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The PlayStation Paradox
Japanese companies are known for technological prowess. But in e-commerce, the rep remains unearned

As a benchmark for Japan's e-commerce appetite, Goldman Sachs Internet analyst Yamashina Hiroshi cites the goings-on at Sumitomo Trading Corp.'s annual management meeting this year. Held in May at a time the business world was buzzing about business-to-business trading on the Internet, Yamashina expected the top brass for one of Japan's biggest industrial groups would have major Net initiatives to announce. But in a 50-page document outlining Sumitomo's strategy for the year ahead was nary a mention of B2B, nor was it discussed by management. "At the end of the meeting, I asked a colleague of mine, 'Weren't you going to bring up B2B yourself?' " recalls Yamashina. "He said, 'I thought about it, but I'm pretty sure none of them know what the term means.' "

Sumitomo Trading, part of one of Japan's keiretsu industrial groupings that dominate the Japanese economy, is not an exception. While many industrialized countries are quickly incorporating the Internet into their operations to speed communications, slash procurement costs and boost efficiency, major corporations in the world's second-largest economy have been avoiding B2B as if it were LSD. "We are two or three years behind the U.S." in the development of online trading networks, says Yamashina.

The contrast is even more marked when Japan is compared with neighboring South Korea, where hundreds of chaebol subsidiaries are pursuing B2B programs in every line of business. In chemicals alone, for example, units of Samsung, SK Global, LG and Hyundai have set up online exchanges for buyers and sellers. Yet a government database of Japanese B2B initiatives lists nothing for Japan's chemical industry. "Every time I go to Korea, the plane is full of e-commerce managers," says Lane Leskela, head of Asian Internet research at the Gartner Group. "All of the chaebol have appointed an implementation team with authorization at the highest levels." Not so in Tokyo. "In industries exposed to the global market - like car making and electronics - we may be almost in line with Korea," says Yamashina. In other important sectors, including retailing and services, "almost nothing is happening," he adds.

To outsiders, the situation is puzzling given Japan's long list of accomplishments in electronics manufacturing and other areas of the digital economy. This is the country that invented the Walkman, rules video games with the PlayStation and is a world leader in wireless Internet access. But Japan is also known for its hidebound corporate bureaucracies. Over a decade of almost zero economic growth, Japanese companies have spent relatively little on information technology. Many still rely on pre-Internet-era mainframe computers to run their companies. I.T. spending is increasing, but Japan continues to lag other major economies. Capital expenditures for new technology amounted to about 3% of Japan's GDP last year. That's less than half the level of I.T. investment in the U.S., according to Merrill Lynch. "A lot of [Japanese] companies are drawing up B2B strategies, but I doubt if they will be implemented for a few years," says Leskela. "They are too conservative. They don't appreciate what the advantages might be. They want other people to go first."

Company managers, however, say Japan's slow B2B uptake has less to do with conservatism than cost — specifically, high telecommunications fees. Although the average cost of a dial-up Internet connection fell 60% earlier this year, it is still roughly three times that of the U.S. That helps to explain why all e-commerce transactions in Japan totalled just 5% of U.S. e-commerce last year.

The country's resolve to improve its e-commerce standing appears to be strengthening. Last month, Prime Minister Mori Yoshiro vowed to "make Japan the world's leading information and telecommunications nation in five years." Steps to open up telecommunications markets are reportedly in the works. Merrill Lynch predicts Japan's B2B marketplaces will take off in two to three years, at least in some industrial sectors.

But Internet-based trading would disrupt rigid domestic distribution systems and longstanding wholesaler relationships. By encouraging wide-open competition, virtual marketplaces have the potential to lower costs. They can also reduce profit margins, eliminate middlemen and throw people out of work. "What is going to happen to your sales force if a B2B exchange opens and your margins plummet from 5% to 0.2%?" says Till Vestring, a consultant for Bain & Co. in Tokyo. Given that Japan's economy continues to sputter, that's a question most companies would rather not try to answer right now. To them, the process of creative destruction is better postponed until a time the economy is better able to absorb an army of workers displaced by technological change.

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