Let’s Learn From, Not Gloat Over, Sony and Japan

Sony Corp., the once-revered consumer products company, finally made a smart move in its film business last week, appointing new management, including an executive who can keep Hollywood in touch with Tokyo headquarters.

The move in the entertainment division, a unit that caused Sony to write off $3.2 billion two years ago, mirrors a renewal of vigor in other parts of Sony’s worldwide spread of businesses, which have $43 billion in sales in everything from camcorders to video game machines.

It indicates a return to common sense at Sony, which lost its way in recent years, as did so many of Japan’s premier companies--as, indeed, did the world’s second-largest economy itself.

And thereby hangs a cautionary tale. Sony’s troubles and those of Japan stemmed ultimately from lack of flexibility and resistance to change, definite flaws in dealing with the economy of the ‘90s.

How the mighty fell. Sony towered in the 1980s. The company that invented the transistor radio and helped create the compact disc was lauded for its international outlook and long-term thinking.

The company believed its own press. Sony’s now-retired founder, Akio Morita, used to criticize the U.S. Securities and Exchange Commission for requiring quarterly earnings reports because, he said, that encouraged short-term focus.

And countless U.S. academic studies and magazine covers agreed with him, hailing Japan as a place where government worked with business and economic ascendancy was guaranteed.

Now all has changed, which gives us a chance to learn but not to gloat. There are lessons and consequences for Americans in the state of Japan’s economy and the ways its companies have had to adapt.

There is also a prod for Americans to shed their complacency and isolation. The current presidential campaign, mentioning foreign policy only briefly and Asia not at all, says America is self-absorbed these days.

Japan is also having an election, next Sunday, that over time will change that society and many other societies in fast-growing Asia. To understand our own prospects, we need to be aware of the trends among others.

Refusal to change has hurt Japan’s giant economy ($4 trillion in annual output of goods and services). It is only fitfully coming out of a six-year recession, despite the fact that interest rates are as low as 0.5% short-term and 2.8% longer-term.

The economy has a throttle on it in the form of $600 billion-plus in bad loans at banks and financial institutions. But in contrast to the write-offs taken by U.S. banks and savings and loans, Japan’s government and banks have not written down bad loans. As a result, says economist Haruo Shimada of Tokyo’s Keio University, there is a cancer in the financial system.

“Unless that cancer is removed, there is no hope of regaining real vigor,” he says.

Ironically, that “illness” is giving a boost to the U.S. economy. Japanese pension funds and savers now are fleeing their own low interest rates to seek higher yields abroad, mainly in U.S. Treasury bonds plus some corporate bonds and common stocks. That helps keep U.S. interest rates low. “We hear a lot of interest from Japan in seeking U.S. investments,” says Lee Thomas, a vice president at Pacific Investment Management in Newport Beach.

But if Japan now recovers and its interest rates rise, U.S. rates will rise also, because Japanese savings will be drawn back home. Today’s world is interdependent indeed--and less than predictable.

Japan’s companies have adapted to the slow economy at home by moving production to low-cost countries in Asia. And that has sparked new prosperity throughout the region and fresh markets for Japanese goods.

But because they were slow to restructure at home, Japan’s companies largely missed the move to personal computers and software that has so transformed the U.S. economy.

Sony instead stuck with an idea it had in the late ‘80s of combining entertainment software--movies, music and TV shows--with its consumer electronics hardware. It bought the Columbia movie studio in 1989, paid too much at the start and then stuck doggedly to its vision while the U.S. managers it hired behaved like children and wasted hundreds of millions of dollars.

Only in the last year or so with the appointment of a new president, Noboyuki Idei, has Sony moved to stop the nonsense. Why did it wait so long?

“You have to understand consensus decision making,” says an executive of a Japanese company. “It is so hard to get a consensus that once the decision is made in a Japanese company, it is next to impossible to alter the course of events.

“The thinking is always that the original decision must be allowed to work itself out.”

What that tells us is that the other side of long-term thinking can be paralysis in the face of failure. And there can be advantages to a system constantly under pressure to change.

Sony today is changing. Long a maker of components for personal computers, such as its Trinitron monitors, the company is bringing out its own PC. But Sony’s is different, a computer with a Pentium processor combined with a television set and CD player to create a home entertainment center for the future.

It’s a major commitment but, unlike in the past, not one made alone. Sony is producing its PC in a joint venture with Intel.

Similarly, Sony is investing heavily in personal telecommunications systems in a joint venture with Qualcomm in San Diego.

“They are creating new kinds of consumer products,” says Miyumi Valenski, an analyst in the San Jose office of Nomura Securities.

Elsewhere, though, Sony is making its largest current investment, $1 billion, in new semiconductor plants in Asia--where its business is growing more than 20% a year. With its annual sales almost evenly distributed in Japanese, American, European and Asian markets, Sony is once again a formidable force in world industry. It will thrive when troubles in the movie business fade from memory.

Similarly, a recovering Japan will play a formidable role in Asia, as what one expert terms the economic “conductor of Asia’s orchestra.” So Americans need to pay more attention to changes in Japan and their implications. If resistance to change has been their failing, self-absorption is ours. We should expand our horizons.