Cracking Japan: Without Targets, It's Just Talk

Earlier this month, a band of prominent economists sent an open letter to Bill Clinton and Morihiro Hosokawa, urging the President to forget about numerical trade targets and advising Japan's Prime Minister to resist them. Let's hope they don't listen. Snaps David Hytha, managing director of wireless systems at AT&T Japan Ltd.: "Economists have yet to unveil a model that makes sense of Japan."

Well put. For two decades, Japan's incessant trade surpluses have defied every macroeconomic prediction and prescription. They have damaged key areas of U.S. manufacturing and soured American goodwill toward Japan. Even Japanese now question the wisdom of past trade policies. "What do people mean by Japan's success in America?" muses Takashi Kiuchi, chairman of Mitsubishi Electric America Inc. "We have very little support in the U.S. community."

Despite the objections of free-market economists, trade agreements with explicit goals stand out as the only bright spots in this grim record. Take the U.S.-Japan chip accord of 1986, which combined market-opening steps with a goal of 20% foreign share in Japan. Before the pact, recalls William O. Howe, an Intel Corp. director and former president of its Japanese unit, "there was a lot of sentiment that Intel would never make a dime in Japan, so why bother?" In the accord's wake, combined U.S. chip sales in Japan have tripled, to more than $3 billion.

MUCH TO DO. No wonder American managers in other high-tech sectors are intent on duplicating that success. "Measurable results" has become a rallying cry for U.S. negotiators in the so-called Framework talks in Tokyo in mid-October. As the discussions advance toward a January deadline, the U.S. will experiment with various approaches for measuring success in areas such as computers, telecommunications, and medical equipment.

In some sectors, nothing more is needed than strengthening an existing agreement. In 1992, for example, Japan pledged to give American computer companies a fairer crack at Japanese government contracts--a market worth as much as $10 billion a year. The figure includes billions of dollars worth of high-end gear for government offices. But the accord should be expanded to include thousands of personal computers Japan intends to install in public schools throughout the country. Some of those will be paid for by a slice of Japan's new, $120 billion pump-priming package. Companies such as Apple Computer Inc. and IBM argue that 40% of those outlays could be devoted to buying American PCs, which are competitive by any measure of price and performance.

Market-share goals may be the only way to tackle emerging-technology areas that will soon account for billions in sales. Take the fast-moving field of digital telecommunications. Over the next two years, Japan's postal authorities will start parceling out radio frequencies for the next generation of digital cordless telephones, known as handyphones. Soon after that, quasi-governmental Nippon Telegraph & Telephone Corp. could begin massive investments in fiber-optic phone and data highways. While U.S. companies such as American Telephone & Telegraph Co. and Motorola Inc. are leaders in both areas, neither superior technology nor marketing brilliance guarantees results. Only a bilateral deal is likely to do so. "You obviously can't set sales goals for products that don't exist," says a source close to the Framework talks. "Market-share targets may be the only solution."

Setting such targets is less of a problem than economists may think. Typically, negotiators study U.S. industry performance in a "neutral" market, where American and Japanese companies are evenly matched, and then contrast it with how U.S. companies fare in Japan. The results are rarely satisfactory to the U.S. Today, American suppliers of ultrasound, computer tomography, magnetic-resonance imaging, and other medical gear have a 21% stake of the $10 billion Japanese market. Sounds pretty good--until you consider that America's worldwide share, not including the U.S., is 49%.

Of course, market-share goals shouldn't overwhelm other tactics. In some cases, counting share points could prevent U.S. companies from exploiting fields where they have an edge. Take cable TV and all the digital services it promises. In Japan, regulatory excesses have created a landscape of struggling cable companies as stunted as a bonsai garden. That has opened a window for giants such as Time Warner, Nynex, and Britain's Cable & Wireless, which are coaching Japan on how to diversify cable programming. Now that they're in on the ground floor, U.S. business could take off as long as there is a level playing field. "Our primary interest is deregulation," says William H. Crawley, managing director of Nynex Corp.'s Japan unit.

But U.S. products that thrive without Washington pushing for specific results in Japan are the exception. In most cases, numerical targets are the best--indeed the only--way to go.

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