Not Made In Japan

Heard of DoCoMo? Probably not, unless you happen to live in Japan. NTT DoCoMo is one of the world's biggest wireless phone companies. It operates in a ferociously competitive market, boasts about 50 million customers and has been known to produce cutting-edge technology. By all rights it ought to be a star performer in the increasingly global business of wireless communications. Yet DoCoMo's brand is still virtually unknown outside its home country. This is one story that could've had a very different ending. At the turn of the century, DoCoMo executives announced they were setting out to conquer the world. Their company's star mobile Internet application, known as i-mode, was leading the pack in its home market, and DoCoMo planned to leverage that success into a bid to dictate wireless Internet standards around the world. The company went on a buying spree, trying to gain footholds by purchasing stakes in overseas companies—stakes that soon made for painful losses, and not much else, when the dot-com bubble popped soon thereafter.

The would-be worldbeater proved tone-deaf. DoCoMo was so enraptured with its state-of-the-art Internet service that it failed to notice that the long, intricate menus favored by Japanese consumers didn't impress foreign customers who were looking for more-intuitive interfaces. One reason for the failure to communicate: not a single person in senior management was non-Japanese. "With the right approach they could have become a Google," says Gerhard Fasol of the Tokyo consultancy Eurotechnology Japan. "They had the chance—but they blew it."

The fall of DoCoMo is only the most recent chapter in a long tale of Japanese innovation failures over the past two decades—a huge irony, since the country remains a technological powerhouse. If you exult in brilliantly bizarre gadgetry, engineering wonkery and prodigious feats of craftsmanship, you'll feel right at home. It's also an extremely sophisticated business environment, with a big and nuanced domestic market. On the face of things, it would seem to add up to an entrepreneurial paradise. Japan spent $130 billion on R&D in 2006 (as a percentage of GDP, more than the United States or the EU, putting it in third place behind Sweden and Finland). It registers more patents than any other country—even more than the United States. But these days, big business, academia, think tanks, government and the media, as well as the average Japanese salaryman, are all brooding about the state of their economy in the digital era: the educational system is going down the tubes, generating math and science scores that increasingly lag behind other democracies. The government is gridlocked, stalling urgently needed economic reform. Managers are mired in old mentalities, while imaginative newcomers can't find the space or the capital to develop ideas. It's a syndrome that's sometimes summed up in a single, angst-ridden question: how come we weren't the ones who invented the iPod?

It isn't just the iPod as a cool gadget that keeps the Japanese awake at nights. It's the iPod (and its relative the iPhone, soon to debut in Japan) as the symbol of a new way of doing business. While Japanese companies like DoCoMo, NEC, Sony and the like struggle with incremental improvement, competitors like Apple and Google are fusing innovative technology with great marketing, design and distribution to create entirely new product categories. Japanese bloggers and commentators routinely invoke Apple's success as a wake-up call for a country that once ruled the consumer-electronics market. Masamitsu Sakurai, the chairman of Ricoh and head of one of Japan's leading industrial associations, shocked listeners in a recent speech that held up the iPod as an example of an innovative Western product that Japan can't emulate because of its outmoded management.

There are many who would write off this sort of talk as hyperbole. Japan, they argue, has a long track record of innovation. "Lean manufacturing," low-mileage cars and Toyota's Prius hybrid must surely count for something. They also note that Japan is the land of Sony, a company that once represented, in the persons of its legendary cofounders, Masaru Ibuka and Akio Morita, the perfect fusion of engineering and marketing savvy.

But that was then. One reason Apple so galls the Japanese is that it's displaced Sony as the leading innovator in consumer electronics. Sony's last truly big thing was the Walkman, and many non-Japanese aren't even aware the Walkman still exists—as a digital music player competing feebly against the iPod. The lithe Sony of Morita's day has given way to a fat conglomerate, with interests in everything from finance to movies, that stumbles over its own feet. Because Sony has its own music division, its executives guard their copyrights, so they set up a distribution system much less open than Apple's. That's one reason the Walkman holds a 23 percent market share in Japan, compared with the iPod's 58 percent share.

The innovation crisis is in large part rooted in the country's peculiar corporate culture. Japan Inc. still remains dominated by big, vertically integrated dinosaurs with little maneuverability and a marked disinclination to creativity. Sony CEO Howard Stringer was brought in from America to shake things up in 2005 and has acknowledged his struggle ever since to break down the barriers between company divisions. The strict hierarchies of Japanese companies discourage people with radical new ideas. One notorious example involves Shuji Nakamura, the scientist who invented a revolutionary energy-saving blue-diode light source only to find himself mired in years of litigation as he struggled to extract royalties from the company that had profited from his invention. Nakamura ultimately abandoned Japan for California. Fasol recalls asking scientists at the University of Tokyo if they considered his departure a blow. " 'Not at all,' they told me. 'It might be good to have someone more ordinary'." Sergey Brin and Larry Page, the cofounders of Google, wouldn't have stood a chance in Japan.

Nor would Google's remarkable culture of chaotic cross-pollination. In Japan, boundaries between groups (even inside companies) are clearly defined and hard to cross. Carl Kay, a U.S. consultant who has spent years analyzing Japanese service companies, recalls encountering several representatives of a Japanese computer maker at an Internet conference in the United States back in 1995. "We went to Starbucks together, and they said, 'We don't get it. Why would we want to use the Internet to talk to people outside of the company?' " Insular Japanese companies are evidently ill poised to craft the sort of personalized, culturally specific content that is at the heart of much of technology and telecom development today.

Takahiro Fujimoto, an economics professor at the University of Tokyo, offers another theory: PCs, software and hybrid gadgets like the iPod are "modular" products, made up of existing components that "people mix and match in an innovative way." The Japanese tend to excel at "integral" products like cars, with components designed from scratch. "We are not good at dealing with genius individuals," Fujimoto says. "We're good at teams."

One intriguing exception: Nintendo, whose easy-to-use interactive Wii console has enabled it to break away from rivals like Microsoft and Sony. But Nintendo is also the exception that proves the rule—it has cultivated an outsider image and pursued a strategy of tapping consumer groups traditionally uninterested in gaming. It's no accident that Nintendo, like several other more innovative companies, is based in Kyoto—far from staid Tokyo.

The cautionary tale of DoCoMo continues to be relevant. Today it is trapped in a domestic market with a diminishing population, watching as its nimbler rivals at home grab an ever-bigger piece of the shrinking mobile pie. Its only hope for decisive growth would have been to leapfrog into the global market. But it didn't happen. Just three years ago the value of DoCoMo's shares amounted to about 10 times that of Nokia's. Today Nokia (based in Finland, with its population of 5 million versus Japan's 127 million) has a market cap more than double that of DoCoMo's. That puts Nokia in the realm of other global giants like Apple and Google.

The lesson for the Japanese isn't necessarily to be more like Americans. But they will have to change decisively. Over the next century, disruptive innovations won't be coming only from countries like the United States. They'll also be emerging from dynamic, hungry, rising economies that offer plenty of room for risk-taking, flights of fancy and cross-border synthesis. If the Japanese want to be a part of that club, they'll have to revamp not only how they think about technology, but how they think about themselves.

Not Made In Japan | Business