The Japanese disease: How its corporate culture turns disasters into catastrophes

IT HAS not been a good few years for Japan PLC. In 2009, its car industry was plunged into crisis after Toyota was forced to recall 6m vehicles following a series of fatal accidents in the US. Then came the tragic Japanese earthquake, which had a chilling effect on businesses. A few months later, Sony was forced to pull the plug on its PlayStation network following one of the biggest hacks in history. And now Olympus, the Japanese camera maker, has admitted it covered up two decades of investment losses.

Bad luck? In part, yes. Japan’s corporations can hardly be blamed for a natural disaster, while companies of every nationality – from Switzerland’s UBS to Britain’s BP – have also suffered huge reputational damage in recent times.

Yet there is something unique about Japan’s problems. The reaction of its businesses to corporate disaster follows the same pattern every time. First, deny the problem; then deny its scale; eventually admit things are much worse than first thought; and finally come clean in a public mea culpa, with top executives bowing in deep shame.

Anyone who has spent more than a few weeks in Japan will recognise the routine. A couple of years ago, I got lost trying to find a restaurant in the tangled nexus of Tokyo’s backstreets and decided to ask a local for directions. To begin with, he assured me he knew where the restaurant was, setting off with a confident stride. After twenty minutes or so, he started to backtrack: maybe he didn’t know after all, but he could still find it using my map. Finally, after over half an hour of searching, he admitted defeat, and apologised so profusely that his girlfriend – who witnessed the entire spectacle – had to avert her eyes.

The chain of events is sparked off by a desire to please. The inclination to say “yes” to every request – even a difficult one – is ingrained in Japanese culture. Next, a sense of pride kicks in, meaning the company – or person – can’t accept their mistake. It is shame that influences the final two stages – an attempt to cover up the problem and an eventual, excruciating apology that follows once all is laid bare.

These cultural traits aren’t necessarily all bad for Japan PLC: eagerness to please and pride can be hugely positive for business. If an employee is off sick for more than a few days in Japan, it is their colleagues – not management – who call round to the house and ask them to return to work. The result is an absence rate among working men that is around half that in the UK. And these traits explain the PR disasters that follow corporate mistakes, not the mistakes themselves.

There are other aspects of Japan’s corporate culture, previously seen as inherent to its success, that help explain some of its recent problems. Take the so-called just-in-time system of production, perfected by Japan in the 1970s, which allows for component parts to be ordered and delivered to the factory gate at the very moment they are required. There is no need to build up costly inventories, while parts and suppliers can be switched at a moment’s notice.

Another phenomenon unique to the Japanese factory is the quality control circle, a small group of workers employed on similar tasks who meet regularly to solve quality control issues. The theory behind the circle is that workers who are responsible for a problem will most want to solve it, and will best know how to. Throughout the 1980s and 1990s, the likes of GM and Ford employed armies of experts to test cars as they came off the production line. Toyota spent far less, but its cars were far more reliable.

In recent years, these successful methods have faced their biggest ever challenges. The Japanese earthquake and floods in Thailand have disproportionately hurt Japanese firms who operate just-in-time production lines. Factories with large inventories could continue churning out cars and televisions, but Japanese ones ground to a halt.

More worryingly, the attempt to export these methods to America has proved catastrophic. The just-in-time approach works well in Japan because it is a relatively small country; a handful of trusted suppliers can be relied upon to provide quality parts. But as Toyota shifted more and more production to the US, it came to rely on an ever-growing list of suppliers who were geographically disparate and of varying quality, paving the way for the faulty accelerators that ended up in its cars.

Similarly, quality control circles that worked so well in Japan were nowhere near as effective in Toyota’s American factories, where workers had less pride and earned lower real wages.

The challenge for Japan PLC is to modify its methods and customs, which have underpinned its booming exports for several decades, without abandoning them entirely. Otherwise, Japanese executives will find themselves taking a bow for all the wrong reasons.

David Crow is City A.M.’s managing editor.