Government Procurements:
Do Foreign Computer Vendors Get a Fair Deal? US Trade Representative Mickey Kantor may still be on the Japanese
government's tail over agricultural issues, but what about public sector
computer procurements? Are foreign computer vendors playing on a leveled
field? The answer seems to depend on who you talk to.
by John Boyd
Foreign computer vendors - particularly US makers - have never had it so
good in Japan. Whether it's PCs, workstations, mainframes, or
supercomputers, today American manufacturers are in the markets,
eyeballing it with the best of the local competition - and as often as
not, it's the local guy who blinks.
In the software markets, too, US firms are enjoying inordinate
success. Whether it's Microsoft's DOS/V, Windows, and Windows NT, Novell's
NetWare and UNIX, or Apple's Macintosh OS - foreign operating systems have
taken firm control of the desktop and server markets. And according to
publisher Software Japan, 15 of December's 20 top-selling PC titles were
localized versions of US programs.
But in the public sector...
The success stories, however, have all been written in the private sector,
where (in the 1990s, at least) market forces can generally be counted on
to ensure that the best company wins. When these same vendors try to sell
their wares in the public sector, however (where the customers include
government agencies, research labs, and schools), the scene recalls the
dark decades (of the '70s and '80s), when the door to the public sector
was generally slammed shut before a foreign foot (never mind a bid) could
enter.
There is no question that the situation has improved, but there is
still some way to go before foreign access to public procurements is as
open as that of the commercial market. The Computer Systems Policy Project
(CSPP) - a group of 13 major US computer manufacturers active in Japan
(including IBM, Apple, Cray Research, DEC, AT&T, and Sun) - regularly
monitors the public sector markets and compiles data on sales. According
to CSPP, the value of the overall Japanese hardware market (excluding
PCs) was Y3 .56 trillion in 1993, of which the public sector accounted
for about 20% or Y713 billion. A market study made available by CSPP in
January notes that the 1993 foreign vendor share of the public sector
remained at 8.9%, unchanged from 1992. This was despite
a 3% growth in the public sector and an agreement between the Japanese and
US governments in 1992 to free up foreign access to public tenders.
Compare this with the 36.3% share foreign computer vendors grabbed
in Japan's commercialmarkets, or the 32.6% market share foreign
manufacturers snatched in the quasi-government-agency sector, and it
becomes clear why many foreign corporations feel all is still not as it
could be when selling to the bureaucrats. The US government shares this
opinion. "US computer companies are doing well in the private sector, but
not as well in the public sector," says a government official at the US
embassy in Tokyo. "We feel the Japanese government could do a lot better
in their procurement of foreign computers."
An uphill road Digital Equipment Corporation has long criticized the lack
of foreign maker inroads into the government sector. While DEC is a major
supplier to the US government and does well in several overseas markets
(such as Australia, where it ranks as the second l argest computer vendor
in the public sector), Nihon DEC barely ranks in the top ten in Japan.
Yoshihiro Ono, sales manager in Nihon DEC's government and services group,
cites a number of hurdles. "Severe competition is the first reason. Japan
is a special market; it has so many major computer manufacturers -
Fujitsu, NEC, Hitachi, Toshiba. You don't find this in the US or other
markets." Ono has no problem with that; competition, after all, is supposed
to be the name of the game. But the Japanese government, and the Ministry
of International Trade and Industry (MITI) in particular, still tends "to
protect Japanese business against foreign manufacturers. The protective
attitude still remains," he says.
As another example of the difficulty foreign manufacturers face,
Ono points to a recent tender for a major PC network put out by MITI. The
contract eventually went to NEC. "NEC discounted 70% to 80%. We couldn't
even bid because we would have made a larg e loss," Ono complains. His
explanation for the deep discounting is that Japanese competitors have
related businesses in areas like semiconductors, telecommunications, and
consumer electronics. They are willing to discount in one area to get
business and keep the factories humming. In Nihon DEC's case, though, "We
have only our computer business, so we must secure a minimum gross
margin," explains Ono.
Though MITI claims to be completely non-partisan and open to
market forces, Ono believes this "is only partially true." A MITI
official, however, expressed surprise at such comments. "The US is the
motherhood of competition. It's sad to hear such a compl aint," he says.
Besides, the network installed by NEC contained "a lot of foreign
equipment [like] Compaq servers. And all the software except one or two
items like Ichitaro [word processing software] was US made," the MITI
official notes.
In for the long term
In the area of supercomputer sales in Japan, long a contentious issue
between the US and Japanese governments, deep discounting by domestic
supercomputer makers has been viewed by the American side as a major
barrier keeping foreign manufacturers out of t he game. After strong US
government pressure, and some bad publicity concerning government computer
contracts that were won with bids as low as Y1, MITI moved to exercise
"ministerial guidance" in an attempt to stem the more blatant discounting
practices.
According to Gene Banman, president of Nihon Sun Microsystems,
which leads in shipping workstations in the commercial and higher
education markets, there has been scant progress in selling to government
agencies. Banman takes deep discounting philosophically, though. "Whenever
you try to unseat the incumbent, their reaction is to save the business at
all costs."
"The Japanese vendor attitude to his customer relationship is that
it's a 20-year investment, with a 20-year horizon for a payoff. And if it
looks like he's going to lose his customer, he'll do anything to save it,
and suffer even years of losses." Banman says that this is simply one of
the "realities foreign companies face when coming into Japan, and one of
the frustrating parts of trying to break into this market. They [Japanese
competitors] can't afford it forever, but they have always funded it
through other businesses they're doing with the government that are
profitable. They can lay it off on that."
A real education
Apple Computer, too, has run up against problems with deep discounting.
Apple has long been a pioneer in the world of education and today holds
50% of the education market in the US. In Japan's commercial market, Apple
Japan has been firmly en¤sconced in the No. 2 slot behind NEC Corporation
for the past three years, and currently claims over 15% of the market. But
this success has not carried over when it comes to supplying computers to
Japanese schools and government agencies. According to market researcher
IDC Japan, Apple Japan's 1993 share in the kindergarten to high school
(K-12) segment was just 5.5%, and an even slimmer 4.3% in the government
sector. (At the university and college level, where government politics
plays a less influential role, it is noteworthy that Apple Japan held a
19.8% market share in 1993.)
Says Atsuko Yamamoto, program manager in Apple Japan's K-12 group,
"There are many cases where [domestic] companies give very big discounts.
Apple just cannot match them. But we cannot say it's unfair if the bid
goes to the lowest bidder."
Perhaps not, but a former executive at Apple Japan, Hector Saldana
(who has since returned to the US), questions if bids have any meaning at
all. "Procurement is very politicized to say the least," said Saldana when
he was director of strategic sales in 1993. "Even though we offer a very
good product [Macintoshes localized for the Japanese market] at a
competitive price, because we're not entrenched in the politics of the
country, we are often excluded from bidding. And even when we are
included, the decision usually goes to local vendors."
John Stern, vice president of Asian operations for the American
Electronics Association in Tokyo, agrees. "It's not a price issue, but a
political decision." A famous case in point came to light in 1993 via a
television program about foreign PC manufacturers competing in the
education market, broadcast by NHK, Japan's national broadcasting
corporation. The documentary looked at three different tenders for
equipping public schools (in Sakai City, Osaka; Amagasaki in Hyogo
Prefecture; and Shibuya-ku, Tokyo). In each case, committees of teachers
and administrators, established to consider the bids, selected foreign
vendors. Yet in all three cases, the local government bureaucrats who held
the purse strings insisted that the tenders go to domestic suppliers.
(The bureaucrats won out in Sakai and Amagasaki. In Shibuya, the
teachers stood firm and, after 12 months of bitter contention, the Apple
distributor was finally given the contract. )
Other US computer manufacturers have their own war stories to tell
when they can talk off the record. Such experiences help to explain why
just two domestic vendors, NEC and Fujitsu, together held 79.4% of the
K-12 market in 1993.
How much do you want it?
It's a similar story at the local government level. CSPP statistics show
that the market share for foreign computer vendors in this category
dropped from 7% in 1992 to a meager 3% in 1993. This dip didn't escape the
eagle eye of US Trade Representative Kantor, who voiced his concern this
January. He noted that the local government sector was the fastest
growing, and therefore it is important that foreign manufacturers be able
to compete in it fairly.
But the lack of sales cannot be blamed entirely on cozy
relationships between the bureaucrats and domestic vendors. Timothy
Sheehy, an external programs manager at IBM World Trade Asia, says, "It's
tough to sell to any government, even the US government." It finally boils
down, he says, "to the level of commitment on the ground." And given that
the ground in this case is Japan's own backyard, it should be obvious that
the likes of Apple and Compaq cannot match the level of support NEC and
Fujitsu can throw behind their bids.
Apple, for example, relies entirely on nine distributors to win
government contracts, and does no direct bidding itself. One of those
distributors was quick to grumble ó off the record ó that Apple Japan
provides very little back-up support. Even IBM, with its considerable
resources, only recently established a group to focus on marketing to
worldwide public and education sectors. This group is now working closely
with its colleagues in IBM Japan to improve matters here.
A success story
MITI says that all the procedures to make the bidding process open and
transparent, as agreed upon in the 1992 computer accord, are being
followed by all government agencies. IBM World Trade's Sheehy supports
this assertion. "MITI is more receptive now," he says. In fact, the
ministry has even invited IBM to join it in drawing up additional criteria
that could be used in better judging bids, "so that it's not just the
lowest price that wins."
Cray Research, the world's largest vendor of supercomputers, has
enjoyed a recent string of successes in Japanese government procurement.
Outside Japan, Cray has long held about 70% of the world's market for
supercomputers (the giant number crunchers used in everything from
designing integrated circuits and forecasting weather to modeling jumbo
jets and simulating crashes of new automobiles). In Japan, though, Cray
was struggling to make an impact on the market. It was up against fierce
competition from Fujitsu, Hitachi, and NEC, who market their own
supercomputers.
The US government, judging the technology to have strategic
importance, made supercomputers a specific issue and strong- armed the
Japanese government into making two supercomputer agreements (in 1987 and
in 1990). These called upon Japan to open up access to the public sector.
Since the 1990 agreement, says Yoshikazu Hori, president of Cray Research
Japan, "The situation has improved. The Japanese government is now trying
to be fair."
In comparison to how things used to be, that's an understatement.
According to Cray Japan's own data, in the category of high- end parallel
vector processor supercomputers, by the end of 1994 Cray held 17% of the
public sector market and 23% in the commercial market. If
mini-supercomputers are factored in, Cray's share jumps to 46% of the
public sector and 33% of the commercial market, a remarkable achievement
compared with the barren years of the '80s.
Even AEA's John Stern, known for not giving an inch in the trade
battles, admits that, "The Japanese government has purchased more
[American-made] supercomputers than expected." But he quickly adds,
"That's because there is more software available and because US firms have
MPP (massively parallel processors) technological advantages."
That's just how the system works
Bill Totten, president of Ashisuto KK, a major Japanese software
distributor, brings a new twist to the argument for increased foreign
access. "The Japanese usually imitate the US" he says, "and since the US
is blatantly exclusive ó only US companies can sell to the military, and
the military puts out about 90% of the bigger contracts ó that's the way
it is."
"Secondly," continues Totten, "the Japanese government gets its
revenues mostly from the Japanese people, through taxes. So it's only
natural the Japanese government should spend those revenues on Japanese
companies, on Japanese citizens."
"I don't agree with that," says a MITI official in rebuttal,
perhaps fearful of further charges of unfair trade practices. "As a member
of GATT (the General Agreement on Trade and Tariffs), the market must be
open. We have no intention of purchasing only Japanese goods over foreign
goods. We want an open market." Besides, he adds, "It's better for
taxpayers to have quality goods at the cheapest prices." It's hard to
argue with that sentiment ó providing the same taxpayers don't end up
subsidizing cheaper government computer prices in other ways, such as by
paying more for other categories of goods.
Perhaps Nihon Sun's Banman sums up the situation best. "You can't
blame the Japanese supplier for trying to rescue his account. And you
can't blame the government for taking the lowest price it can get." After
all, that's how competition works.
Who do you trust?
So, just how many foreign computers does the Japanese government really
buy? The figures compiled by the US-industry group Computer Systems Policy
Project, cited in this article, show that Japanese national government
procurements in 1993 included less than 10% foreign-made computers. Yet on
February 24, the Japanese government announced that its procurement of
foreign-made computers made up 27.9% of total purchases for fiscal 1993
(up from 18.9% in 1992).
According to these "official" figures, government purchases of
foreign-made computers, peripherals, and software amounted to Y226.6
billion. If foreign-procured services are factored in, the total is said
to have reached Y288.6 billion. These figures were offered by government
officials as proof that the 1992 action program to promote open and fair
competition for public-sector computer purchases has been effective.ó Ed.
Are complaints effective?
For foreign computer manufacturers who feel they have a legitimate cause
for complaint regarding government procurement practices, there is a
formal mechanism by which they can present their case. "As long as they
don't use this mechanism, I don't see the legitimacy of the complaints,"
says a MITI official. "It has never been tried, except one or two times in
the area of supercomputers."
AEA's John Stern, however, suggests that foreign reluctance to use
official channels may stem from past negative experiences. "Very often,
you are brought back to the same place you started when you raised the
problem," he says.
Ken Richeson, a vice president at IBM Asia Pacific who has been in
Japan since 1981, suggests a more practical reason for the reluctance to
make an official complaint. "It ain't the Japanese way," he says
succinctly. "That's not how you win in Japan. If you go that route, you
can shoot yourself in the foot. You might be kept out of future
opportunities."
