After Hours

Keiretsu dynasties give way to global changes

International business forces are leading to historic shifts in Japan's corporate culture, philosophy and workplace.

Stay on top of the latest tech news with our free IT News Digest newsletter, delivered each weekday. Automatically sign up today!

By Michael Kanellos
CNET News.com

TOKYO—Staring out the window from the heights of NEC's corporate headquarters here, a visitor is flooded with impressions: oceans of skyscrapers extending in all directions, thousands of trains and taxis, the looming mass of Mount Fuji in the distance—and countless rows of desks of quiet employees toiling deep into the night.

The Japanese corporate work ethic, instilled during the country's postwar industrial rise, remains firmly intact despite the economic gyrations of the last two decades. Employees arrive each morning between 8 a.m. and 9 a.m. but typically stay well past the official closing time of 5:30 p.m. or 6 p.m. Leaving at 9 p.m. or later is fairly common, as is blowing off steam over beer or sake at a yakitori grill before finally taking the train home.

Hire learning

Despite outward appearances, however, companies are grappling with major changes that could forever alter the composition and philosophy of Japanese business.

Large corporations are fusing historic strengths in engineering with leaner and faster Western management concepts. That's a dramatic reversal to anyone who remembers the lionization of Tokyo conglomerates only a couple of decades ago, when U.S. businesses experimented with such distinctly Japanese practices as morning calisthenics.

The keiretsu way is fading
These efforts are part of a once-unthinkable shift in Japanese corporate direction that's questioning the relevance of the system of business that evolved from the country's feudal roots: keiretsu, an oligarchy that encouraged subsidiaries of a conglomerate to give contracts to sister companies. As recently as five years ago, nearly 70 percent of contracts were awarded to related subsidiaries, according to the Japan External Trade Organization. But that figure is closer to 20 percent today.

"The long-term business relationships, once considered a distinction of Japanese business, are dramatically declining," said Naoyuki Haraoka, chief executive director of the trade organization's San Francisco office.

Changes in corporate relationships have been made necessary by tectonic shifts in the global economy. Japan can no longer confine its business dealings to domestic companies as China, South Korea and other countries increasingly find ways to produce competitive products with more efficiency and at much lower prices.

Japan's rising sun
'Cool factor'
Companies face major tests in
products such as digital
cameras, high-end television
sets and DVD players.

A significant reason for such gains by foreign counterparts is the prolific production of engineers from their university systems, an area once dominated by Japan among all Asian countries. Because of this technological brain drain, economists say, Japan's relative number of engineers and scientists has fallen considerably below what it needs to support a graying population in a growing world.

"It is a very serious problem. The government recognizes the situation and is making polices to encourage students to go into the sciences," said Jun'ichi Sone, general manager of the Fundamental and Environmental Research Laboratories at NEC. "Otherwise, we have no future in Japan. We have no natural resources."

Radical changes for 'salarymen'
The changes sweeping Japan's business and technology landscape are being felt on a very personal level by the legions of white-collar workers known as "salarymen" who have driven many of the country's industries for decades. One of the more controversial experiments involves the Western-style concept of pay raises based on merit, not just seniority.

"Nenko joretsu," the seniority system in which companies gauge compensation by length of employment rather than by merit or ability, has widened the gap between engineers and management. For the past 10 years, several companies have tried to create merit-pay programs, but the idea still has not completely been accepted.

"In some cases, it has worked. In some cases, it has not worked as well as we hoped, so we are reviewing it once again to make it better," said Akira Yamanaka, corporate vice president of Fujitsu's server group. "We are trying to move to a more flat organization and to clarify what is each individual's mission or job."

Therein lies perhaps the most daunting challenge of all for those seeking to change the deeply ingrained culture of Japanese business: introducing a Western concept of self to a system that has historically emphasized institutions, not individuals.

Bigger not always better
Contributing to its sense of anonymity has been the size of Japan's conglomerates, which still tend to be far larger than those of other countries. Panasonic has 290,000 employees, and Hitachi has more than 300,000. By contrast, IBM has about the same number of workers but reports far higher profits. Hewlett-Packard employs about 140,000, while Intel and Dell have fewer than 100,000.

Starting in October, Fujitsu began a process to define a person's duties within a company more specifically, as well as to identify the supervisor to whom an employee reports. (In a development that might not be related, Fujitsu has seen its sales of servers to companies outside Japan grow 190 percent during this same period, albeit from a small base.)

"In Japan, it has been rather ambiguous what kind of mission an individual had," Yamanaka said. "They had a stronger sense of belonging to a company."

In this process of self-discovery, Japanese companies have encountered other issues affecting individuals in the work force, such as the conundrums facing working mothers. The number of women in the work force increased by 60.8 percent from 1980 to 2003, according to the Ministry of Health, Labour and Welfare. But many companies don't have maternity leave policies, so mothers who want to return to the workplace must reapply for their old jobs, said Haraoka of the Japan External Trade Organization.

Falling behind in population
The concept of day care is almost unknown in Japan, executives and workers say. Once women have children, they must live near home so that grandparents can take care of the kids, or they must simply quit working. Partly because of this, Japanese women are increasingly starting families later and having fewer children, a situation that will further exacerbate the country's low birth rate and aging population.

Japan's fertility rate in 2003 was 1.29 children per woman, government figures show. By 2050, the country's population could drop from 127 million today to 100 million. The global population is expected to rise from 6.1 billion to 9 billion in that time frame, according to the Population Division of the Department of Economic and Social Affairs at the United Nations.

"The population is perhaps the biggest problem," Haraoka said. "It is declining."

For the high-tech industry, that means the country isn't producing enough scientists and engineers. Companies such as NEC have begun to increase the number of engineers they hire from Russia, South Korea and elsewhere to fill the void.

"Rather than taking the lead, Japan is losing ground to the United States in advanced technology and interdisciplinary fields, including IT and the life sciences," the Ministry of Education, Culture Sports, Science and Technology wrote in its annual report on technology. "In light of a future trend toward an aged society with fewer children...it is an urgent task (to) attract high-caliber personnel into the world of science and technology."

The decline of engineers and scientists entering the work force derives from a number of factors, many of which are familiar in the United States and Western Europe. Science and engineering, which remain scholastically demanding disciplines, tend to be unattractive as majors. Business graduates, particularly those who go on to earn master's degrees, can often get higher salaries in other fields.

Lack of discipline blamed
Yet executives here say some of the issues in Japan are unique to the country's academic system. Two decades ago, they say, students relentlessly plowed through calculations and exercises in a curriculum heavy in repetition and memory that began at young ages. The educational establishment then shifted the emphasis to creativity, the arts and problem solving—a move that critics say dampened interest in hard sciences.

"We're losing the ability and interest of small children," said Fumio Ueno, an executive in Toshiba's Display Devices & Components Control Center whose own technological prowess is evident in his work to develop a small fuel cell for MP3 players and handheld devices. During the dot-com bubble, he added, "people learned they can make a lot of money in the stock market."

Others say Japan must strengthen the ties between its universities and private enterprises, developing relationships similar to the kind of U.S. pipelines that have led to the creation of companies ranging from Sun Microsystems to Google.

"Some companies sponsor university research, but it is not as embedded in the structure as it is in the U.S., Europe or Taiwan," said Douglas Sparks, a consultant at DSK Associates. For example, he said, Taiwan's National University has nearly doubled its faculty in the past three years and erected several new buildings that bear the names of local technology giants.

Japanese companies are also aware that they must pay more attention to those engineers already on their payroll. Fujitsu is planning a program to provide a richer in-house professional career path for engineers, allowing them to get pay raises and promotions without moving to management positions that do not make the best use of their technical talents.

Here again, Western business philosophy comes into play, in a form that is distinctly Silicon Valley: invention of the next big thing.

"In the U.S., there are many stories of the engineer realizing the American dream," Yamanaka said. "In Japan, there aren't as many."

Editor's Picks

Free Newsletters, In your Inbox