself as a company that can’t be pushed around. Said Stern: “Motorola has become someone who has to be included when decisions are made.”