Cozying Up To Keiretsu

U.S. companies are forging close ties with Japan's big business groups

Amid rolling hills outside Nagoya, Toshiba Corp. recently took the wraps off a new $1 billion chipmaking facility that uses ultraviolet lithography to etch circuits less than one micron wide--a tiny fraction mf the width of a human hair. Toshiba aims eventually to turn out next-generation, 64-megabit chips with 70% fewer parts and 40% more efficiency.

A decade ago, such advances would have inspired fear in IBM's boardroom. Not this time. The Toshiba chip site owes much to a strategic alliance with IBM and Siemens of Germany. In fact, IBM's knowhow in chemical mechanical polishing, essential to smoothing the tiny surfaces of multilayered chips, played a critical role. "We had little expertise here," concedes Koichi Suzuki, group executive for Toshiba's semiconductor business.

DENSE WEB. What's more, about 20 IBM engineers will show up in several weeks to transfer the technology back to an IBM-Toshiba joint venture in Manassas, Va., set to open in 1997. In addition to the semiconductor cooperation, IBM and Toshiba also jointly make liquid-crystal display panels--even though the two companies use the LCDs in their fiercely competitive lines of laptop computers. "It's no longer considered a loss of corporate manhood to let others help out," says IBM Asia Pacific President Robert C. Timpson.

What's going on? Call it alliance capitalism. For years, many U.S. tie-ups with Japanese companies tended to be defensive in nature, poorly managed, and far removed from core businesses. Now, the alliances are deepening, taking on increasingly important products and expanding their geographic reach in terms of sales (table). U.S.-Japanese alliances are, for example, popping up everywhere in Asia's emerging but tricky markets, reducing the risks each company faces.

This deepening web of relationships reflects a quiet change in thinking by Japanese and U.S. multinationals in an era when keeping pace with technological change and competing globally have stretched the resources of even the richest companies. "The scale and technology are so great that neither can do it alone," says Jordan D. Lewis, author of The Connected Corporation.

Overall, instances of joint investment in research, products, and distribution by Japanese companies and foreign counterparts, mostly American, have jumped 26%, to 155, in the first quarter of 1996--on top of a 33% increase between 1993 and 1995--according to the Sakura Institute of Research. The American king of the alliance game is IBM Japan, which by itself has about 100 local joint ventures with Japanese companies and $12 billion in sales last year. Other alliances don't involve actual manufacturing: They concentrate instead on working together to win deals, such as for big power plants.

The growing business links add a new dimension to the Washington-Tokyo trade debate, which has long fixated on U.S. trade deficits with Japan. Trouble is, official trade statistics track only the small universe of U.S. products made in America and shipped directly to Japan. They don't capture the value of, say, IBM Japan's notebook computers produced and sold locally or of Motorola Inc.'s pagers peddled in Japan but actually produced in Singapore. In short, trade figures are becoming a less accurate gauge of underlying competitive strengths.

These alliances also blur the difference between corporate and national interests. True, Eastman Kodak Co. has marshaled Clinton Administration trade warriors to back its bid to crack Japan's allegedly rigged market. Yet how many Americans realize that Kodak and archrival Fuji Photo Film Co. have for years collaborated in joint research on a new advanced photo system?

STAKEHOLDERS. And while the U.S. government and American companies with grievances have attacked Japan's industrial groupings, called keiretsu, as exclusionary, other chieftains of Corporate America have quietly become stakeholders of sorts. The list includes companies as diverse as IBM, General Motors, TRW, Boeing, and Caterpillar. All of this "represents a very significant constraint on what the U.S. government can do without hurting its own players," says Yale University professor Mark Mason, author of American Multinationals and Japan. "It's much more difficult to determine policy."

Many American executives who have established these alliances say they appreciate the attributes of Japan's big industrial groups. U.S. managers have always envied the keiretsu edge in spreading risk over a cluster of companies when betting big on a next-generation technology or blitzing emerging markets in Asia. TRW Chairman Joseph T. Gorman, for example, is proud that his company has become a second-tier member of the Toyota and Nissan groups. That means TRW enjoys long-term supplier relationships, but neither Japanese company actually owns equity in TRW. "Both Toyota and Nissan are among the top 10 customers of TRW worldwide," says Gorman.

TECH GAINS. One thing that has changed since the Americans and Japanese first started the alliances decades ago is that U.S. companies are gaining technology, not just giving it away in exchange for access to the Japanese market. They also are attracted by some Japanese partners' ability to supply abundant capital to an alliance.

Much has changed on the Japanese side, too. When confronted with this decade's soaring yen and a high-cost home market, even Japan's strongest companies found collaborating with the enemy useful at times. Last year, GM's sprawling parts division, Delphi Automotive Systems, sold $400 million in parts to Toyota and other Japanese companies--and expects to double that figure in five years.

In fact, Delphi is now the Japanese auto maker's No.1 foreign supplier of parts. It participates in Toyota Motor Corp.'s quarterly kyoho-kai, or keiretsu-member strategy sessions. In an increasingly global market, Toyota "has to look at purchasing parts outside of its keiretsu system," says Delphi Asia-Pacific President William A. Ebbert.

Nobody is suggesting that U.S.-Japan economic rivalry has suddenly vanished. Far from it. Toyota may be peddling GM's Cavalier under its own brand name through dealerships in Japan. But that hasn't stopped GM from setting up a joint venture in Thailand to challenge Toyota's dominance, or from planning to bring a right-hand-drive version of its Saturn sedan to Japan in 1997. IBM is making a serious run at Toshiba's leadership in notebook computers. And while Hewlett-Packard Co. and Canon Inc. share laser technology for printer engines, they still bang heads for sales of the finished product worldwide.

CATCH-UP. In one industry after another, U.S. and Japanese partners are breaking new ground in cooperating. The impact is felt far beyond the U.S. and Japanese home markets. Take the 50-50 joint venture between Caterpillar Inc. and Mitsubishi Heavy Industries Ltd., part of Japan's $200 billion keiretsu of the same name. Early on, Cat wanted a way to sell construction equipment in Japan and compete with rival Komatsu Ltd. on its home turf. Mitsubishi Heavy wanted to play catch-up with Komatsu and expand its export markets.

The alliance played a key role in taming Komatsu. But the partners have broader ambitions than just that. Since Cat shifted all design work for its "300" series of excavators to the partnership back in 1987, the venture's two Japanese factories have emerged as Cat's primary source of production for sales to the fast-growing Asian markets. By teaming up, both sides also could afford to start making transmission casings and cylinders at a plant in Hungary last summer. The parts are 35% cheaper than those made in the West. The alliance's products reach the world market through Cat's network of 186 independent dealers in 197 countries.

Even General Electric Co., which has done well on its own in Japan, found it useful to tap Japan's sprawling trading houses for big-ticket project financing in Asia. Earlier this year, GE and the Japanese trading company Mitsui Bank Ltd. picked up an $85 million contract in China for two steam turbines, with Mitsui playing the role of lead contractor. The two also have teamed up on a major power project in Indonesia. Why join forces with Mitsui? "They're an important source of financing in the region," says Orit Frenkel, GE's senior manager for international trade. In short, Japanese trading companies are offering services to American companies that are similar to what they would offer members of their own keiretsu.

When a Japanese trading company teams up with an American equipment provider, it has the added virtue of allaying Asian concerns that either Japan or America is getting too dominant. That's a particularly useful combination in China. There, Sumitomo and Exxon have joined forces to work on oil and gas development, while Mitsubishi and DuPont have launched a polyethylene manufacturing joint venture.

RIPPLES. Europeans are beginning to voice concern that the deepening pattern of U.S.-Japanese alliances may hurt their interests. While it's true that both American and Japanese companies have some links with European companies, the sheer number of U.S.-Japanese tie-ups is growing faster. "The largest and most sophisticated economies in the world are getting together, and they are getting most of the benefits of this," says Ulrike Schaede, a German who is assistant professor of economics at the Graduate School of International Relations & Pacific Studies at the University of California at San Diego. "The Americans and Japanese are doing this more extensively than any [other] two countries in the world."

So the partnerships are not only reshaping the contours of U.S.-Japanese rivalry in fascinating ways. They're also having surprising ripple effects around the world. As they evolve into even more complex economic webs centering on technology or new markets, the trend "is beginning to push the traditional boundaries of what competition means," says Walter E. Shill, a principal at McKinsey & Co. in Tokyo. Sorting out the winners from the losers will forever be more difficult.