T. Boone Pickens: The Heck With Japanese Business -- Texas Entrepreneur Not Interested In Competing In A Cartel System
OK, Toyota; OK, Koito; I give up. After more than two years as the largest shareholder in Koito Manufacturing, it has become clear to me that you will never grant my request for representation on Koito's board. And I'm not interested in being a 26 percent owner in a company in which I have no influence.
As an oil man I've drilled my share of dry holes, but I've always prided myself in knowing when to plug them. I have decided to sell Boone Co.'s stake in Koito back to its former owner. Koito is known as one of the world's premier auto-lighting manufacturers, and I had hoped to make it still more profitable. But now I realize I can't fight Japan's cartel system that keeps Koito, and many others like it, captive.
I won't realize a profit on the deal, but I have learned an important lesson. It is this: As good as it is, Japan's industry is not necessarily smarter, more agile and more efficient than ours - it is simply based on business practices that the United States spurned almost a century ago when we outlawed trusts, monopolies and cartels. We never said those practices didn't work - the question was, work for whom and at what cost?
Sure, I know why the Japanese prize their system of corporate cartels. Cartels give executives more control over everything from suppliers to the market. In Japan cartels go by the special name of keiretsus - interlocking webs of share ownership and corporate board memberships that give a handful of Japanese corporations virtually feudal control over vast networks of suppliers and workers.
Cartels may be good for business, but ultimately, they limit consumer choices and increase prices. Unfortunately, since the competitors have to be squeezed out first - and while the squeezing is going on, prices often fall sharply - the consumers are the last to recognize what is happening. Anyone who reads the business section of a newspaper should recognize that this process is already under way in important sectors of U.S. industry, including, as I discovered, the auto-parts industry. I didn't go looking for a deal in Japan. It came looking for me.
In early 1989, a Japanese entrepreneur, Kitaro Watanabe, traveled to Texas and offered to sell me a large share of Koito. He had acquired the shares from the Koito family, reportedly frustrated as their family business fell under Toyota's control.
It isn't clear if Watanabe offered to sell his stock to Toyota, as it alleged. What is clear is that he realized Toyota was too big for him to fight alone. Because Japan's system offers few avenues for dissent, opposition often comes from abroad. So Watanabe found his way to Texas, and I soon found my way to Tokyo.
Boone Co.'s interests were like those of other shareholders: We wanted the company to prosper so we could profit. We hoped to expand Koito overseas and to review the company's pricing policies whereby Toyota, as Koito's keiretsu boss, enforced preferential pricing for itself. (In the days of America's trusts this was called a "cram-down.") Putting an end to Toyota's cram-down pricing would have made Koito's profit soar.
My first trip to Japan (likened by the Japanese press to the arrival of Commodore Matthew Perry's "Black Ships" in the 1850s) differed from those that followed in only one way - it started out friendly. Takao Matsuura, Koito's president and former Toyota manager for 28 years, assured me he would give our request for representation on Koito's board full consideration. In our only substantive agreement that day, he asked that in talking to the media I portray our meeting as strictly introductory. He pledged to do the same, as he assured me was Japanese custom.
But Matsuura promptly held a news conference and announced that Koito rejected Boone Co.'s request for board representation. That introduction to the "polite" Japanese business culture was the last time Matsuura agreed to meet his company's largest shareholder.
We have fought in Tokyo courts for two years just to review documents that Japanese law says any shareholder of more than 10 percent has a right to see. But our most telling experience was last summer's annual shareholders' meeting where I and 40 other Americans were heckled by Japanese shareholders with anti-American taunts. (When a female member of our group, former Reagan administration official Michele Laxalt, rose to ask a question, she was met by a full four minutes of jeers including, "What's your real job? You are a stripper, aren't you?") Matsuura allowed the meeting to get so out of control we couldn't present our proposals; we left in disgust. The Japanese, quick to call any American criticism Japan-bashing, offered no apology.
We had requested meetings with Koito's major shareholders and other prominent business and government leaders to present our case. Tokyo's airport must have been busy that day, because every one of them claimed to be out of town. The few Japanese businessmen who met with us led us through narrow alleys to basement pubs of the Rappongi district where they shared their experiences fighting keiretsu from within Japan.
One brave Japanese businessman, who wrote to me supporting Boone Co.'s efforts, later testified before the U.S. House Judiciary Committee. Positioned behind a screen to protect his identity, he told how his auto-parts business started out making parts for a number of companies. One company gradually became his largest customer and offered to "improve" his supply process, sending quality-control officers, then auditors, then board directors.
Eventually his company was held captive, its profit margins set by the keiretsu along with every other facet of the business. Asked why he didn't break away, he explained, "No one else would buy from me. All my family wealth is in my company. It would be economic suicide."
Even more alarming for our own economy is that his story is similar to one told to me by a Chicago manufacturer. His company, having previously sold parts in Japan with some success, approached a large Japanese auto "transplant" company in the Midwest in hopes of securing a contract. The Japanese company required the American to enter into a joint venture with one of its Japanese suppliers. Quickly the plant was overloaded with four times the expected orders.
This may appear at first blush to be a high-class problem, but the Japanese company had put him right where they wanted him. He either had to put in new capital or go bankrupt. Now that he had been sucked in, the cram-down could be enforced and his profit margin shrank to a pittance. "Get out," a Japanese friend told him. "This is how they work. In the end they control you, because you can't get out without suffering economic disaster."
The story related by the Chicago manufacturer is told by hundreds of small businessmen in Japan and an increasing number of Americans. In a report, the Mid-America Project, a group of unions based in Ohio and Kentucky, identifies 61 companies in Toyota's American keiretsu and 60 companies in Nissan's. It's not a story with a happy ending if you're prone to cheering for the little guy.
The success of keiretsu is its ability to lock Americans out of Japanese markets while eliminating competitors in the United States. According to Michael Farren, undersecretary of commerce for international trade, Japan exported more than $11 billion in auto parts to the United States in the past two years while allowing only $640 million worth of U.S. parts into Japan.
Some may say keiretsu has won again as I leave Japan. But I hope my experience with Toyota and Koito will pay off by heightening the already growing interest in how Japan's cartels are operating. I've recently submitted testimony to the U.S. Federal Trade Commission, which is investigating whether Japan is violating our antitrust laws by exporting its keiretsu system to the United States.
Congress is also getting more interested in pursuing Internal Revenue Service reports that Japan is dodging up to $34 billion in U.S. taxes each year by under-reporting the earnings of keiretsu-member companies. And U.S. trade negotiators have succeeded in getting a pledge from Japan to make keiretsu "more transparent" by requiring disclosure of company ties. Now U.S. negotiators must make them honor their pledge.
More broadly, the United States should resolve that our antitrust laws are essential to our free-enterprise system and that they will be enforced wherever American commerce is at work.
Maybe we should sit down with the Japanese, show them a copy of the free-trade agreement with Canada and tell them we need to negotiate something similar. Investment-reciprocity requirements would be the first place to start.
T. Boone Pickens is president of the Boone Co. and founder of the United Shareholders Association.
(Copyright 1991, The Washington Post)
Copyright (c) 1991 Seattle Times Company, All Rights Reserved.