Economic Reform Comes at a Price

The Bridgestone tire scandal isn’t the half of it. A series of defects, product recalls, poisonings and quality lapses at some of Japan’s best-known companies in recent months are outward signs of a seismic shift taking place deep within the economy. Hanging in the balance is Japan’s ability to compete effectively in the 21st century.

The recent string of crimes and misdemeanors are part of Japan’s struggle to transform many of its industries from inefficient backwaters led by insular committees into a globally competitive network of companies answerable to shareholders and the general public.

“What you’re seeing is a transition from a producer- to a consumer-driven system,” said George Fields, visiting management professor at Japan’s Sanno Graduate School of Management and Wharton Business School. “It’s a big change.”

Evidence of this Japanese identity crisis can also be seen in the handling of a crisis once it hits--including denials, lies, paralysis, stony silence, finger-pointing and the confused muddle of corporate foot soldiers diving for cover. Tire maker Bridgestone, which finally broke a long silence this month to admit it should have been watching the store more carefully, is caught up in the latest of several scandals that have added to Japan’s reputation as a country unable to find its feet after a decade-long downturn.

The case has also brought into question how well Japanese companies are managing their overseas subsidiaries. Firestone, a U.S.-based unit of Bridgestone, recalled 6.5 million tires after more than 100 deaths were linked to tread separation, mostly on Ford Explorers.

The Bridgestone debacle follows an admission by Mitsubishi Motors last month that it hid tens of thousands of customer complaints for more than 30 years to avoid costly recalls. Early this month, it compounded the bungling by recalling previously recalled fuel caps.

Corporate sister Mitsubishi Electric followed suit Sept. 12 with its own mea culpa involving television defects. Snow Brand milk products poisoned 14,849 Japanese starting in late June when the company mixed rotten milk powder with fresh milk and sold it to the public. And last fall, Japan’s ambitious nuclear industry was shaken to its core when workers at a nuclear processing plant were caught mixing radioactive material in stainless steel buckets.

Mistakes happen in every company and nation, and each of these cases involves some unique corporate culture and oversight issues. Taken together, however, they reinforce a growing impression overseas that Japan’s long-vaunted quality control was never as good as it seemed.

Japan has long harbored a double standard between the sumo-like global champions Toyota, Sony and Honda and the 85-pound weaklings in its domestic banking, life insurance, construction, farming and retail industries. The Mitsubishi case suggests that even some of the global standard-bearers were putting up a brave front.

Perhaps of greater concern, Japan throughout the years started to believe its own myths. Many second-tier manufacturing companies adopted quality circle and just-in-time delivery systems made famous by Toyota and Honda without understanding the underlying logic.

Management experts say companies acted on the commonly held assumption that Japanese labor was superior by giving employees more control over the shop floor. Yet they failed to enact the less obvious but crucial checks and balances that keep upper level managers at Toyota, for instance, informed and in control.

Some ordinary Japanese, such as 84-year-old Tadashi Fujita, a tax accountant, also see in the recent blizzard of scandals a slackening of Japan’s traditional rigor following decades of wealth--punctuated by a younger generation with a weaker work ethic.

“As a whole, Japanese people’s minds have gotten slack,” he said. “Their focus is too relaxed. They have to respect the country and really think about what it means to be Japanese.”

What’s clear from a global perspective is that many Japanese companies have had a pretty sweet deal for a pretty long time. Coddled behind protective walls, Japanese companies became comfy and even sleepy, free of many of the searing legal, consumer, media, shareholder and regulatory threats faced by their counterparts overseas. This has arguably dulled their edge and made them woefully unprepared when a crisis does hit.

“I call it the zombie syndrome,” said Yasuhiko Ushiba, president of risk management consultancy Ushiba International. “Japan’s overly bureaucratic system leaves people in suspended animation.”

Until a few years ago, for instance, Japanese law put the burden on consumers to prove a product was defective. Without the resources to prove otherwise, most consumers were forced to accept the company’s apology and drop their case. Those who persevered faced huge costs in time and money.

On other fronts, company stock and board seats have been held mostly by insiders who rubber-stamp management decisions. The media have until recently seen individual complainants as troublemakers. And regulators have tended to protect companies--the source of their tax revenue, perks and future jobs--over consumers.

In effect, many companies find their senses anesthetized by a system that caps economic opportunities but also keeps many risks at bay. “Regulation has acted like a cage,” said Tatsumi Tanaka, managing director of Risk Hedge, a consultancy. “You can’t go outside. But no one will come inside the cage either.”

Increasingly, however, globalization and the weaker threads binding Japan’s once tightly knit society are starting to make companies more vulnerable and accountable. Change, as usual in Japan, remains slow. But a new information disclosure law effective next April in theory will give the public more access to corporate information affecting safety and the environment.

“I hope consumers make good use of the law,” said Setsuko Yasuda, former head of the Consumer Union of Japan. “Consumers haven’t had any powerful tools to counter the extraordinary power of corporations.”

Elsewhere, new accounting and disclosure rules should eventually create more demanding, independent shareholders. The media are now willing to cover consumer issues. More layoffs have led to more insider leaks. And the Internet has become an increasingly potent threat, spurred on by a very successful one-man campaign against Toshiba last year that saw the company humiliated after it failed to take seriously a consumer complaint involving a defective VCR.

Yet deep and continued confusion in corporate boardrooms can be seen in the way companies are responding to crisis. Most ignore the cardinal rules of crisis management: Respond quickly, candidly and completely.

Bridgestone President Yoichiro Kaizaki remained silent for weeks as the U.S. crisis intensified, leading to rumors he was cowering in a hotel room. When he finally spoke Sept. 14, Kaizaki’s spirited rebuttal dispelled fears of paralysis, even as he admitted to management problems and a slow response. “We thought it was a Firestone problem, but not our own,” he said.

Chang Yi, analyst at Sumitomo Marine Asset Management, said Japanese managers have been slow to react to threats in their overseas subsidiaries that wouldn’t be a problem in more forgiving Japan, as seen in the Bridgestone case and in earlier sexual harassment charges against Mitsubishi Motors America Inc.

Recently, beleaguered top executives in Japan have displayed a daunting ignorance of their own operations. Mitsubishi Motors President Katsuhiko Kawasoe insisted at a news conference that his company had never knowingly hidden a recall, only to be informed by his own director in front of the national press corps that the company had in fact repaired numerous flawed vehicles without telling regulators.

In similar fashion, a plant manager told Snow Brand President Tetsuro Ishikawa in front of reporters that solidified milk had stuck to a valve in the factory. “Is that true?” Ishikawa asked in obvious disbelief. The clump was later found to be infested with bacteria.

Both companies also repeatedly changed their stories. And Ishikawa compounded his problems by brushing off reporters with the comment: “I haven’t been sleeping.” Many Japanese saw this as arrogant self-pity at a time when thousands were falling ill.

Not everyone has been caught flat-footed.

When extortionists threatened to poison its eyedrops this summer, Santen Pharmaceutical Co. quickly mounted a recall and kept the public informed. Santen has since become a model.

The string of recent crises, meanwhile, has been good news for one group: practitioners of the field known as risk management.

An area virtually nonexistent in most Japanese companies, risk management has seen its time arrive. Seminars are swamped, books are selling well and public relations companies are rushing to bulk up their crisis-management teams.

Meanwhile, corporate Japan continues to struggle.

“The trust of the public at large is now shaken by so many problems,” said Takashi Kiuchi, economic advisor to Shinsei Bank Ltd. “We have to reestablish that, otherwise we can’t build an ordered society.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Can Japan Regain Its Edge?

A string of Japanese failures, cover-ups and other embarrassments reflects an economy in the throes of profound change. A few recent examples:

* Snow Brand milk products poisoned nearly 15,000 Japanese in June when rotten milk powder was mixed with fresh milk.

* Disintegrating tires built by Bridgestone’s U.S. subsidiary, Firestone, are suspected in more than 100 traffic deaths.

* Lax safety practices were blamed for radioactive leaks that contaminated more than 60 Japanese at nuclear processing facility last year.

* Mitsubishi Motors President Katsuhiko Kawasoe, who stepped down earlier this month, took responsibility for a scandal that has resulted in a recall of 620,000 vehicles and a police investigation.