Why Apple Isn't Japanese

Ever 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 have had a very different ending. At the turn of the century DoCoMo executives announced that 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 New Economy bubble popped soon thereafter.

The would-be worldbeater proved tone-deaf. DoCoMo managers were so enraptured with their state-of-the-art Internet service that they failed to notice that the long and intricate menus favored by Japanese consumers didn't score with foreign customers who were looking for more direct and intuitive interfaces. One reason for the failure to communicate: not a single person in the senior management of the company 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 story in a long tale of Japanese innovation failures over the past two decades—a huge irony, given that Japan is 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. The Japanese domestic market is big and nuanced; Japanese consumers are notoriously finicky and demanding.

On the face of things, it would all seem to add up to an entrepreneurial paradise, a playground of creativity and innovation. Japan spent $130 billion on research and development last year (more as a percentage of GDP than the United States or the EU, putting it in third place globally behind Sweden and Finland). It registers, far and away, more patents than any other country—even more than the United States, with more than twice the population.

So you'd think Japan would be confident about its technological future, but you'd be wrong. 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, it's said, generating math and science scores that increasingly lag behind other OECD countries. 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 their 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 supersuccessful symbol of a new way of doing business that causes the hand-wringing. 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.

That's precisely what unnerves the Japanese. Bloggers and commentators routinely invoke Apple's success as a wake-up call for a country that once ruled the world's consumer-electronics market. Masamitsu Sakurai, the chairman of office-equipment maker Ricoh and head of one of Japan's leading industrial associations, shocked members of his group with a recent speech that held up the iPod as an example of an innovative Western product that Japan is finding hard to emulate because of its outmoded management.

There are many who would write off this sort of talk as heretical hyperbole. Japan, they argue, has a long track record as a country 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 galls the Japanese so is that it has 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 that 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 are jealous of 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, while iPod holds a 58 percent share, according to market researcher BCN.

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 been struggling ever since to break down the barriers between company divisions.

The strict hierarchies of Japanese companies discourage people with radical new ideas. As James Mok of the Tokyo software consulting firm Apriso notes, "In the U.S. it's much easier to spin off the results of a particular project as a separate business." In Japan, a risk-averse culture makes it harder. Mok recently penned a study called "How the Japanese IT Industry Destroys Talent."

One notorious case in point involves Shuji Nakamura, the brilliant 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 royalty payments 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. " 'No, not at all,' they told me. 'It might be good to have someone more ordinary'." Sergey Brin and Larry Page, the youthful, productively offbeat 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 leading Japanese computer maker at an Internet conference back in the United States 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 telecoms development today. But even straight-ahead research

is problematic. Stodgy government labs and big corporate research centers don't have great track records. Back in the 1980s the Japanese government spent hundreds of millions of dollars on a now forgotten project called the "Fifth Generation Computer." Americans, still reeling from Japan's stunning rise in cars and consumer electronics, watched with anxiety. In 1984, one U.S. computer magazine pronounced portentously: "The Japanese are planning the miracle product. It will come not from their mines, their wells, their fields, or even their seas. It comes instead from their brains."

Apparently, it's still there. Indeed, all too often Japan's technological prowess comes to a screeching halt when it comes to developing computers or the programs that run on them. "Japan was a technological powerhouse in the predigital world," says Keith Woolcock, a global tech strategist at Westhall Capital in London. "But they've never been a dominant computer maker. And the computer, linked with the Internet, is now the armature around which the whole world revolves." There are no Japanese operating systems; Toshiba, the laptop pioneer, is no longer a player in the PC market.

The reasons for this run deeper than a dysfunctional corporate culture. Among the problems: promotion based strictly on seniority (resulting in managers with little training in information technology), and a near-complete disconnect between universities and the corporate sector.

Takahiro Fujimoto, an economics professor at the University of Tokyo, poses another theory: that personal computers, 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 customized components designed from scratch. "When you need this kind of activity, it's likely that people will be working on the same floor for a long time as a team," says Fujimoto. "We are not good at dealing with genius individuals—we're good at teams." That consensus-oriented approach tends to preclude the sorts of disruptive innovation that companies like Google throw off practically at will.

One intriguing exception: Nintendo, the gaming company whose remarkable, easy-to-use Wii console has enabled it to break away from more-conventional rivals like Microsoft and Sony. But Nintendo is also the exception that proves the rule—it has cultivated an outsider image and pursued a distinctive 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 away from staid Tokyo.

The insularity issue, which underscores so much of the innovation problem, has reached a boiling point. One of Japan's leading business papers, The Nikkei, published a piece earlier this year describing how a senior executive at Sanyo Electric had an idea similar to the iPod back in 1997; when he tried to form an alliance with Apple to explore the technology, his company's own chairman refused. Today, the story noted, Sanyo is struggling to survive. The paper went on to point out that Japanese electronics companies depend to a large degree on sales to regulated industries and the government. The world's second biggest market, protected by the Japanese language and its own cloistered standards, offers many companies a profitable sanctuary. But, as the article concluded, Japanese companies must ultimately "face globalization."

Of course, Japan's obsessive, incremental approach to innovation is a perfectly good way to run some companies. Japanese steelmakers have a proprietary technology that makes their high-tech steel untouchable by Korean and Chinese competitors. They keep trying to close the gap, but the Japanese, given their extraordinary attention to detail, could very well manage to keep a few steps ahead—enough to maintain crucial comparative advantage.

Japan abounds with this sort of almost artisanal industrial company. Toyota's famous production philosophy of kaizen, or continuous improvement, is perhaps the ultimate example—a system where workers are constantly proposing small improvements that perpetually bring the manufacturing process closer to perfection. Over the short term, says Fujimoto, Japan shouldn't be afraid to maintain focus on those areas where it truly excels. But over the longer term, he warns, something will have to give. Growth industries, like technology, aren't about incremental improvement—they are about making big bets, and finding the next new new thing.

At this point, it is worth taking another look at the cautionary tale of DoCoMo. 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, thanks mainly to the company's limited cultural horizons and unimaginative management. 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 a population of 5 million versus Japan's 127 million) has a market capitalization more than double that of DoCoMo's. That puts Nokia in the realm of other global giants like Apple, Google and Vodafone. And just look at who tops the list: China Mobile.

This drives home the point that the lesson for "them" (the Japanese) isn't necessarily that they should be more like "us" (the Americans). It's merely to warn that some serious adjustments might be in order. 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.

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