Collision Course : Confrontation Looms as Japan Persists With Trade Barriers

A few years ago, the Japanese head of a high-tech company in Japan went shopping for a state-of-the-art mainframe computer. After weighing many options, he bought a U.S. model.

Not long after, he was astounded to find himself summoned to the prime minister’s office to justify his purchase.

“In Japanese society, this is the most intense kind of pressure, short of being asked to cancel an order,” said Pat Loui, a Honolulu marketing consultant who is a friend of the executive.

Though it insists it is committed to free trade, Japan continues to erect barriers--some subtle, some as blatant as an invitation to the prime minister’s woodshed--to U.S. companies seeking to prosper in the world’s second-largest economy.

By so doing, U.S. executives and diplomats say, Japan flouts the spirit of a number of recent and longstanding trade agreements reached by its own negotiators with the United States.

America’s frustration peaked this month, as the latest round of trade talks collapsed after eight months. President Clinton put U.S. prestige on the line, raising the spectre of a trade war with tough talk about sanctions and quotas. A new government report underscored the stakes: America’s merchandise trade deficit with Japan grew in 1993 to nearly $60 billion, a record.

Inarguably, headway is being made. Many American companies have painstakingly pried open the Japanese market, proving it can be done. And some U.S. executives acknowledge that their go-get-’em bluster and lack of understanding of Japanese ways may contribute to their problems.

But confrontation is looming. Washington has taken the first step toward retaliation in a high-profile dispute over Motorola Inc.’s access to Japan’s cellular phone market.

Japanese leaders have sounded conciliatory, promising a package of market-opening actions within a month. But many skeptical U.S. business people say they’ve heard that pledge before.

What’s really going on in the key markets?

Here is an assessment of trade conditions in industries--telecommunications, insurance, autos and medical technology--that U.S. trade negotiators say have been notably stymied by Japanese barriers.

Telecommunications

With all the talk of a coming information superhighway, splice closures and telephone terminals have taken on a glamorous aura. And U.S. companies such as American Telephone & Telegraph Co. and Motorola have captured an impressive share of the huge global market for innovative telecommunications gear.

Yet despite decades of costly marketing efforts, they have made little headway with Nippon Telegraph & Telephone Corp.--the victims of Japan’s adherence to procurement methods that exclude outsiders, according to Debra Waggoner, a spokeswoman on international trade for the American Electronics Assn.

Even so, the tech firms keep bashing away.

“It’s the largest phone company in the world, so how can you not try to sell to NTT?” asked Harry O. Postlewait, an executive vice president at Raychem Corp., a Menlo Park, Calif., maker of equipment for telephone and consumer electronics companies, utilities and auto makers.

Before buying equipment, NTT--65%-owned by the Japanese government--meets with favored suppliers to discuss specifications. It then writes proposals to suit those companies’ products, in effect shutting out U.S. and other foreign companies from the bidding, Waggoner said.

Often, NTT invites just one company to bid on a project. When foreign companies are allowed in, they often are limited to making proposals for equipment that represents a narrow portion of the work. Many U.S. companies don’t bother.

Another problem: In their 50s, many NTT executives leave to run small companies that make telecommunications equipment--and count on their old ties to win business.

“The problem is that you have remnants of a pure monopoly system,” said Thomas Zengage, a telecommunications consultant in Tokyo. “It’s a constant battle to make the market truly open.”

Postlewait said Raychem has sensed “a turn for the better” in its dealings with Japan in the last 18 months. But the company expects to do just $500,000 in business with NTT this year, out of its overall telecommunications sales of $450 million.

Still, Raychem has adopted a Japanese-style strategy in its tiny Tokyo office--a strategy of building trust over the long term.

“We’re trying very hard to be their friends and to work together,” Postlewait said. “We’ll play by their rules.”

Insurance

Although American insurance companies face no explicit barriers in Japan, few U.S. carriers have entered the market. The reason, experts contend, is that American corporate impatience tends to collide with Japan’s bureaucracy and culture.

The situation is similar in banking, where the same rules ostensibly govern all financial institutions, yet American banks have been unable to grasp even a 1% share of the market.

“Insurance companies have gone there and tried to get in, but they find it’s a long process and not everything is written down,” said Mark Weston, director of international insurance for accountants Ernst & Young.

But it is a market worth fighting for.

The Japanese are the world’s most fervent believers in insurance. With a population half that of the United States, Japan leads the world in the amount of life insurance in force; Japanese trail only Americans in purchases of other kinds of insurance.

In Japan, domestic insurers set up sales operations within major corporations, selling directly to their work forces. These agencies typically are staffed by company retirees who are well trusted by their former co-workers.

Most American insurers, however, have failed to gain access to these networks, putting them at a powerful disadvantage.

Another problem, from the U.S. perspective, is that most Japanese insurance prices are set by the government.

Premiums can run twice as high in Japan as in the United States for similar coverage.

Still, there is one conspicuous American success story. Aflac Inc., a relatively obscure company based in Columbus, Ga., broke into the Japanese market in the mid-1970s with a unique product: cancer insurance.

Today, Aflac reaps four-fifths of its $5 billion in annual revenue from Japan.

A key difference between insurance and banking in Japan is that one major, explicit obstacle exists for foreign banks: They are not allowed to buy Japanese banks.

Yet acquisition is the fastest and surest way for a bank to establish itself in a new territory, noted Fred Furlong, an economist with the Federal Reserve Bank of San Francisco. Without that option, “it’s much harder to establish a beachhead and fight your way in,” he said.

Such U.S. banking giants as Citicorp, Bank of America, Chase Manhattan and J.P. Morgan all have prominent Japanese offices, but their operations tend mainly to support American companies doing business in Japan. American banks’ market share is “well under 1%,” Furlong said.

By contrast, he said, Japanese banks held 9.8% of all U.S. banking assets as of mid-1993.

Autos and Auto Parts

For many Americans, it has been hard to sympathize with Detroit’s complaint that it can’t sell cars in Japan.

The Big Three’s credibility long was undercut by the dubious engineering, design, quality and marketing of U.S. cars.

But the last two years have altered the auto world’s landscape. Many of Detroit’s new cars and trucks are hot, while Tokyo’s suddenly seem dowdy.

Japan--its car makers in painful retrenchment--actually lost ground in the U.S. auto market last year, while Detroit added to its meager share in Japan. U.S.-based makers of auto components predict they will sell a record $19 billion worth to Japanese auto makers this year.

So why did the trade imbalance in autos and auto parts--source of more than half the U.S. deficit in trade with Japan--grow an additional 4% last year to a projected $34.5 billion?

Some answers were suggested this month with the publication of a joint U.S.-Japanese study that details a wide variety of entrenched business practices and interlocking interests that serve as unofficial barriers to imported autos in Japan.

The study, funded and endorsed by the U.S. and Japanese governments, finds fault on both sides. It notes that some tax and other government obstacles have been eased or eliminated and criticizes Detroit for not making a serious effort, until lately, to crack the Japanese market.

“Which is another way of saying lack of market share is the result of choices made, not government interference,” said William C. Duncan, the top Washington lobbyist for Japan’s auto makers.

Yet the study also suggests that Detroit’s past resistance to investing heavily in Japan had some business logic, given other overseas priorities, its financial woes in the 1980s and the limited prospects for success.

The findings focused on the financial ties between Japan’s auto manufacturers and dealers, obstacles to researching the auto market there, exorbitant land prices that discourage new dealerships and a distribution system that makes imports 20% more expensive than domestically produced cars.

Only the Japanese government can force change in such deeply embedded conditions, said Andrew Card, the former U.S. transportation secretary who now is the Big Three’s top lobbyist.

But in some ways, the situation portrayed by researchers is being overtaken by events.

Analysts say economic turmoil--notably Japan’s recession and the dramatic rise in the yen against the dollar--is driving fundamental change that will ease the auto trade deficit.

The stronger yen gives U.S. autos and parts a big price advantage over those from Japan. That and improving U.S. quality are causing Japanese auto firms to break out of their keiretsu, or “families” of suppliers, and buy more U.S. components.

Similarly, better cars and prices and Detroit’s newfound commitment--U.S. car makers are acquiring dealerships and building cars with right-hand drive--are making it more attractive for Japanese business people to align themselves with General Motors, Ford and Chrysler.

“Economics have broken down a lot of the barriers,” said Marc Santucci, president of ELM International, a Lansing, Mich., research firm. “If the dollar-yen relationship stays in this range, you’ll see fairly dramatic moves” in the auto trade deficit.

Medical Technology

Much has been made of Japanese prowess in consumer electronics and other high-technology fields. Yet U.S. companies can claim undisputed leadership in selling medical technology to the rest of the world.

Except Japan, that is.

While American manufacturers of medical devices and supplies capture about 50% of worldwide sales, in Japan their market share is a relatively puny 21%. By comparison, Japanese medical companies have a paltry 7% of global sales but a whopping 70% of their domestic market.

Representatives of the U.S. medical technology industry say those figures demonstrate that Japan doesn’t play fair with offshore competitors.

They complain that Japan’s Ministry of Health and Welfare has established a confusing array of regulations that make it difficult for U.S. firms with new medical technology to get their products into the hands of Japanese doctors and hospitals.

“The Japanese government is very creative in thinking of new regulatory impediments,” said Terri Ethridge, director of global strategy and analysis for the Health Industry Manufacturers Assn., a Washington trade group.

After a new medical technology has been deemed safe by Japan’s version of the Food and Drug Administration, the Japanese ministry often requires a second round of clinical trials. The maker of a new medical testing device could be required to provide its products free to a hospital during this process, which can take two or more years.

“For lots of medical technology, the life cycle is only three years,” Ethridge said. “By the time you can sell it (in Japan), it is obsolete.”

The regulatory process also buys time for Japanese competitors to develop similar products, she noted.

Bob Croce, group chairman of a Johnson & Johnson unit that markets endoscopic surgical equipment, has been frustrated by Japan’s regulatory procedures. Although endoscopic devices are commonly used for a variety of surgical procedures in the United States and Europe, the Japanese ministry considers the devices experimental. Except for gall bladder surgery, Japan refuses to reimburse doctors and hospitals for their use.

Japan “has a regulatory system in place that is not in tune with the dynamic growth of this industry,” Croce said.

The industry is also irked by new Japanese price controls on heart valves, pacemakers, catheters, respiratory equipment and artificial limbs. U.S. and foreign firms are by far the leading producers of such products, which account for about $1 billion in annual sales in Japan, according to the manufacturers group.

“We support measures to contain health care costs, but we believe the burden should be spread” so it doesn’t discriminate against foreign suppliers, said Ed Rozynski, a group vice president.

Some U.S. companies say they don’t find Japan’s policies discriminatory.

McGaw Inc., an Irvine supplier of intravenous products, sells more than $50 million of products annually through its Japanese distributors. Larry Watts, a company spokesman, described the Japanese regulatory process as “fair but demanding.”

Hideki Tarumi, a health and welfare official at the Japanese Embassy in Washington, said price controls are not as onerous as the U.S. industry suggests. And the Japanese regulatory process, he added, is “almost the same as the FDA.”

Rather, some U.S. firms don’t do well in Japan because they lack understanding of foreign markets, added David Anast, publisher of the Biomedical Market Newsletter in Costa Mesa.

“A lot of people seem to mistakenly have the idea that you set up shop, and if you don’t immediately have sales, then it’s the fault of that country’s government,” Anast said. “But our problems are not always someone else’s fault.”

This story was reported and written by Times staff writers Martha Groves in San Francisco, Thomas S. Mulligan and David Olmos in Los Angeles and Donald Woutat in Sacramento.

Trade Among Giants

Behind the $59.3-billion imbalance in U.S.-Japan trade lurk complex flows of goods across the Pacific. The bulk of Japan’s sales to America are cars and high-technology manufactured products. America sells a substantial amount of aircraft and computers to Japan, but much of America’s exports consist of unprocessed commodities such as food and wood. Chart shows the 15 highest-volume trade flows between the two countries in 1992. Arrows point in the direction of trade flow.

15 LEADING ITEMS TRADED BETWEEN JAPAN AND THE U.S. IN 1992

(in billions) *: Exports from the United States to Japan. **: Exports from Japan to the United States.

** Cars & other motor vehicles ($20.11 in Japanese exports): U.S. car makers complain that government and business practices lock foreign car makers out of the Japanese market, where imports make up only 3% of sales. American firms have little to lose under U.S. proposals to hike tariffs on Japanese minivans and sport utility vehicles.

** Computers ($8.59 in Japanese exports): While claiming a substantial share of the Japanese private sector, U.S. computer firms say sales to government agencies still fall short of international targets. Any sanctions against Japanese exports could backfire on U.S. firms that depend on Japanese electronic components.

** Motor vehicle parts & accessories ($5.45 in Japanese exports): U.S. auto part makers have been boosting sales to Japanese car makers as they produce more vehicles in the United States. Japanese buyers might reduce their U.S. purchases should tension and trade barriers increase. ** Integrated circuits($5.01 in Japanese exports): The current U.S. share of the Japanese computer chip market, about 18%, has fallen below levels agreed to by both countries. But few expecting the market to turn into a trade war battleground, because companies on both nations depend on each other’s specialized exports. ** Telecommunications equipment ($5.00 in Japanese exports): Complicated and obscure Japanese government buying policies appear to favor domestic manufacturers. But the success of some U.S.-made products such as fiber-optic cables could be jeopardized as tensions rise.

* Aircraft & associated equipment; spacecraft & parts ($3.81 in U.S. exports): Japan is the single largest export market for U.S. manufacturers, which have established close ties to Japanese suppliers. Even short-term animosity could prompt the Japanese to begin shifting orders for new equipment and parts to European and other foreign competitors.

** Parts for computers ($3.76 in Japanese exports): Although Japanese exports are twice American levels, the Japanese market is still a lucrative one for U.S. firms. Dependence on each other’s products might limit what the United States and Japan can do without harming their respective interests.

** Sound recorders, tv recorders, recording media ($2.94 in Japanese exports): The United States has virtually ceded the manufacture of products such as videocassette recorders to the Japanese. Higher U.S. tariffs might hurt Japanese firms but would also raise the ire of U.S. consumers, who would have few alternatives.

** Internal combustion piston engines & parts ($2.94 in Japanese exports): Most exports from Japan are destined for Japanese-owned automobile plants in the United States. American manufacturers have pushed hard for a bigger share of that “transplant” market and would welcome any boost from Washington.

** Electrical machinery & apparatus ($2.46 in Japanese exports): Japan dominates trade in this sector, which includes everything from home appliances to industrial tools. Even many home appliances sold under a U.S. brand name are manufactured by Japanese firms. Again, U.S. consumers would feel the fallout of a trade war.

** Baby carriages, toys, games & sporting goods ($2.16 in Japanese exports): U.S. firms have made some inroads into the Japanese market; the growth of U.S. retailers, such as Toys R Us, bodes well for American firms. Many of the Japanese imports represent computer games. Could Washington deny American youngsters their Nintendo and Sega fixes?

* Computers ($2.05 in U.S. exports): Japan is the world’s second-largest market for computers after the United States. Both U.S. and Japanese firms are vulnerable to sanctions and higher tariffs on finished computers and components.

** Printed circuits ($1.68 in Japanese exports): The trade in computer circuit boards is dominated by the Japanese. But few expect U.S. sanctions in this sector, as many American-made computer chips are included on Japanese-produced circuit boards.

** Office machines ($1.65 in Japanese exports): Japanese firms dominate U.S. sales of low-end photocopiers and are major producers of other types of equipment, such as electric typewriters. This could be a tempting target for U.S. sanctions as a way to deny Japanese companies greater market share.

* Parts for computers ($1.57 in U.S. exports): U.S. firms have found a large market in Japan for computer disk drives, memory storage units and other computer and office machine parts. Japan could easily retaliate against U.S. sanctions and hurt American firms, so Washington will probably leave Japanese exports alone.

A Swelling Deficit

After decreasing in the late 1980’s, America’s merchandise trade deficit with Japan-the amount by which U.S. exports of goods to Japan fall short of Japanese exports of products to the United States-has grown dramatically in the last two years.

Source: U.S. Department of Commerce, International Trade Administration Researched by JESUS SANCHEZ / Los Angeles Times