In the Computer World, No Nation Stands Alone

NEC, a giant of Japanese industry, is buying a 20% stake in Packard Bell, a leading seller of personal computers, in a transaction that would have sparked fear and outrage in U.S. industry and government only a decade ago.

Then it was thought that Japanese companies, on the strength of their manufacturing and competitive dedication, would come to dominate the personal computer business.

It sure has not worked out that way. Yawns greeted last week’s deal. Analysts saw NEC’s cash resources helping Packard Bell, to be sure. But more important, they thought Packard Bell’s savvy about home computers might help NEC, which is losing out to Compaq, IBM, Hewlett-Packard and Japanese competitors in Japan’s small but growing personal computer market.

Small but growing. In personal computers, one of the world’s centrally important businesses, Japan is like an underdeveloped country. There were 3.39 million PCs, including portables and laptops, sold in Japan last year, according to International Data Corp. In the United States, the figure was 15.1 million, and in Western Europe PC sales totaled 12.1 million.

Behind those numbers lies a story of computers, of Japan and of world markets that holds lessons for all industries, investors and governments.

The simplest lesson, and one particularly relevant to Japan, is that no nation is an island in business today. Technology and products are global; protected national markets don’t prosper.

Japanese computer makers led by NEC developed proprietary operating systems for their PCs. You bought NEC hardware, you used NEC software; a Hitachi machine, Hitachi software, etc. This was looked upon as a smart way to “lock in” customers to your brand name.

Computers were expensive. Basic business software, such as an accounting spreadsheet, typically cost $4,000 in Japan; PC hardware cost about the same.

Meanwhile, computers in the U.S. market were evolving rapidly, becoming more powerful and less expensive. Customers demanded the ability to link computers in networks, and their demands were met as Microsoft operating systems and Intel microprocessors facilitated creation of global-standard software programs and communications among machines on so-called open systems.

Oddly, Japan’s computer makers did not think such changes would affect their business. They were following the same proprietary strategy, after all, that IBM, Digital Equipment, Hewlett-Packard and most computer makers had used in the old days of large computers. But the old ways no longer apply.

In the early 1990s, Microsoft devised the DOS/V operating system, allowing keyboards to accommodate the thousands of Japanese-language characters. Compaq brought out a $2,000 computer that included software. NEC denounced it as a “cheap U.S. clone” but Japanese customers clamored for it. They wanted their computers to run worldwide-standard programs so companies could communicate with each other no matter what brands of equipment they used.

NEC’s share of Japan’s PC market fell from almost 60% to 43% last year--a dramatic illustration that customers won’t be denied or locked in these days.

The story of Hewlett-Packard’s LX100 hand-held computer makes the point another way.

The LX100 was introduced in Japan last November, initially with a basic English-language operating system. But customers snapped it up anyway. And then an LX100 user group, with H-P’s cooperation, created a kanji , or Japanese-language, adaptation for the operating system. Now sales are skyrocketing.

In business today “you should make an alliance with your customers,” advises Hiroshi Menjo, a consultant with Regis McKenna Inc. in Palo Alto.

Customers have often shown the way in the personal computer business. Years ago when European countries were trying to favor national champion computer makers--Siemens Nixdorf in Germany, Bull in France, Olivetti in Italy and so forth--”you would see cardboard boxes with Compaq, IBM, Apple and other computers coming off with baggage from international passenger flights,” recalls Manfred Leuthard of Advanced Consulting Enterprise in Long Beach, who advises European clients on technology.

Even though the European computers were almost all on open systems themselves, “people were still bringing home the computers they wanted from the U.S.,” says Leuthard.

The message of open systems has gotten through in Japan. Most manufacturers have adapted their PCs to worldwide standards and the market is taking off. PC sales grew 36% last year.

NEC is adapting. “It is using more parts made in Taiwan to bring down costs and the link with Packard Bell will give some of its models the open system,” says analyst Hideki Wakabayashi of Nomura Securities in Tokyo.

NEC, with sales this year of about $45 billion, is a formidable company. It is a leading maker of telephone equipment and one of the world’s largest manufacturers of memory chips as well as a computer leader in the Japanese market.

Can it now make a belated bid for international leadership? Hard to say, because coming from behind in computers is hard to do. The business is so competitive that profit margins on sales are down to about 5%, experts say.

More important, the technology changes daily. Microsoft is developing new versions of the Windows system, while IBM is acquiring Lotus to outflank Microsoft, while Intel makes its chips more powerful and all-encompassing to garner more of the computer business.

One reason predictions of Japanese computer dominance did not come true is that the business remains a moving target.

Which is why it is sadly significant that a Japanese accreditation board is trying to control the flow of foreign software in an attempt to favor national producers. The world changes and Japan doesn’t--which explains why it lags in computers and why its economy is in trouble.

Americans should take heed but not feel smug. U.S. companies lead in computers worldwide because they remained flexible and adaptable, but exceptions also prove the rule: Smith Corona, the typewriter maker that incredibly did not change with technology, filed for bankruptcy last week.