Look who's innovating: Japan continues to blaze trails but with a lower profile

A worker at Fujitsu's Aizu-Wakamatsu semiconductor plant checks a crop of lettuce in a renovated clean room once used to make mobile phone chips. Credit: Image credit: Fujitsu

Even though Japan is still the third-largest economy in the world you don't hear about it anymore, but that doesn't mean it stopped innovating

If you were of age in the 1980s, then you remember the handwringing over Japan Inc. That was the term used to describe the close-knit connections between the Japanese government and businesses (known as "keiretsu") back then that many felt gave Japan an unfair advantage.

There was hyperventilating as Toyota and Honda blew past GM and Ford in popularity. When Victor Company invented the VCR, they didn't even try to bring it to market, they just sold out to Japan and became JVC. And people practically blew a gasket when The Rockefeller Group sold out its New York City holdings to Mitsubishi Estate Company of Tokyo in 1989.

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Thirty years later, do you even remember Japan? It's right where we left it, at the western edge of the Pacific Ocean, not far from Korea and China. But judging by the amount of news it gets, Japan seems all but forgotten except for the 2011 tragedy.

The most recent example would be the aerospace business. The world's largest air show, The Farnborough Airshow, recently took place in England. There was tons of talk about sales for Boeing and Airbus, but did you hear a word about the soon-to-be launched Mitsubishi Regional Jet? This is Mitsubishi's first commercial offering in 50 years and it will be used by Eastern Airlines as it attempts to restart one more time. But not a word in the American press except in Seattle, and that's because the plane will be tested in that state.

Japan has gone from being the economic Godzilla to economic Godzuki, at least in terms of perception, and it bears much of the blame for that because of its closed off nature. Japan is still the third-largest economy in the world after the U.S. and China, impressive for a nation of just 120 million. You don't hear about it anymore, but that doesn't mean it stopped innovating. Economic turtling After the roaring '80s, the country hit the economic doldrums that led to what was called "The lost decade." That is usually said in reference to the 1990s when Japan's economy flatlined following the collapse of its real estate market. The problem is the Lost Decade stretched for two decades and Japan withdrew into itself like a turtle. "The truth is that Japan's rapid growth days are way behind it. China is where the economic growth, at least for now, will continue. That's a function of Japan being a mature economy, and all such economies have slowed in growth. It's also the function of a rapidly aging society," said Maria Toyoda, Professor of Political Science at Villanova University and a visiting professor at Kyushu University's Art, Science and Technology Center for Cooperative Research (KASTEC). Two decades of no growth also have to do with the large debt overhang following the banking collapse of the early 1990s and the bursting of the bubble economy, she added. "A lot of consumers pulled back on spending because of that debt. So did corporations. Now, balance sheets have recovered, people and corporations are spending and investing again, and [Prime Minister Shinzo] Abe is reaping some of the political benefits. Of course, the massive quantitative easing is helping too," she said. The reason Japan took so long to recover is that it is a closed system. Japan has among the lowest foreign direct investment/GDP ratios in the world because the nation is reluctant to let foreign interests invest or buy its companies. Foreign investment to GDP is just 3.5% compared to 25% in the U.S. and 50% in England. "Japan could have spared itself two lost decades if it had done more to open its economy to the outside world," said Fariborz Ghadar, a professor at the Smeal School of Business at Penn State and Senior Advisor and Distinguished Senior Scholar at the Center for Strategic and International Affairs. Outside investment can pay off well. Nissan Motor Co. is a major example of that. In 1999, with the company in dire financial difficulty, it entered into an alliance with Renault S.A. of France. Both companies maintained their separate culture but also owned a piece of each other. Renault executive Carlos Ghosn took over Nissan and was instrumental in turning the company around, partly because he didn't do things the Japanese way. Hard sell All of this makes one thing pretty clear: Japan often struggles to relate to the world beyond its shores. Many firms don't try, said Mikako Kitagawa, a Gartner analyst and native of Japan. "They think that outside of Japan is a completely different world," she said. "Some companies are looking outside of Japan but most just think about selling outside Japan and never do. The Japanese market is shrinking, so if you stay in that market you will not survive." As an example of Japanese executives not thinking beyond their country, Kitagawa pointed to the success of car maker Subaru. Subaru is very popular in the U.S. and there is a backlog of orders. It's also a subsidiary of Fuji Heavy Industries, which didn't think the cars would take off, so they didn't allow Subaru U.S. to increase in manufacturing lines. "Execs don't believe it's popular so they don't want to invest in the Indiana manufacturing plant. They don't see it in Japan, so they can't believe it's popular in the U.S. That's an example of older execs not knowing what's going on outside Japan, and they are missing an opportunity big time," she said. Newer firms, led by younger, more Internet-savvy executives who know about the world beyond their borders, are reaching out worldwide, Kitagawa notes. Software maker Line and clothing store Uniqlo are making an international reach. Uniqlo entered the market with a bang, opening its San Francisco store by using the Internet sensation Maru the cat as its pitchman. The challenge for the younger, more worldly generation is getting this through to their elders. In Japan, respect for elders is sacrosanct and leaves Gen-X/Gen-Y business people in a lurch. "A lot of companies have seniors execs in their 60s and 70s and they are not innovative in general. It's really difficult for a person of a younger generation to say something to them," said Kitagawa. But Toyoda maintains that Japanese firms are still very good at selling abroad. "Just because we don't see the results up front doesn't mean there isn't success. And that's the key point I want to make: Japan is still technologically and culturally at the forefront in many ways, but being a mature industrialized economy means that you don't get the attention you did before. In lots of ways, it is nicer to fly under the radar. Trade disputes have fallen way off, for example," she notes. China China China While Japan withdrew into its shell and dealt with the real estate collapse of the 1990s, China began to open its door and an economic boom turned into an explosion. Double-digit GDP, something unheard of in the U.S. or Japan, was the norm as millions moved up into an expanding middle class. "Made in the USA" was increasingly replaced with "Made in China," which sparked resentment here, but also problems. But while Japanese products were synonymous with quality, Chinese products are synonymous with recalls. Lots of them. Children's toys had lead paint, there were tainted treats that were killing dogs, and both GM and BMW had to recall thousands of cars due to defective parts made in China. While improving, Dr. Toyoda doesn't think China's product quality will ever match Japan's due to the different political systems. "China's quality control won't ever reach the heights of Japanese quality control," she said. "Quality control in China is not just a managerial issue, but a political one. Japanese workers were very involved in the quality control process, first of all, since unions and management were not entirely adversarial. The concept of worker empowerment has different connotations in China." There's also the issue of quality control. Japanese companies matured and developed a strong quality control culture in the 1960s and 70s, when Japan wasn't prominent on the world stage and firms weren't under pressure to produce immediate profits like they are today. "Chinese firms are for the most part competing on price and efficiency, not quality," said Toyoda. "The kinds of products China is known for are not driven so much by quality as by quantity and low prices. This might change in the future, but expediency is driving a lot of the dynamics for them." Japanese companies investing in China have discovered. This is why a lot of Japanese production is moving back to Japan if it involves high levels of QC, Toyoda said. "[Japanese] stuff is really, really good," said Ghadar. "The Bullet Train is 40 years old. The Chinese have one now, and they had three accidents in a year. Japan hasn't had one in 10 years. If we don't value [quality], then we buy the Chinese because we don't want to pay the price. So our interest relies on China because we want the cheaper one." Still in the game Despite the economic problems, along with a myriad of social problems, Japan has kept its innovation strong. "It never did let R&D suffer, and the educational system has been superb all along," said Ghadar. With Japan working its way out of debt, businesses and people alike are ready to start spending again, and Toyoda predicts they will. "I would be modestly optimistic in the short term of 5 years. In ten years, if certain changes don't come into force, then I would be modestly pessimistic. But Japan is surrounded by countries that face a lot of uncertainties, and in lots of ways, its destiny lies in their hands as much as in its own," she said. The best way to keep up with Japan is through the international version of its public broadcast network, called NHK World. AT&T U-verse has the largest national coverage. Some other cable providers only offer it in major U.S. cities. NHK World has documentaries and shows like "J-Tech," "Great Gear," "Science View," and "Asia Biz Forecast." It recently ran a documentary on Japan's first big foray into Big Data, where the government used analytics to help the country recover from the March 2011 earthquake.

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