U.S. PCs INVADE JAPAN Once the Japanese had a lock on the market. Now the Americans are attacking with new machines, new software, and lower prices -- and gaining ground fast.
By Brenton R. Schlender REPORTER ASSOCIATES Emily Thornton, Cindy Kano

(FORTUNE Magazine) – WHO SAYS American companies can't compete against Japanese giants on their home turf? In the past three years U.S. semiconductor makers have nearly doubled their market share in Japan, to 20%, and arm-twisting government trade negotiators get only part of the credit. What really swayed Japanese customers to buy American? The basics -- quality, uniqueness, performance, and price. Now U.S. makers of personal computers, suddenly confident of their ability to beat the Japanese, are out to replicate -- and perhaps outdo -- their chipmaking colleagues. The PC business in Japan has followed a familiar story line so far: Though American companies invented the industry, continue to drive its innovation, and dominate it everywhere else in the world, they had just 15% of Japan's $6 billion market last year. Japanese electronics giants took the rest. Apple Computer has done best over the years. The sprightly Macintosh accounted for 8.3% of the 2.2 million PCs sold in Japan last year, according to Dataquest, good for third place. NEC is dominant, with 53.4%, followed by Fujitsu, which has just 9.8%. Toshiba is in fourth place, with 7.6%. Still, Apple's share in Japan is only half what it has in the U.S. IBM and America's leading makers of IBM-compatible PCs -- Compaq Computer and Dell Computer -- have struggled. Together they delivered a little more than 6% of the PCs sold last year, with IBM accounting for the largest share. Even so, America's biggest PC makers think the Japanese behemoths are suddenly vulnerable in the brave new world of more graphic and powerful hardware and software. The Americans are attacking with spiffy machines, a new Japanese-language version of Microsoft's hot-selling Windows, and sharply lower prices. The Japanese are dithering over how to react. Compaq and Dell, which both entered the market only last year, already have forced the Japanese to slash prices. IBM Japan has become more aggressive too, lowering prices on a family of machines designed and made in Japan to suit local tastes. Apple has publicly set the ambitious goal of doubling annual sales in Japan to $1 billion by 1995. It won't be easy. The Japanese PC market is a strange beast, especially compared with the rest of the world. The most obvious difference stems from the unique nature of the Japanese language, which requires that PCs display and manipulate kanji pictograms rather than the Roman alphabet. In the early days of the industry the IBM-compatible PCs so prevalent in the U.S. and Europe couldn't handle kanji. So each of the major Japanese computer manufacturers -- NEC, Fujitsu, and Toshiba, among others -- ''Japanized'' the standard PC hardware and operating system software for themselves in different and often incompatible ways. The result is a crazy-quilt market. Software developers had to tailor slightly different versions of their word processors, spreadsheets, and the like to fit each manufacturer's machine. Moreover, even if users of different Japanese PCs load them with the appropriate version of the same software application -- say Ichitaro (the biggest-selling Japanese word processor) or Lotus 1-2-3 -- they still can't share documents or spreadsheets by swapping floppy disks. That's because NEC, Fujitsu, and Toshiba chose to store the bits and bytes of data in fundamentally different ways. The upshot of all this incompatibility: higher prices for both hardware and software, sluggish development of PC networks, plodding innovation, and much less choice and flexibility for customers. Language differences create another anomaly. Says Yoshi Takayama, who runs NEC's PC business: ''We don't have a typing culture in Japan as you do in the West. For many Japanese, using a keyboard is kind of like experiencing magic.'' Again, that's because written Japanese draws upon thousands of pictograms rather than on a limited number of phonetic characters to represent words. Typewriters just were not practical, because they would require a keyboard as big as a desk. Computers made typing in Japanese possible but still daunting. To produce a kanji, a user must hit several keystrokes to enter the sound of the desired character and then choose from a menu that pops up on the screen displaying various kanji that sound the same but have different meanings. The Japanese word kisha, for example, could mean newspaper reporter, train, your company, or come back to the office. Each meaning is represented by a different kanji. To type the right one takes four keystrokes, not to mention a photographic memory. THEN there's the wahpuro phenomenon. Many Japanese office workers who can get past keyboard phobia make do with machines that can process words but are incapable of other computing chores such as analyzing financial models, making charts, or searching databases. Indeed, demand for wahpuros -- the word derives from ''word processor'' and describes portable devices, often equipped with built-in printers, that are more akin to electric typewriters than PCs -- is almost as great as for PCs. Because producing wahpuros, which sell for about half as much as regular PCs, is a good business for computer makers, they are reluctant to drop the prices of their more powerful machines lest they cut into that market. There are also profound differences in how PCs are distributed in Japan. Most are sold in retail stores, many of which are financed or owned outright by manufacturers. One reason NEC is so successful is that it has by far the largest number of dealers -- 7,000 of them. Many stores carry competing brands, but unlike their counterparts in the U.S. and Europe, they rarely discount. Mail-order distribution hasn't caught on yet either, nor do many manufacturers sell directly to corporate customers. In short, Japan is the world's stodgiest PC market. The numbers tell it all. While the country has the world's second-largest economy and a well-educated population, the number of PCs per capita is less than half that of the U.S. Prices are roughly 50% higher than in the rest of the world, averaging $2,900 for a typical machine with color screen and hard-disk drive. The combination of high prices and the lack of compatibility has created the most distinctive attribute of Japan's PC market -- it is stagnant. While worldwide PC sales rose at double-digit rates in recent years, the market in Japan has been more or less flat. Last year it actually shrank 6%. U.S. hardware and software manufacturers -- and even a few of their Japanese competitors -- think something is wrong with this picture. The problem is incompatibility, and they've been working on several fronts to solve it. Two years ago IBM perfected a bilingual version of Microsoft's DOS, the standard operating system that controls about 80% of PCs elsewhere in the world. DOS/V, as the Japanese version is called, enables any standard PC to prepare or search documents with kanji characters, the Western alphabet, or both. Big Blue licenses the software to other PC manufacturers, including Dell and Toshiba, but so far only about 6% of PCs sold in Japan use it, mainly because it only replicates features that proprietary Japanese PCs have offered all along. (Apple has sold bilingual Macintoshes for several years, hence its relative success.)

A much more ambitious assault on incompatibility began this year. The platoon leaders are -- who else? -- Bill Gates and Microsoft. The centerpiece of the strategy is a new Japanese-language version of Windows, the easy-to- use, add-on operating system software that gives IBM-compatible machines a prettier face and lots more power. Windows has taken the rest of the world by storm, selling more than a million copies a month and revivifying both the hardware and software parts of the PC industry. In Japan, however, only 440,000 copies of Windows have been sold so far, largely because earlier versions didn't handle kanji that well. Says Richard Fade, Microsoft's vice president for the Far East: ''We got a lot of grief for our previous versions of Windows. So we took our time, picked it apart, and put it back together again with the Japanese user in mind.'' Adds Gates: ''It may seem like we're a little late, but Japan had to be ready for Windows too, and now it is.'' IT'S NOT that Microsoft wasn't making money in Japan. Although the Japanese electronics giants had designed proprietary PCs, they based the operating software on parts of Microsoft's DOS and for years paid royalties on each machine they sold. Still, Microsoft is going all out to promote Windows this time because the software offers a big chance to collect even more revenues per machine. So in May, six months after its intended launch date, Microsoft unveiled the new product, called Windows 3.1J, at a blowout in Tokyo attended by 3,500 people. Pacing around an enormous stage and bathed in blue-green laser light, Gates described a program that is fully bilingual and can run on just about any manufacturer's hardware, including NEC's proprietary 9800 line, as well as IBM-compatible PCs. Indeed, joining Gates on the stage were Compaq's Pfeiffer, whose company has everything to gain, and Tadahiro Sekimoto, president of NEC, who has the most to lose. With one stroke, the rules of the Japanese PC market changed. Says software entrepreneur Kazuhiko Nishi, president of ASCII Inc. and an old Gates pal: ''It's like what happened when the U.S. deregulated the airlines. It will make the business harder for the providers, but the consumers will win big.'' Windows 3.1J looks like a hit, judging from early reports. Microsoft took orders for 65,000 copies in two days and thinks it might sell a million this year. American hardware vendors also hope to ride the Windows boom. Among them, Compaq is making the most noise, practicing what one security analyst calls ''in your face'' marketing. In blunt comparative advertisements, Compaq critiques NEC's market-leading 9800 family of PCs. To taunt NEC employees on their way to work, Compaq even bought ad space on platforms at the train station adjoining NEC's 43-story headquarters. NEC fired back with ads warning customers not to buy a PC ''with the steering wheel on the wrong side,'' a reference to Compaq's reliance on American software technology. (In Japan, as in Britain, cars drive on the left.) Masaru Murai, a former IBM executive who is president of Compaq's Japanese subsidiary, just laughs when asked if he intended to stir up such a fuss. But he turns dead serious when describing his goals: ''Japan is way, way behind the rest of the world, both in PC technology and in value, and it's insulting to customers. We want to change that.'' Compaq won't say how many machines it is selling in Japan, but analysts there estimate that this year it will sell perhaps 50,000 PCs, up sharply from last year's volume of 7,500. Even so, those figures pale compared with Compaq's worldwide 1992 sales of more than three million units. IBM Japan isn't sitting on its hands either. While its parent back home has had differences with Microsoft in the past, IBM Japan has embraced Windows 3.1J with a passion. Long respected in brand-name-conscious Japan -- indeed, IBM was a model for many of Japan's electronics leviathans -- Big Blue wants to use that fame, its impressive array of portable and desktop computers, plus Windows and rock-bottom prices to wean customers away both from NEC and from wahpuros. Analysts in Tokyo expect IBM's sales to surge this year from 133,000 units to 200,000, despite competition from other U.S. PC makers. Dell, the mail-order PC maker from Austin, Texas, has the most modest expectations, mainly because it isn't sure whether Japanese will buy computers by mail in large enough numbers. Just to be safe, Dell has signed up a few retailers. Still, Dell's toll-free phone lines in Japan have been swamped since they opened last fall. Meanwhile the company has nearly doubled its staff since January, to 75 people. Analysts estimate Dell will sell 12,000 PCs, compared with 2,000 in the latter half of 1992. IBM- and Windows-compatible hardware vendors in Japan are getting a timely boost from the U.S. software industry. The American Electronics Association in Japan reports that 86 U.S. software companies now have operations there, up more than 50% since last year, largely because of the high expectations that Windows will catch on. Moreover, Microsoft and Lotus both have pledged to cut permanently the suggested retail prices of software by about 40%, and others are expected to follow. Overlooked in all the hoopla over Windows is Apple, which has methodically built a business that many American PC companies admit they would like to emulate. Early on Apple hired its management team in Japan, sensing that Japanese would better know how to tackle the market than would expatriate managers. These executives cultivated a strong network of dealers and burnished Apple's image as an innovator. Apple is politely skeptical that the new immigrants will be runaway successes right away, despite all the enthusiasm for Windows. Says Shigechika Takeuchi, president of Apple Japan: ''The key to success in Japan is distribution. But to attract good dealers and distributors your product must be unique. I'm not sure all these American Windows PCs can differentiate themselves, especially if the Japanese manufacturers start selling them too.'' HOW is Japan Inc. reacting to all this? NEC seems to be hedging its bets by promising to support Windows 3.1J on some of the machines in its 9800 series of PCs. They won't be fully compatible, however: Although these machines will run the same applications as other Windows machines, floppy disks created on them will still be unreadable by PCs from other makers. But NEC executives don't think Windows will catch on quickly. PC chief Takayama says he'd be surprised if Windows captured 40% of the Japanese market by 1995 (it got 60% the first year in the U.S.). The problem is twofold, he says. First, Windows machines, which require a hard-disk drive and a lot of memory, are much more expensive than the stripped-down models most Japanese buy. (Compaq and Dell, whose budget models rival wahpuros in price, strenuously argue that point.) Second, NEC 9800 users can choose from more than 15,000 Japanese-language application programs, vs. 450 for Windows. Indeed, NEC President Sekimoto told the crowd at Microsoft's Windows introduction: ''Even in the Windows era, NEC's software superiority will not be shaken. The NEC 9800 is for the Japanese who are a step ahead.'' Other Japanese manufacturers, however, seem to recognize that Windows offers their last, best chance to cut into NEC's enormous lead. Fujitsu will continue to support its proprietary models but will emphasize other PCs that are fully compatible with Windows. To better compete on price, Fujitsu also plans to import low-cost machines made by independent manufacturers in Taiwan. Toshiba, the other big Japanese PC maker, will try to leverage its success in the U.S. and Europe, where its IBM-compatible portable and laptop machines are the biggest sellers. Less than a month after Windows 3.1J arrived, Toshiba unveiled a new family of desktop models tailored to it. Then, most ominously for the Americans, there's the government wild card. Earlier this year, the legislature approved a $126 billion fiscal stimulus package to revive the sluggish Japanese economy. The package includes nearly $1.5 billion to finance public school purchases of PCs over the next two years. No one knows whether the government will urge schools to buy Japanese, or let them make their own decisions. In the commercial marketplace the customers ultimately will decide. They will have to weigh whether the power and convenience of Windows justifies buying new machines and application software. Lower prices on American brands might help them make that decision. But Japanese manufacturers are already cutting prices in response. Even NEC rushed a lower-priced model to market last winter right after Compaq started its advertising campaign. For now, though, American PC vendors feel the wind at their backs. Not only is the software finally available to help them attack the Japanese market with a coherent strategy, but in addition the strengthening yen lets them further undercut the prices of their Japanese counterparts. The Americans can be sure, however, that the Japanese PC makers won't let market share slip away easily. After all, the Japanese wrote the book on efficient manufacturing and high quality. Moreover, their suffering mainframe and minicomputer divisions are also in the throes of adapting to the trend toward open, compatible systems that is now rocking the entire computing industry. The one thing Japan's electronics giants want to avoid is isolation. Whatever happens, the Japanese computer user, long saddled with incompatible, underpowered, and overpriced PCs, will be a lot better off. If nothing else, the Americans can take most of the credit for that.