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A monthly review of the latest developments in Japan’s IT, telecom, and life sciences sectors

February 2004 - Volume VII, Issue II

Triangle Technologies is the leading Japan Israel business development and investment advisory firm
www.triangletech.com

Dan's Desk

From Triangle's CEO

FLYING UPSIDE DOWN - OEM relationships in Japan.

Japanese firms beat the US in the 70's and 80's partly because they surprisingly violated the basic underlying, Western assumptions of how to do business effectively. Nowhere is this contrast more stark than in interfirm supplier-customer relationships, in particular OEM relationships.

My close friend Tom Lifson (without whom I would not have founded Triangle Technologies) has been studying interfirm relationships in Japan for almost 30 years now, including when we taught together in the '80's at Harvard Business School. Here are just a few points from one of Tom's articles: (sorry, a bit longer than most Dan's Desks, but worth it because it will explain why our OEM relationships do or don’t work in Japan!)

1. Permanence

Western assumptions: OEM relationships are transitory, discrete, transaction based, each transaction stands on its own merits.

Japanese assumptions: OEM relationships are permanent, indefinite, to be dismantled only when someone screws up. Temporary relationships are viewed as promiscuous, almost immoral.

2. Specified complexity

WEST: OEM transaction (because it is a time-bound transaction, not an indefinite relationship) should specify the precise conditions for the bounded exchange of which values (money, technology, products, people etc.).

JAPAN: More than money is exchanged, and therefore not all parameters can be specified. Money, goods, services, technology, information, personal ties, trust are all part of the complex, indefinite relationship.

3. Closeness

WEST: Intimacy between OEM partners is limited and boundaries are explicitly and implicitly maintained.

JAPAN: Intimacy will increase steadily over time, and many boundaries will become increasingly permeable. Over time, OEM partners will increasingly have access to information about technology, intentions, production costs, human resource flows. Even people are exchanged (a practice known as "shukko").

4. Mutual obligation

WEST: Obligation is contractual, discrete, with beginning and end.

JAPAN: Obligations (contractual and otherwise) are carefully maintained and balanced over time, but remain open ended. To paraphrase: "…quality competition [in the end market] may oblige OEM customers to ask their OEM suppliers to invest money, people, etc over long time periods"

5. Grace period

WEST: Why should an OEM customer carry the supplier through an adjustment period?

JAPAN: OEM suppliers are given a longer time period to adjust to new requirements for lower prices, better quality, and the supplier fulfills his end of the implicit bargain by showing his SINCERE efforts to do so. OEM customers will actively assist their suppliers in making such adjustments. All of the above means that to succeed as an OEM-er in Japan, you need to FLY UPSIDE DOWN. It means performing unnatural business acts. Short term investments, if managed well, will be rewarded by long term orders.

Dan

***TRIANGLE TECHNOLOGIES NEWS***

+GLUCON RAISED MONEY FROM A STRATEGIC JAPANESE INVESTOR

Glucon (www.glucon.com), an Israel based developer of non-invasive glucose monitoring technology for the diabetic market, has completed the first closing of a financing round.. Glucon was founded in 2000 by Israeli scientists Ron Nagar and Dr. Benny Pesach. The Company currently employs a professional team of fifteen engineers, physicists and algorithm experts.

The Company’s unique Photoacoustics technology enables direct measurement of glucose levels from within blood vessels. Continuous non-invasive glucose monitoring is essential for controlling diabetes and preventing diabetic complications. Glucon’s technology represents a significant improvement over both the commonly used finger stick blood testing system as well as alternative non-blood measuring systems currently under development

One of the important investors in this round is a leading Japanese distributor of medical devices and health care products. This investment was one of the largest Japanese investments in Israeli health-care related companies ever. The cooperation of Glucon and this company will cover various commercial aspects.

***ISRAEL-JAPAN NEWS***

+BEZEQ IN PRELIMINARY TALKS WITH SOFTBANK, YAHOO! BROADBAND TO INVEST IN YES

Globes online-Bezeq (TASE:BZEQ), headed by CEO Amnon Dick, is holding preliminary talks with Yahoo! (Nasdaq:YHOO) subsidiary BT Yahoo! Broadband and Softbank (TSE:9984) about investing in YES satellite broadcaster. Yahoo! Broadband is considered a great success in terms of market share, but still loses hundreds of millions of dollars a year.

[Editor: we think this is very unlikely in part because Yahoo BB's shareholders are frantically liquidated other assets to fund their broad band business-Triangle]

***BUSINESS NEWS***

+U.S. AGAIN REJECTS JAPAN'S CALL TO TEST ALL COWS

Kyodo News -A senior U.S. Agriculture Department official reiterated on Friday the U.S. rejection of a Japanese request to check all U.S.-raised cattle slaughtered for human consumption for signs of mad cow disease. Peter Fernandez, associate administrator of the department's Animal and Plant Health Inspection Service, told a news conference at the U.S. Embassy in Tokyo that there is no logical justification for testing all cattle upon slaughter to see if they are infected with the disease.

+MCDONALD'S SUFFERS BIG LOSS

McDonald's Holdings Co reported Friday a hefty group net loss for the business year ended Dec 31, falling victim to massive restructuring expenses and a slump in hamburger sales by its unit McDonald's Co (Japan). McDonald's Holdings posted a group net loss of 7.12 billion yen for the just-ended business year, bigger than the previous year's loss of 2.34 billion yen. (Kyodo News)

+FOUR OUT OF 10 JAPANESE IT COMPANIES EMPLOY FOREIGN ENGINEERS, 70% OF THEM CHINESE: SURVEY

Nikkei Solution Business- Of the IT companies in Japan surveyed, 40.1% employ foreign engineers, and Chinese engineers account for 67.8% of the total, according to a joint survey by three industry organizations. China is the largest supplier in terms of nationality. The survey was conducted jointly by the Japan Electronics and Information Technology Industries Association (JEITA), the Japan Computer Software Association (JPSA), and th eJapan Information Technology Services Industry Association (JISA) in December 2003. The three associations surveyed a total of 262 computer manufacturers and system integrators. As of the end of March 2003, 40.1% of IT companies in Japan employ foreign engineers. In terms of nationality, China accounts for 67.8%, and it is followed by Korea (9.8%) and India (7.6%). The development and programming division employs the most, with 772 foreign engineers, and as many as 380 engineers are working for the design division. It is likely that employment of foreign engineers is expected to increase in upstream processes in the future. Responding to questions on outsourcing, 22.1% of respondents said they used outsourcing at the end of March 2003. Of the companies utilizing outsourcing, 48.3% placed direct orders with foreign companies, accounting for more than 50%. And 29.3% dispatched an order to foreign companies through the intermediary of domestic companies; 22.4% used both direct and indirect ways.

+FOREIGN EXCHANGE INTERVENTION BUDGET EXPANDED

Bloomberg.com-The parliament has just approved the government's request for an extra JPY21trn ($199bn) in funds to buy more foreign exchange in an ongoing intervention program to curb appreciation of the yen. In January along, the Bank of Japan spent JPY7.155trn ($67.5bn) to keep the yen stable against the US dollar. The dollar closed at 105.63 yen on Friday night.

+TOYOTA TO ADOPT PERFORMANCE-BASED PAY SYSTEM THIS YEAR

Kyodo-Toyota Motor Corp will make a full shift to a performance-based pay system this year, putting a complete end to traditional seniority-based pay, company officials said Tuesday. The largest Japanese automaker has already introduced the performance-based pay system for administrative, clerical and engineering employees and will do so for professional factory workers in April, the officials said.

***GENERAL TECHNOLOGY NEWS***

+SONY, MITSUBISHI CREATE ENVIRONMENT-FRIENDLY VEGETABLE-BASED PLASTIC

Sony Corp. said it has developed an environment-friendly biodegradable plastic for use in its electronics products by teaming up with Mitsubishi Plastics Inc. Sony will first apply the new vegetable-based plastic to a DVD player it will put on the market this fall, it said. The vegetable-based plastic uses polylactic acid made from corn starch as one of its main materials. If users put the parts of used products incorporating this plastic underneath the soil for several decades, it will eventually decompose into water and carbon dioxide, a Sony spokesman said.

+INVENTOR ROYALTIES’ DEBATE (NAKAMURA-NICHIA)

Shuji Nakamura, the inventor of the blue diode, recently won a ruling against Nichia Corporation for the amount of JPY20bn ($190m). The debate whether Shuji Nakamura really deserved the $200m payout he received or not continues, it has emerged that the company in fact DID NOT provide him with an entire research team and facilities. Indeed, apparently Nakamura had to build some of the equipment from hardware store parts in order to conduct his experiments. For this reason, the court justified its ruling that Nakamura's contribution was far greater than for some other cases. Secondly, the government is moving fast to counter criticism about the rulings, and new legislation will be presented in Parliament to revise the Patent Law. The new bill will provide clear-cut criteria to govern how much employees can claim for inventions."

+NEW LIGHT STICK

nikkeibp.com-Nissin Electric has designed a new light stick (like the ones sold at evening rock concerts), which will emit a luminous glow when hit or shaken. The interesting thing is that rather than chemicals, the unit uses a piezoelectric transducer which powers a LED inside the stick -- thus the unit can be reused over and over. Nissin apparently has two units, one which uses a steel ball to drive the transducer, and the other which requires bending of the transducer body.

+LIQUID CRYSTAL PANEL SHOWS IMAGES ON BOTH SIDES

Kyodo-— Mitsubishi Electric Corp said Tuesday it has developed a liquid crystal panel that shows images on both sides, and hopes to create practical products a few years from now.
The panel has liquid crystals sandwiched between two transparent backlights, Mitsubishi said. By turning on the backlights alternately, images can be seen on both sides of the panel.

***LIFE SCIENCES AND ENVIRONMENT NEWS***

+JAPAN APPROVES RESEARCH USING DOMESTIC EMBRYO STEM CELLS

Kyodo News , February 14, 2004 TOKYO — Japan on Friday approved its first medical research project using domestically created human embryo stem cells, government officials said. Past research into generating various cells from human embryo stem cells in Japan has used only imported cells, said the officials at the Ministry of Education, Culture, Sports, Science and Technology.

+EXCESSIVE EXPOSURE TO X-RAYS INCREASES RATE OF CANCER IN JAPAN

Japaninc.com - Researchers at Oxford University in the UK have announced that the Japanese as a nation have a 300% higher rate of cancer caused by excessive exposure to preventive X-rays than do people in other countries. The researchers said that 3.2% of all Japanese cancer patients appear to have contracted the disease because of excessive X-ray exposure. This figure was found by testing cancer patients up to 25 years of age and assessing likely causes.The researchers brought up some very interesting results from their findings. For example, there are 1,477 CT X-ray tests done for every Japanese person, almost double that of other countries. Put another way, there are 64 Computer Topography (CT: a type of computerized X-ray) units per 1,000 people, compared with 26 in Switzerland, the second-most CT-obsessed country. Ironically, most CT scans in Japan are used to detect early cancer. We all know about Japan's "Cleanness ethic" and so it is understandable that the authorities have instituted the procedure. However, unfortunately due to the warped government re-compensation system for public health services, we suspect that lots of CT X-rays are really used for better revenue flow for hard-up doctors, rather than to keep people healthy.