Conflict of interest possibly.
>Originally posted at 12:33 PM ET 4/27/01 on RealMoney.com
You'd think that after a decade of stagnation in Tokyo, the love affair with the Japanese way of doing business would have abated.
And yet, Silicon Valley only now is learning that adhering even indirectly to some of the worst aspects of the once-admired Japanese business model is dangerous to your corporation's health. A column here in 1999 warned about the informal -- and sometimes more official -- keiretsu, or trading blocks, that had arisen in Silicon Valley. I noted the two major groupings of firms backed by Kleiner Perkins and banked by Morgan Stanley on the one hand -- Amazon.com, Drugstore.com, for example -- and the startups associated with Benchmark, Sequoia, Softbank and Goldman Sachs on the other. eBay and Yahoo! come to mind. Kleiner and Softbank even adopted the language, giving their collection of companies clever Japanese-sounding names such as Netbatsu and the like.
The problem was real: Keiretsu led to sloppiness because loyalty to the group becomes more important than making sound business decisions. But the Japanification of the New Economy reared its head in worse ways than cozy relationships among venture investors, bankers and entrepreneurs. Consider, without necessarily setting out to imitate the Japanese, how Silicon Valley went wrong by turning too Japanese:
The market share grab. "Go big or go home" is the arrogant motto that Benchmark partner David Beirne used to describe Webvan's strategy, according to the book eBoys, an account of Benchmark's activities during its glory years. This wasn't a unique approach. Scores of technology companies raised tens or hundreds of millions of dollars -- tens or hundreds of millions more than they needed -- for an attempt to get as much market share as possible. The first-mover advantage was a twist the Japanese hadn't considered, but otherwise it was right out of Japan's play book: Take share from the competition, even at the expense of profits, and you'll be big and successful. The strategy worked for the Japanese until its own labor costs grew out of control and the rest of the world caught on to its trade tricks. It "worked" in Silicon Valley only as long as the capital remained free -- that is, if you look at rising stock prices rather than healthy bottom lines. Lesson learned: Market share without profits is meaningless.
Vertical integration is tricky. Japanese firms were famous for owning or being affiliated with their suppliers. That sort of business practice went out of style long ago in the U.S. until Silicon Valley companies revived it on the sly. Cisco Systems, for example, crows about how it outsources the manufacturing process. And yet, that didn't stop the networking giant from being caught with billions in inventory. And it certainly didn't stop its keiretsu suppliers, like PMC-Sierra or Broadcom, from suffering.
Indeed, inventory ballooned at Cisco's suppliers because it had to. Cisco double- and triple-ordered parts to keep up with torrid demand (abandoning, by the way, a good Japanese business practice -- just-in-time inventory management), so its suppliers, de facto members of its keiretsu, followed suit.
Interlocking ownership leads to trouble. To this day, corporate Japan is a tangled web of cross-ownership that makes the entire system one giant conflict of interest. U.S. technology companies -- led by the likes of America Online, Cisco and Microsoft -- have invested willy-nilly in start-ups, potential suppliers and would-be competitors. The investments are meant to help develop the younger companies, but a dubious fringe benefit is to distort the smaller company's progress. The shares of numerous newly public companies shot up when they announced new marketing deals with AOL. Many are out of business today. Others are busy renegotiating with AOL, which, unlike its Japanese counterparts, more or less has hung its "partners" out to dry.
And this, ultimately, leads to the only uplifting part of the story, at least for investors in U.S. technology companies. U.S.-style capitalism, having made a handful of Japanese-like mistakes, will waste no time destroying whatever needs to be destroyed and moving on. Witness Cisco's much-questioned inventory write-down. Have an inventory problem? Kill it. What will Cisco do if it turns out that some of the telecom companies it funded through vendor financing struggle but aren't likely to make it? Ditch them, of course. Ditto for investors. A company doesn't perform? Gone. It was a stock, not a love affair.
Silicon Valley took its eye off the ball by believing its own hype, behaving stupidly in a bubble and getting sloppy. One would hope it won't take technology companies 10 years to dig their way out of the Japanese-style hole they've dug for themselves.
Layoff Chic
A strange phenomenon is developing among the well-educated yuppie elites in former dot-com metropolises like San Francisco and New York: It's practically hip to be laid off and not overly concerned about it.
"Three years ago everyone I knew was doing the dot-com thing," says a close friend, recently laid off from a very large Internet company. "Now everyone's doing the laid-off thing."
An even closer friend, laid off from an even larger Internet company, reports attending an MBA event in San Francisco and hearing of midday waits at a nearby driving range. It seems that out-of-work yupsters are sufficiently unbothered by their lack of employment that they'd rather be working on their golf swing than looking for a job.
The Nasdaq may well have bottomed, though there's no evidence for why it should have. But until the privileged dot-com class of the late 1990s trades in the Beemers, polishes up the resumes and gets back to hustling for a living, how can the bad times possibly have ended? |
