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Special Report:

The Returnof Japan, Inc?

Special Report: Japan

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The Return of Japan, Inc.?Japan's Economy: It May Be Aging, but It's Agile Page 1Ever since the stock market crash of 1989, Japan's economy has been down in the dumps.Despite being the world's second largest economy, it has struggled to regain the momen-tum of the early 1980s, when "Japan, Inc." seemed to be an unstoppable force. Since lastyear, though, signs have begun to appear that the economy may be picking up — andmergers are returning in the shape of high-profile takeover battles. Has Japan reboundedat last? Experts at Wharton and elsewhere offer their insights.

How Yahoo! Outbid eBay for the Japanese Online Auction Market Page 4In most of the world, eBay is synonymous with online auctions — but not in Japan. Theworld's second largest economy, with the third highest Internet population, has remainedas impenetrable as the moat-protected walls of the Emperor's palace in the center of Tokyo.In this case, the undisputed winner is Yahoo! Japan, a joint venture between U.S.-basedYahoo! and Japan-based Softbank. The CEO of Yahoo! Japan spoke with participants of theWharton Fellows program about how his company outbid eBay to win Japan's customers.

Born to Be Wasabi: How Harley-Davidson Roared into the Japanese Market Page 6Time was when Japanese rivals such as Honda, Suzuki, Yamaha and Kawasaki left Harley-Davidson in the dust. During the 1970s and 1980s the U.S.-based motorcycle maker wentdown some rocky roads, which almost brought it to the brink of bankruptcy. Today, how-ever, the company has roared back into the Japanese market and has snatched control ofthe large-motorcycle market away from its rivals. How did that happen? Toshifumi Okui,president of Harley-Davidson Japan, spoke about the turnaround to participants of theWharton Fellows program.

What Is the Global Economy? Page 9The Financial Times once described Kenichi Ohmae as “Japan's only successful manage-ment guru.” Armed with a PhD in nuclear engineering from MIT, he joined Mckinsey & Co.in 1972 and ran the consulting firm's Japan office for several years. In his most recentbook, The Next Global Stage: Challenges and Opportunities in Our Borderless World,Ohmae argues that globalization has already occurred, is here to stay, and is about tomove to a new stage. An excerpt from the book examines the principal features of theglobal economy.

1The Return of Japan, Inc.?

Japan's Economy: It May Be Aging, but It's Agile

To understand the seriousness of thecrisis of the aging of the Japanese population — aswell as the nation's equally serious infatuation withhigh technology — one need only take a look at apartner robot prototype developed by Toyota. Thewhite biped, which looks a bit like a human-scaleLEGO figure, can stroll onto stage and play thetrumpet with its own breath and fingering. Thisrobot is not designed to do anything as practical forthe business as assembling automobiles; it hasother, more alien-looking cousins for that task.Instead, this humanoid is designed to assist people,particularly Japan's growing elderly population.While the Japanese economy has been reboundingin the short term, Japan's aging workforce is amongthe biggest clouds hovering over the nation's eco-nomic future. And it will take more than an army ofandroids to address it.

Rising Sun?Since the stock market crash of 1989, Japan hasbeen struggling to regain the momentum of theearly 1980s when “Japan, Inc.” was snatching uphigh-profile U.S. real estate properties and enter-tainment companies. Corporate bankruptcy lawsand banking practices, which helped keep compa-nies from failing in the post-war rise of Japan, ulti-mately became a burden. Weak corporations andtroubled banks and insurers, which should havebeen weeded out, were sustained through govern-ment protection.

The current picture is more upbeat. Recent reformsled by the Bank of Japan have boosted the money

supply, contributing to increases in business profitsand stock market valuations. And many observershailed last year's takeover battle between bankinggiants Sumitomo and Mitsubishi for Japan's fourthlargest bank as a sign that reforms are creatinghealthy competition. That fight pales in comparisonto the one that has riveted Japan during the pastmonth as Livedoor, an Internet upstart, has beenwaging a legal battle to take over NipponBroadcasting System (NBS).

There are also indications that consumer spendingmay be coming back. The recovery in Japan “is areal one,” said Hiroshi Yoshikawa, professor of eco-nomics at the University of Tokyo, at a recentWharton Fellows class in Tokyo. He cited an eco-nomic growth rate that increased from 3.2% in 2003to 3.5% in 2004. Last year, it appeared as though thebanking problem had largely been solved, unem-ployment had declined and consumption was goingup. Growth was expected to be 2% to 3% this year,though observers also hoped its impact would begreater because Japan's population is shrinking.“The most important factors for the long term arehuman capital and technology,” Yoshikawa said.

“The most important factors for the long term are human capital and technology.”

—Hiroshi Yoshikawa, professor of economics,University of Tokyo

Business Reforms and EntrepreneurshipIt is not just government that needs to change. TheJapanese business environment and culture alsoneed to be shaken up to spark innovation and entre-preneurship. The start-up rate for new businesses inJapan is an anemic 4%, the lowest among industri-alized countries. Genichi Tamatsuka, COO of FastRetailing Company, a major Japanese retailer, notesthat total Japanese retailing has been stagnant at$1.4 trillion over the past decade, while U.S. retail-ing has more than doubled. He also is concernedabout the many small, unproductive players as wellas the large companies that have become compla-cent and unable to change, and suggests morereforms are needed. “The Japanese market is veryattractive, but we need strong organizations that canclearly say no to the weaknesses of Japanese com-panies. We need a catalyst to break the bad elementof the Japanese economy and create a totally newway of doing business.”

“To make a true recovery, there have to bechanges,” says Ikuo Nishioka, former head of IntelJapan and president of Mobile Internet Capital. Henotes that by the time managers work their way upto president of a major Japanese firm, they are intheir 60s and “want to be quiet and have nochange.” The venture capital market is also a limitingfactor in Japan. When venture capital investorsmade significant returns during a technology bubbleseveral years back, the funds were not reinvested.

Japan sometimes is believed to have a so-calleddual economy, with some stellar global performerssuch as Canon and Toyota, but also many less suc-cessful companies. The bad may outweigh the good.George Fields, a Japanese marketing expert andgovernment advisor, notes that a study of Japanesemanufacturing firms found that global exporters hada productivity score of nearly twice that of domesticmanufacturing firms. The problem is that theseexporters account for just 10% of the total Japanesemanufacturers. “You can't talk about Japan as if it isa unity. There are two Japans,” says Fields.

Japan and ChinaAs it has throughout Japan's history, China willhave a big impact on the country's future. WhileChina, Japan's largest and closest neighbor, posesan economic threat to the country — and its low

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Showing Its AgeWhile there should be celebration over the recenteconomic progress, there is only consternation anddebate, primarily focused on “human factors.”Unfortunately, the strong signals the economy gaveout last year have weakened to some extent in2005. Economists now believe growth this year willbe just 1.6% (not 2% to 3%), and the unemploymentrate has begun to climb again. In February, the job-less rate rose to a six-month high of 4.7%, whichstoked fears that last year's recovery might havebeen too short-lived. Another worrisome figurerecently released by the Ministry of Internal Affairsand Communications refers to household spending,which dropped 3.8% in February compared toFebruary 2004.

Disappointing as these economic numbers are, amore serious concern is the aging population. Thenumber of people of working age (15 to 64) hasbeen dropping since 1995. By 2050, the workingpopulation is expected to dwindle to just 54 millionfrom its peak of 87 million. At the same time, thenumber of people 65 and older will rise from one-fifth to one-third of the population. This means thata declining pool of young workers is being asked tocarry the growing burden of Japan's national pen-sion or social security system.

Prime Minister Junichiro Koizumi pushed throughan unpopular pension reform bill last June, but itbecame a source of contention. The bill balanced thepension system squarely on the backs of workers,requiring employees to pay more into the systemand receive fewer benefits. In the midst of thatdebate, a series of pension scandals further roiledthe waters. Several revelations showed that keyleaders had failed to make payments into thenational system over the past decade. The scandalsled to the resignations last year of the chief cabinetsecretary and the head of Japan's opposition party.

Knowledge@Wharton Special Report: Japan

“To make a true recovery, there have tobe changes.”

—Ikuo Nishioka, president, Mobile Internet Capital

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manufacturing costs have led to concern about the“hollowing out” of the Japanese economy — it alsohas been a source of tremendous opportunity.

The reason is that the economic nexus betweenJapan and China has been changing. KenzoYamamoto, general manager of the New York officeof the Bank of Japan, told the Wharton AsiaBusiness Conference recently that economic tiesbetween the two nations are growing stronger.China has replaced America as Japan's largest trad-ing partner; Chinese imports from Japan exceedAmerican imports.

According to Yamamoto, two other factors are help-ing drive economic growth in Japan. First, the debtoverhang that has long plagued the business sectorhas started to diminish; and second, the ongoingrestructuring of industry has contributed to econom-ic growth, with manufacturing pressing forwardheavily, improving efficiency, reducing debt andenhancing profitability. Yamamoto views Japan'sprospects for the future with cautious optimism.Although Japan's economy is still vulnerable to itscontinued dependence on oversized companies, hesays that the economy has several strengths, suchas a solid infrastructure, high-quality labor and itssystem of law.

Shigeki Morinobu, a senior fellow in Japan's financeministry, also is upbeat about Japan's economicfuture. He discussed Japan's tax policy at the con-ference, noting how half of the expenditure of thegeneral account was financed by tax revenues,while the other half was by government bonds. Thisgross financial debt was 1.6 times the GDP, whichwas a risky situation. He said it was a good time tostart a debate about fiscal consolidation, whichmight not necessarily lead to an economic slow-down if the government takes appropriate meas-ures. For example, he explained, cuts in expenditurecould increase consumption in the private sector.

Japan's Global RoleNaotaka Matsukata, chairman of the strategic inter-national business practice of Hunton & Williams, aNew York City-based law firm, sees hope for Japan'sglobal economic role. Noting the strong relationshipbetween the current U.S. and Japanese govern-ments, he is optimistic about the fact that trade lib-eralizers within the Japanese government seem to

be succeeding over conservative protectionists. Thepower of these liberalizers still remains to be tested,though. A major sticking point in U.S.-Japan traderelations is Japan's continued ban of American beefimports, imposed two years ago because of fears ofMad Cow disease. To the U.S., this represents theloss of a $1.7 billion business opportunity.

In fact, Condoleeza Rice, the U.S. Secretary of Statewho visited Asia last month, raised the beef ques-tion during her visit to Japan. She also praised thecountry's role on the world stage and backed itsdesire for a seat on the U.N. Security Council. Thegist of her message to the Japanese people —including businessmen and women — seemed to bethat in a world that is increasingly preoccupied withChina's growing economic might, the world's twolargest economies have a lot to contribute to oneanother and the rest of the world. Aging populationor not, Japan and its businesses still have a lot ofoomph left. ◆

The Return of Japan, Inc.?

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In most of the world, eBay is synonymous with online auctions. Tens of millionsof members buy and sell on local sites in Australia,Austria, Belgium, Canada, France, Germany, Ireland,Italy, Korea, the Netherlands, New Zealand,Singapore, Spain, Sweden, Switzerland, Taiwan andthe United Kingdom. eBay also has established astrong presence in Latin America through invest-ments in MercadoLibre.com and in China throughits ownership of EachNet.

But one glaring exception exists to eBay's nearlyuniversal reach — the Japanese market. The world'ssecond largest economy, with the third largestInternet population, has remained as impenetrableas the moat-protected walls of the Emperor's palacein the center of Tokyo. And the undisputed emperorat the center of these walls is Yahoo! Japan, a jointventure between U.S.-based Yahoo! and Japan-based SoftBank.

Bidding WarIt isn't that eBay hasn't tried to make forays intoJapan. The company launched its Japanese businessjust five months after Yahoo! fired up its auction sitein September 1999. But five months is an eternity inInternet time (and Yahoo! already had a strong pres-ence in other online businesses). A year later, eBayhad managed to carve out only about 3% of thenation's auction market, which had grown to $1.6 bil-lion. By 2002, the San Francisco-area company admit-

ted defeat, laying off all 17 of its Japan employeesand shutting down the site with about 25,000 listings.

How was Yahoo! Japan able to succeed? “We knewthe people and had the user base,” said MasahiroInoue, President and CEO, during a presentation tothe Wharton Fellows program in Tokyo. “When eBaycame in, the company insisted on using its ownmanagement from California. A lot of Internet usersdidn't accept the ways of the eBay site. They alsohad to use their own money to advertise. We didn't

have to do that. We only had to approach peo-ple on our own site.” And eBay's reliance onword-of-mouth, commission structure anddemand for credit card payments also put it ata disadvantage to Yahoo!, which advertised,didn't initially charge a fee and offered non-

credit payment options.

In auctions, there is a significant first-mover advan-tage. A site with more sellers attracts buyers andmore buyers bring sellers. This was a lesson bothcompanies had learned through a very differentexperience in the U.S. There, eBay led the way andYahoo! tried with limited success to build an auctionbusiness in its shadow. “Yahoo! started the U.S. auc-tion site free of charge, with a huge advertising cam-paign, and still it could not succeed,” says Inoue.

Yahoo! also benefited from synergies from its otheronline businesses in Japan. In addition to being the“eBay” of Japan — the No. 1 auction site, with 7 mil-lion subscribers — Yahoo! Japan is the country'slargest Internet access provider, with 7 million mem-bers. In addition, Yahoo! Japan is that country's pri-mary e-commerce site and also the largest portal,with 82% of home users and 90% of office users.


How Yahoo! Outbid eBay for the Japanese Online Auction Market

“We knew the people and had the user base.”—Masahiro Inoue, president and CEO, Yahoo! Japan

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Of course, Yahoo! Japan also has its share of prob-lems. For one thing, competition is emerging insome of its markets. For example, Google Japanhas recently launched an aggressive advertisingcampaign, spearheaded by the Grey Worldwide adagency, aimed at wooing online users to its GoogleNews service. According to some media reports,though, Google — which has some 1 million homeusers a month — has a long way to go before itcatches up with Yahoo! Japan — which gets morethan 13 million monthly home users.

A more serious threat is that customers seem to berebelling. This month, 572 users sued Yahoo! Japan,alleging that the company had engaged in so-called“online scams” in which customers who had takenpart in auctions to buy items such as digital cam-eras did not receive the goods for which they hadpaid. Japan Today magazine reported on April 2 thataccording to the plaintiffs' attorney, Yahoo! Japan,as the intermediary, was obliged to help executedeals smoothly. This represents Japan's first classaction lawsuit, and its outcome could have a signifi-cant impact on Yahoo! Japan's future credibility andalso its business prospects.

Growing MarketStill, so far, Yahoo! Japan has been forging ahead.Internet usage in Japan is estimated to haveincreased by 13% since 2003 and is likely to growmore in the future. Increasing broadband penetra-tion will boost users, page views and time online. Tocontinue to build the business, Yahoo! Japan isexpanding vertically and horizontally. Horizontalmovement is taking the company into areas such asfinancial services, employment services, entertain-ment and selling automobiles. The company movedinto travel, in collaboration with the Japan TravelBureau, building the nation's largest travel site.

Some services haven't sold. While dating is popularvia cell phone in Japan, it is not a large serviceonline. “There is a social problem with online dat-ing,” Inoue says. Gaming also has not taken off. “Weexpected more from the success in the Korean mar-ket,” he notes. “We thought it would be the killerapp of broadband but it wasn't. Some people thinkthat is because we have so many console gamemachines at home.”

While cell phone penetration in Japan is high, fewJapanese surf the Internet on mobile phones.Yahoo! Japan does offer services on all three majorcarriers and is one of the largest players in thissmall market. Yahoo! Japan auction members usetheir cell phones only to receive alerts when the endof an auction is nearing. (The highest volume inJapan is Sunday night, compared to a Mondaymorning peak in traffic for eBay in the U.S., whichmay be a commentary on the surfing habits ofworkers in the two countries.) Pricing of wirelessphone service also limits cell phone use, becausecustomers have to pay packet-by-packet for service,although one carrier recently started a fixed-fee fordata connection.

Yahoo! Japan has been posting record results, withoperating revenues for the April-June quarter of2004 of 24.50 billion yen, up nearly 60% year onyear, and a net profit of 8.31 billion yen, up 83.1%.The company has succeeded by serving users,Inoue notes. “When we started Yahoo! Japan, wesaid the priority was users, not revenues.” He notesthat “in many cases, we have to choose whether tobe nice to advertisers or users, and we alwayschoose users. We believed from the beginning thatthe Internet business has low barriers to entry. Ittakes a relatively small investment and no big facili-ty or factory. The most difficult part is to maintainexisting users and introduce new users. We stillbelieve we are in that stage where users have morepriority than revenues.”

eBay has made it clear it intends to return to Japanat some point in the future. Yahoo! knows from his-tory that the island nation cannot be complacentabout the world around it. This is a world in whichrival eBay is spreading its reach and power. Whilethis is not a threat to be taken lightly, Inoue express-es confidence. “When eBay's chairman is asked ifshe will return to Japan, she has said she would beback,” he said. “If they come to Japan and offerservice free of charge, they may get some impact.But we will survive.” ◆


6Knowledge@Wharton Special Report: Japan

Born to Be Wasabi: How Harley-Davidson Roared into the Japanese Market

In the U.S., Harley-Davidson suffered some rough years in the 1970s and 1980s, mostly atthe hands of Japanese rivals such as Honda, Suzuki,Yamaha and Kawasaki. These competitors empha-sized reliable transportation and achieved standardsof product quality that left Harley in the dust. Evenafter a management buyout in 1981, Harley wentright to the brink of bankruptcy in 1985. Then, it rein-vented its brand and roared back in the U.S. Oneyear before special high tariffs on Japanese importswere due to expire, Harley announced it no longerneeded them to compete in large motorcycles. It isnow one of the strongest global brands.

Then the brand raced into the Japanese market,snatching control of the large-motorcycle marketaway from its competitors. How could this icon ofAmerican independence succeed in a land of con-sensus and collectivism? Partly, its success was dueto its Western rebel image. But its emphasis on a“family” atmosphere and community of riders alsois, remarkably, quintessentially Japanese.

A Tough RoadThe prospects did not look so promising whenHarley-Davidson Japan was established in 1989. It

faced several seemingly insurmountable hurdles.The overall market for motorcycles in Japan hadbeen declining since 1982, and it continued to fallfrom peak annual sales of more than 3 million unitsto just 700,000 in 2003. Harley's motorcycles weretwice the price of giant rivals such as Honda, Suzuki,Yamaha and Kawasaki who dominated the market(and still lead in smaller motorcycles).

Yet Harley-Davidson Japan President ToshifumiOkui, who joined the struggling company in 1990after a career as one of the most successful sales-men for Toyota, has defied giant competitors andthe declining market by posting continuously risinggrowth in a “sunset market.” Since 2000, Harley-Davidson Japan has been the market leader inmotorcycles above 751 cc., now with 30% of themarket compared to the 16% held by nearest rivalHonda. While it is a small company in a relativelysmall but growing niche (major players still control70% to 80% of the total market), the companydemonstrates the unexpected opportunities forbuilding a successful brand in the Japanese marketthrough creative approaches.

A Collection of EnthusiastsPart of Harley's success in the U.S. market and inJapan has been excitement about the brand.“Harley-Davidson motorcyclists buy our productsfor pleasure, not for transportation,” said Okui at arecent session of the Wharton Fellows program inTokyo. Harley-Davidson Japan uses lifestyle market-ing and events as contact points for attracting newcustomers. An annual Blue Sky Heaven event isexpected to attract 200,000 participants this year fordemonstrations, pet fashion shows, test drives andother activities to reinforce the brand experience

“Harley-Davidson motorcyclists buyour products for pleasure, not fortransportation.”

—Toshifumi Okui, president, Harley-Davidson Japan


and attract new customers. Store design and activities are focused on creating a fun experienceor “retailtainment,” as Okui calls it.

“Harley invented the philosophy that the brand is anasset of the owners, not of the company,” saidHotaka Katahira, chairman of Marunouchi BrandForum and a researcher at the University of Tokyowho has studied Harley's Japanese business.“Harley is not a machine, but a world, a collectionof enthusiasts.”

This message of community appealed to Japanesecustomers as much as Harley's open-road U.S.image. “The idea of getting people to come togetheraround one theme is a strength of the Japanesepeople,” Katahira said. “While Americans are basi-cally independent, Japanese tend to gather togeth-er. Okui focused on that point and found a goodmatch between the approach and the character ofthe Japanese people.”

In addition to the strength of its brand and its “family” network, Harley has a coherent process forbringing new riders into the fold that includesevents allowing prospective customers to try amotorcycle, driving schools to earn their licensesand then the final purchase at a dealership. Whileonly about 5% to 7% make it through the entireprocess, this has been enough to fuel the compa-ny's growth. Harley-Davidson Japan even hasevents for children, bringing them into the Harleyfamily long before they can become customers.

“The brand is a fantastic experience, likeDisneyland,” said Katahira. “If anyone isn't interest-ed in Disneyland, just take them there for the experience. Harley dealers complain that it costsnothing to sell Harley-Davidsons, but it costs a lot to entertain the owners. They are offering them thepleasure of being an owner.”

Delightful RelationshipHarley's approach is relationship marketing in itspurest sense. The company doesn't talk about lock-ing in customers, but rather about embracing themas part of the family. “To stay at the top, we mustcontinue to make efforts to sustain our delightfulrelationship with customers,” Okui notes. “We oftenhear companies say that when they develop rela-tionships, they are trying to 'encircle' customers or'fix' the customers. Would you encircle your wives

or sons? Is that the way you secure them? How canyou do that with the customers? The bond or the tieis a delightful relationship we have built with thecustomers. That is the difference between us andsome others.”

At the center of this relationship with customers isHarley's independent but exclusive dealer network.There are just 116 Harley-Davidson Japan dealers inthat country, representing a drop in the sea of 12,500total motorcycle dealers nationwide. But Harley deal-ers have more than four times the number ofemployees and more than 10 times the sales of theaverage motorcycle retailer in Japan. The network isexpected to remain relatively small. With just 200dealers, the company could double its sales.

While other motorcycle retailers in Japan representmultiple brands, dealers that are part of the Harley“family” only sell its products. Harley-DavidsonJapan spends a lot of time managing dealer rela-tionships, using both carrots and sticks. It uses itsown sales force automation and customer relation-ship management applications to collect real-timedata on dozens of marketing activities, and it workswith dealers that have low sales using a systematicprocess. The company also builds relationships withdealers through a Dealer Guide Book, with photosof every dealer and all their employees. The compa-ny sends flowers and cards to dealer employees ontheir birthdays and anniversaries. “Unless we havethis attitude of working together with the dealers,we cannot build bonds with customers,” Okui notes.

Where some cycle retailers had been greasygarages, Harley worked with dealers to create show-rooms that would demonstrate the fun of the brand.Harley-Davidson Japan also trains mechanics toservice its motorcycles and offers safety courses forcustomers. The company recently created its first“concept shop” — a showcase of products and

“Harley invented the philosophy thatthe brand is an asset of the owners,not of the company.”

—Hotaka Katahira, chairman, Marunouchi Brand Forum

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experiences — and expects to build others. Whilethe company has a web site with links to dealerpages, there are no direct online sales per corporatepolicy. “For us, after-services and the lifestyle pro-gram is so comprehensive based on building solidrelationships with customers,” Okui says. “You needto build on activities and interfaces. The web is onlya supplementary measure.”

While the company has a relatively small staff at head-quarters, it has focused on building pride. “Our employ-ees have to be proud of our company,” says Okui. “Ourmotto is to be a small, world-class company.”

The Road AheadHarley-Davidson has a fairly unique product andimage, but is its model transferable? Could Okuihave done the same thing with Corvette? “At thispoint, it would be quite tough,” he notes. “Howgood is Corvette? Does the company have a worldview it could offer to Japanese customers so thatthey would be able to share that view and lifestyle?How much culture and lifestyle is in Corvette? Doesthe company have those assets? I don't think wecould be successful with Corvette alone. Is Corvettewell distinguished from competitors? The mainbrand Harley was well established.”

Harley-Davidson Japan sees strong prospects forthe future. It has a phenomenal 90% repurchase rate(although the average life of a motorcycle in Japanis 60 years), and Harley has posted increasing cus-tomer satisfaction. Ridership among women is alsorising, with about 7% female ownership, compara-ble to the U.S. And the large and aging babyboomer population may have the financialresources and desire to rediscover its youth.Harley's brand continues to be strong, with surveysfinding that 70% of people either own or want toown a Harley someday. “For the next ten years, atleast, we are in a pretty good position,” Okui says. ◆



What Is the Global Economy?

The Financial Times once describedKenichi Ohmae as “Japan's only successful man-agement guru.” Born in 1943, he holds a PhD innuclear engineering from the MassachusettsInstitute of Technology. After working as a seniordesign engineer for Hitachi, Ohmae joined Mckinsey& Co. in 1972 and co-founded its strategy practice.As a senior partner in the consulting firm, he ran itsJapan office for several years.

Ohmae is the author of several books, including TheMind of the Strategist, The Borderless World, andThe End of the Nation State, among others. His mostrecent work is The Next Global Stage: Challengesand Opportunities in Our Borderless World (WhartonSchool Publishing), in which he argues that global-ization has already occurred, is here to stay, and isabout to move to a new stage. In the followingexcerpt from the book's first chapter, Ohmae dis-cusses the main features of the global economy. Thechapter begins by pointing to examples of the globaleconomy in places as diverse as Dalian in China,Dublin in Ireland and Helsinki in Finland:

What are the characteristics of this new global econ-omy relished in places as diverse as Dalian, Dublin,and Helsinki? Terminology is always an inexact sci-ence. Every term is a linguistic sieve. So, beforeattempting to define it, let's just say at the outsetwhat the global economy is not.

What can be said is that the global economy shouldbe differentiated from the notion of the “new econo-my” that sprang up in the late 1990s. This trumpeteda brave new economic order based on the fantastictechnological advances unleashed through theInternet. It was a model that mistakenly saw a paral-

lel and unstoppable rise in productivity. The wheelsfell off this conceptual wagon in April 2000 with thesudden decline in technology stocks.

Apart from its manifest intellectual weaknesses, this“new economy” has very little in common withwhat we will talk about. The global economy isbased on a world in which borderlessness is nolonger a dream or an option, but a reality. This hasbeen helped by the cyber-revolution, but it is not thesame phenomenon as the cyber-revolution itself.

Multiples of stock values, as well as derivatives andfinancially engineered products, also matter farmore in the global economy.

The global economy has its own dynamic and itsown logic. It is no longer theory; it is reality. It isgoing to grow stronger rather than weaker. It willfeed on its own strengths. It is irresistible, and it isdestined to have an impact on everybody-business-men, politicians, and bureaucrats, but, most impor-tant, ordinary citizens. There is no use complainingabout it or wishing it to go away. People will have tolearn to live with it.

The emphasis here is on learning because successand even survival depend on acquiring novel out-looks and relationships with the rest of the world.This book hopefully goes someway toward pointinga route toward these new outlooks and relationships.

The global economy has its owndynamic and its own logic. It is nolonger theory; it is reality.

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Some people and countries might be determined tofight against the reality of the global economy,using the old mind maps and the old paradigms.However, the cost in economic and especiallyhuman terms will be enormous. Progress is asinevitable as death and taxes. Traditional nation-states and national governments face a great chal-lenge. Some seem to want to approach this newworld with one foot stuck stubbornly in the shore ofthe past for support while they gingerly test thewater with the toes on the other.

Some are better placed to take advantage of theglobal economy's opportunities. History favored theUnited States by providing it with a truly federal formof government. As a result, states such as North andSouth Carolina, known as the Carolinas, can pursuean innovative economic agenda without risk of beingstymied by central government. The battles betweenstate and center have been fought over and resolved.The constituent states are each well placed to takeadvantage of the global economy. This does notmean that all 50 states do so. Some still seem to bewedded to a past based on Canute-like protection of“strategic” economic sectors.

Other federal states in the world do not allow theirconstituent members anything like real autonomy,and the central government maintains a tight reinon regional developments. Examples include Indiaand Brazil, two of the BRICs (Brazil, Russia, India,and China), according to Morgan-Stanley's new jar-gon of promising new economies. In terms of theglobal economy, these nations are still asleep as awhole nation. Nevertheless, some of their regionshave begun to take their places on the global stage.China adopts a somewhat schizophrenic policy; intheory, it follows a rigid, centralized political formu-la. In practice, unprecedented economic autonomyhas been allowed to regions and cities, particularlysince Zhu Rongji's reform of 1998.

But at the opposite extreme, there are states such asJapan, Russia, and Indonesia, which maintain cen-trality of decision making in theory and practice. Noregion succeeds because no region is permitted tosucceed independently of the rest of the state. Theircentral governments are jealous of allowing anydirectional role to escape the center. They are swim-ming against a tide that could yet inundate them. Ofthe BRICs, only China has the governance structureto help its regions to work interactively with theglobal economy. Others have a long way to gobefore their central government really wakes up tothe calls of the rest of the world.

The task of describing what this new world is maybe difficult. If all the news stories and clippingsabout globalization are assembled, the integratedpicture that emerges is distorted. Not all the compo-nents fit neatly together; it is a wild, abstract mosaicrather than a jigsaw.

But let us forget the scare stories and the merchantsof bad news, and instead try and see what we cansay positively and with certainty about the charac-teristics of the global economy: It has innate charac-teristics, which I list in no order of importance.

BorderlessFirst, as I have long argued, national borders are farless constrictive than they once were. Some of thishas been thanks to technology, while some hasbeen the result of international and bilateral agree-ments, especially in the area of trade. The world isan increasingly borderless place. Tariffs are evapo-rating as countries realize they need each other tosurvive economically.

It is not yet completely border free, as nation-statesstill have reasons to maintain controls on the move-ment of people and goods in the interest of securityand public safety. But in terms of four key factors ofbusiness life, the world has already attained theposition of being effectively without borders. Thesebusiness factors I have labeled the four C's: commu-nications, capital, corporations, and consumers.

Effective communications always depend on thenonexistence of borders. It was one thing whencommunication was predominantly physical. If aperson wanted to go from A to B or send somethingthere, be it a letter or a product, the inert force of


The world is an increasingly borderlessplace. Tariffs are evaporating as countries realize they need each otherto survive economically.

11

gravity often slowed the process down. Slowness ofmovement was further added to by border check-points, the need for visas, and passport control, notto mention custom and excise inspection. Peopleviewed these as obstacles and deterrents. But tech-nology spurred an improvement. Telephone linesallowed a person to speak with someone directly onthe other side of the world, without having to gothrough a host of intermediate exchanges. Oncesuch lines of telecommunication, existed they couldbe used for data transfer. Improvements alsooccurred in the production of cables using fiber-optic technology. A barrier to communicationsremained while the conduits of this communicationstill had to pass along wires, which, in turn, had tobe laid across mountains or oceans. The latest tech-nological advances do away with wires and theircostly installation and maintenance. When data iscarried by radio frequencies, it is absurd to believethat lines drawn on maps can have any impact onits movements.

Telecommunication benefited from a process ofderegulation in the 1980s, and many former statemonopolies were privatized, thereby increasingcompetition and lowering costs for consumers.Domestic markets that had formerly been impris-oned in the clutches of national communicationsmonopolies were opened up. Many communica-tions companies co-operated and entered intoalliances; others merged so that the telecommunica-tions world was changed from a patchwork of statemonopolies into a far more dynamic and colorfulkaleidoscope that did not respect national borders.Many telecom operators, including TeliaSonera,Vodafone, and Telefonica, have become truly global.

Yet it was the development of the Internet from themid-1990s onward that has probably had the great-est impact on making the world of communicationstruly borderless. This is a technology that is widelyavailable, accessible from personal computers any-where. Traffic passes through it oblivious of borders.

The second C, capital, is also a beneficiary of a bor-derless world. This, too, has been aided by deregu-lation of financial markets. It has also been assistedby the position of the U.S. dollar as a monetary plat-form. Not only is it the major trading and settlementcurrency, but it is also the currency of choice formany savers throughout the world. In most devel-

oped countries, the aging population save moneyfor their retirement. The trouble is that no OECDmember country offers adequate returns for aninvestment at home. This is one of the biggest rea-sons why a massive cross-border migration of capi-tal, both short and long term, has occurred.

Some corporations have successfully responded tothe borderless economy by shedding the trappingsof the nation-state that hindered their self-aware-ness. It was far too common in the past for a suc-cessful corporation to identify closely with a “homebase,” a company headquarters, or a corporate“home town, where it all began.” Some of thismight have been sentimental, but it was outdated ifthe corporation saw the world as its marketplace.Improvements in telecommunications mean thatcompanies do not feel tied down to a corporateheadquarters in a certain city. If circumstancesdemand it, they might even dispense with legal tiesto their home bases by reregistering in another,more favorable location.

The last two decades have seen a remarkabledecomposition of corporate functions, ranging fromR&D and manufacturing to sales/marketing andfinancing. It is now common within an individualcompany for these functions to be located acrossnational borders-for example, R&D in Switzerland,engineering in India, manufacturing in China,financing in London, while the marketing functionand HQ remain in the United States. More recently,indirect work has been outsourced: Witness thegrowth in call centers in India and elsewhere, andthe outsourcing of logistics to specialists such asFedEx, DHL, and UPS.

It is in terms of the last C, consumers, that the bor-derless element of the global economy has madeitself felt most keenly. Consumers have the ability todo what they have been urged to do many times:


It was the development of the Internetfrom the mid-1990s onward that hasprobably had the greatest impact onmaking the world of communicationstruly borderless.

12Knowledge@Wharton Special Report: Japan

shop around. The Internet gives consumers the abili-ty to compare products and prices and make amuch more informed choice more easily. Platformsfor paying by credit card then allow the purchase tobe made, processed, and delivered. There might stillbe some who are emotionally tied to the ideal of thenation-state, who support demagogues seekinggreater protection of domestic businesses and jobs,but when they are presented with a choice of twosimilar products, one (product A) available locally ata price considerably higher than product B, whichoriginates elsewhere and still enjoys a price advan-tage when delivery charges are added on, only themost die-hard partisan of the nation-state will optfor the pricey product A. The reality is that it isalmost impossible to buy a shirt that is genuinely“Made in America.” Its fabric may come from Egypt,threads from Japan, and buttons from thePhilippines. If only the sewing process takes placein the United States, how American does that makethe finished shirt?

InvisibleObservers might be forgiven for not fully realizingthe potency and prevalence of the global economy.It is largely invisible. It might be better said that it isnot totally visible to the naked eye. This should notbe taken as implying that it is secretive or reclusive.It is because the actions that it performs often takeplace not on the streets or the debating chambers ofnational parliaments, but on computer terminals.One of the mechanisms whose development hasenabled speedy cash transfer is a piece of plastic:the credit card. It is the preferred means of carryingand spending money for hundreds of millions ofconsumers. Yet the money that credit-card holdersspend is never seen. Sometimes, payment occursso quickly that not even the most sophisticatedcamera with an incredibly high shutter speed couldrecord it.

Some of the most important developments areearth-shaking in their potential, but their implica-tions are not fully understood outside of a small cir-cle of players. As a result, they are not headlinenews; they are lucky to feature in the news at all. Asfor the print media, they may be buried ratherinconspicuously in the business pages.

Consider a few aspects of this invisible world.Transactions and settlements of money now takeplace mostly on and through computers. Someproducts are also purchased in the plaza known asB2B and B2C trade exchanges, or as C2C auctions.Most ATMs around the world spit out local currencyif you use your home country cash/credit card withPlus or Cirrus membership. There is no way for thegovernment to know how much cash you have with-drawn abroad or how much you have spent with acredit card to purchase goods and services acrossnational borders.

Cyber-ConnectedThe global economy would not be possible, or evencomprehensible, without cybertechnology allowinglarge amounts of data to be transferred incrediblyquickly. It would not be possible without the corre-sponding drop in technology prices. The Internet isonly the most public part of this. Today, the Internetprotocol (IP) is capable of handling transmission ofnot only data, but also images, voice, music, andvideos. Voice over IP (VoIP) is rapidly making inroadsinto the world of traditional telecom providers, butmusic and movies are also downloaded acrossnational borders, as long as there is a line with IProuters. Everything and everyone connects.

Outsourcing, for example, rests on the capability tomodel new processes and instantly deliver criticalsoftware components, all within minutes of a con-versation. The success of Indian software houses,such as Infosys, WiPro, HCL, Tata InformationServices, and others, underscores the fact that 24x7development is no longer a wish, but a reality.

Measured in MultiplesMoney makes the world go around. And so the roleof money in a global economy must be important.Money is no longer seen only as a unit of value inthe short term. The late 1990s and the first years of

Observers might be forgiven for notfully realizing the potency and prevalence of the global economy. It is largely invisible.


the new century have witnessed a number of corpo-rate takeovers and restructurings that would havebeen viewed as surreal two decades earlier: Inthese, a company that had only recently emergedand maybe was not actually profitable successfullyacquired a much larger, longer-established, andseemingly solid part of the corporate landscape.None of this was possible without those who assesscorporate value looking at a far bigger picture, notone based on the here and now alone and the cur-rently quoted price on whatever share index theychose, but on what the situation was likely to be in10 or 20 years, and on how this was reflected inprice/earnings ratios.

Multiples are signs given to the management by theshareholders to shoot at the business opportunitieson the horizon. If the management does nothingother than business as usual, the multiple will comedown, reflecting the disappointment of the ammuni-tion givers. Multiples are fictitious, in that they oftendo not reflect corporate value, but they express anexpectation. This can become reality if a company isbought or a new investment is made to fully utilizethe multiples.

So the global economy is borderless, invisible,cyberconnected, and measured in multiples. Manyof these elements are self-nurturing: They feed offone another. They all involve taking a leap, if only anintellectual leap at first, into uncharted waters.

This global economy is in its infancy. Unfortunately,this description contains an analogy with humandevelopment, from the state of the infant, the child,and the uninformed. It might be better to say thatthe global economy is in the early stages of devel-opment, but there is nothing childlike or uninformedabout it. It has not emerged like an extraterrestrialfrom on board a meteorite. It has entered the worldthrough the actions and intellect of human beings. Ithas not been foisted onto the world by some small,nefarious network intent on world domination. Ithas developed collectively. And, as we will see, itpromises to be beneficial to the world at large.

The excessive capital in developed countries is look-ing for opportunities to breed. If you understand thelogic of the global economy, you can attract compa-nies, customers, and capital to your region or com-pany from the rest of the world. You do not have to

be born rich or be born in a wealthy country toprosper. All four C's can and will come to you if youhave the right recipe. Alternatively, if your logic andsystems are out of sync with the global economy,the four C's will evaporate, and you will not have anopportunity to perform on the global stage. ◆

Additional Reading and Information

Knowledge@Whartonhttp://knowledge.wharton.upenn.edu

Wharton School Publishinghttp://www.whartonsp.com

The Next Global Stage: Challenges and Opportunities in Our Borderless WorldBy Kenichi Ohmae http://www.whartonsp.com/title/013147944X

The Wharton Fellows Programhttp://execed.wharton.upenn.edu/course.cfm?Program=FEB

China Report: Studies in Operations and Strategy

Overcoming the Challengesin China Operations

Chris Mark

[email protected]

Jamie Hammond

[email protected]

For further information or inquiries, please contact:

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