Delivering Innovation to the “Zero-Defects” Culture: Japanese Conservatism Meets Israeli Risk-Taking

This essay is part of the Middle East-Asia Project (MAP) series on "Israel: The Future is Asia". The series investigates Israel's expanding relations with Asia -- the forces propelling and impeding their growth, the progress made in their development, and their as yet unrealized potential. See more ...
 

Despite the fact that Japan was one of the first countries in the world to recognize Israel as an independent nation, and despite the fact that relations between the two peoples have been generally amicable, the business linkages that would have been mutually beneficial have been very slow to develop.  Only quite recently has there been a change in the wind that promises much more positive economic interaction between Israel and Japan as we enter the second half of this second decade of the new millennium.  The formal reasons for this delayed change of heart, as well as for the current shift, are both political and economic. However, the contrast between the way Israelis and Japanese engage in creation and innovation also contributes to the need for the two business cultures to engage each other more actively. The Arab boycott against Israel, the heavy Japanese dependence on Middle Eastern energy sources, and the Japanese desire to achieve scale in their manufacturing pursuits all impeded the growth of such business ties.  But Israel needs Japan as a market, as a source of investment and as a mentor in implementing “zero defects,” while Japan sorely needs the creative energy of Israeli start-ups and technology companies.  Out of this mutual need there may emerge a match made in heaven.

Two Nations with “Nothing In Common”

A milestone of sorts in the commercial relations between Israel and Japan was reached early in 2014 when Japanese internet shopping giant Rakuten acquired the Israeli video and chat company Viber for $900 million.[1] It was not the first foray by a Japanese company into Israel’s R&D cornucopia, but it was certainly the largest investment ever made by a Japanese firm. Japan is famous for producing very high-quality, well-designed products, and it has long been known for elevating continuous improvement (kaizen) in all things as a sacred principle. Indeed, more than almost any other nation Japan has come to be considered the society most serious about “0 defects” in its material culture. In Israel, however, for historical and cultural reasons, people are more willing to take risks if the risks are likely to promote innovation. Israelis will accept a 0.005 percent margin of error in a software solution if it works well in general. The Japanese have slowly had to become less rigid about their standards because in the digital world industry, leaders accept that continuous innovation and product improvement carry the possibility of short-term imperfection.

Because of Japan’s well-earned reputation for perfection, one might easily forget that Japan has not always had such a focus.  Japan’s drive to rebuild its war-depleted economic base after the devastation of 1945 in order to recapture what a decade of imperialist adventurism had wantonly sacrificed, however, provided sufficient motivation for the entire country to develop almost a fetish for continuous improvement. Japanese organizations found that part of the solution to the many challenges that faced them in the postwar world was to gradually fine-tune all the things they did, from design to manufacturing to testing. Students preparing for university as well as workers went about learning English—the linguistic gateway to the developed world—with fierce determination, company employees obediently gave their all for the firm at the expense of their families and quality of life, and manufacturers kept raising the bar for what they produced in order to capture export markets. As a consequence, Japanese cars, consumer electronics, and other major product categories became increasingly attractive when the country’s leading industrial groups pushed overseas (1960s-1990s) in their now famous drive to become “number one.”[2]

Three decades ago, the then-chairman of General Electric, Jack Welch, was quoted in a classic article by Harvard Business School’s Theodore Levitt as asserting that the Japanese, with few natural resources, an alien culture, and a complex language, had cracked the code of Western markets. They discovered what, to Welch, was the one great thing every market has in common—an overwhelming desire for dependable, world-standard performance at aggressively low prices. The Japanese delivered such irresistible value everywhere, attracting people with products that market research would probably not have regarded as marketable.[3]

As Japan’s star rose in the 1970s and 1980s, nobody there except a very prescient few could see any benefit from pooling resources with Israel, a small country in the Middle East that had successfully fought wars, but at the same time had still not finished building infrastructure and adequate housing for its growing immigrant population. Most Japanese could barely pick out Israel on a map. 

Israel is known for its spontaneous and sometimes argumentative, ad hoc way of doing things—for finding solutions from the give-and-take of open debate, irrespective of rank or position. In this, Israelis follow a very different protocol from the diffident, respectful, and polite Japanese. Israelis are rarely concerned with the occasional lapse of quality or execution because of their fundamental concern with innovating to create a better solution to a problem. So why would the Japanese, who were busily building themselves a world reputation for high-quality, fail-safe products be interested in a small, struggling country that was obviously fertile with great ideas but was often short on quality control? Japanese indifference toward Israel was to change slowly to curiosity, and the change is attributable to the restructuring of the global economy that took place during the past 20 years.

Drawing Parallels, Marking Limits      

Israel’s triumphant survival was still none too assured in the first two decades of its existence. Similar to Japan in the 1950s and 1960s but on a more drastic scale, Israel was short of everything a modern economy needs to thrive—capital, technology, trained human resources, even food. And Israel also had the monumental task of assimilating immigrants from a multitude of different lands speaking a babel of languages, many of whom had lost everything they ever owned in the Holocaust or in their hasty flight from hostile Arab countries. During this period of austerity Israelis developed a strong and enduring interest in Japan precisely because they saw the similarities between their own conditions and constraints and those of Japan. And they noted how the Japanese were succeeding in overcoming those limitations. This recognition of similarities and the consequent interest in Japanese culture was not reciprocated by Japan, however, where most of the citizens remained ignorant of what Israel was all about or even where it was located.  Japanese only heard about Israel when there was news of conflict with the Arabs or of terrorist incidents against Israelis, including the one perpetrated by Japanese terrorists in 1972 in the Lod airport massacre. In addition, much of the left-wing propaganda in Japan (as elsewhere) was reflexively pro-Arab even before the advent of the Palestine Liberation Organization (PLO). Because of Japan’s dependence on imported oil and OPEC, these sympathies were perhaps expressed more as lip service than sincere emotional support, but they nevertheless stood as a barrier to the development of healthy commercial ties with Israel. The stereotyped notions and uninformed opinions held by even educated Japanese that Israel was a wilderness of camels and desert, dangerous and unrewarding—remained conventional wisdom in Japan until the dawn of the new millennium.

Yet even as Japanese businessmen chose to ignore Israel, and spent many years scrupulously observing the Arab boycott against Israel and Israeli goods, the situation on the ground was changing in such a way that ultimately they would belatedly come to recognize Israel as an innovative giant, as a potential partner to help them retrieve their own lost leadership position in the global economy. And that story of the gradual Japanese shift in thinking toward Israel is what we are focusing on here.

Pacific Overtures

Japan is an extraordinarily homogeneous country, though perhaps not quite so homogeneous in its origins as the Japanese themselves want to believe.  Everybody knows the rules of the game and shares the same playbook. Israel, on the other hand, is a polyglot immigrant society where people come from more than 50 different cultures with different languages and practices and they continue to apply those varied cultural templates in their daily life. At the same time, they still think of themselves as members of the same Jewish people, a “peoplehood” that can claim a far older pedigree than the relatively young Japanese nation.

The pioneers of the Israeli hi-tech industry benefited from an environment where (like Japan) there was a very high degree of literacy and numeracy and a large, underpaid pool of well-educated workers who could be utilized. In addition, the government worked hand-in-hand with Israel’s universities to support the type of research and development that eventually led to innovative breakthroughs in information and medical technologies, pharmaceuticals, agriculture, and defense-related industries. Japan graduated in the 1980s from exporting textiles to exporting memory chips, automobiles, and optical equipment; similarly, Israel evolved during the 1990s from exporting citrus fruit to exporting IT, telecom and digital products, and services worldwide.

During the first decades after World War II, five Japanese large general trading companies aggressively planted their flag on foreign soil: Mitsui, Mitsubishi, Sumitomo, Itochu, and Nissho-Iwai. Nissho-Iwai was one of the first to open an office in Israel and stayed there until the implosion of Japan’s economy in 1990 caused it to retreat from that market. The other general sogo shosha[4] have token representation in Israel. To this day, for example, Mitsubishi Corporation has staff in Tel Aviv but keeps the head of its office in neighboring Amman, Jordan to placate its Arab clients. The Japanese auto manufacturers dealt with the Arab boycott by establishing a sort of papal line of demarcation until the mid-1990s, when they agreed to sell Subaru and Mazda in Israel and Toyota and Nissan in the Arab countries but not in Israel. Given that 25 percent of all vehicles sold in the Middle East by 1992 were being bought by Israel, Toyota eventually decided that it would be to its advantage to sell cars to the Israelis and by 1998 Toyotas, too, were conspicuous on Israeli streets. 

In the summer of 2014 a large delegation led by Japan’s Economy Minister Toshimitsu Motegi visited Israel to jump-start relationships and investments between Japanese and Israeli enterprises.[5] The visit was prompted in part because Japanese industry has had difficulty in accommodating the global transition from electro-mechanical technologies to digital ones, and Japanese firms have not kept pace in the transition from traditional manufacturing to knowledge-based service industries. The latter is a volatile and risky marketplace at the best of times where agility and paradigm-busting innovation count as much as sheer corporate bulk, and Japan’s leading firms seemed to lack the essential flexibility required for success. Israeli start-ups, on the other hand, are more comfortable dealing with uncertainty and the need to make quick decisions and changes of direction that are demanded by the digital marketplace. 

After the Oslo peace process took off in the early 1990s, there was a gradual softening of Japan’s hitherto rigid observance of the Arab boycott. Starting in 1996, the Japanese company Softbank Capital began investing in Israeli companies, though still trying to keep a low profile by managing the investment process from its New York office.[6] It was soon followed by Sony, which invested in Rainbow Medical. Fin Tech Global Capital, founded in 1994 and which launched a venture capital business in 2007, was the first Japanese venture capital firm to look for investments in Israel’s life sciences and information technology (IT) companies. Another Japanese firm, NIF Ventures, invested in several Israeli start-ups and in 2007 CSK Venture Capital toured 25 startups and invested in Horizon Semiconductors Ltd. 

A New Momentum

In October 2013, a report issued by Mitsubishi UFJ Research and Consulting, the think tank of Mitsubishi UFJ Financial Group, belatedly acknowledged reality in a report, “The Unknown Hi-Tech Venture Powerhouse of the Mideast: The Current Situation and Future Outlook for Israel’s Economy.”[7] The title would undoubtedly strike those who know the facts as highly ironic—Israel’s hi-tech prowess was by this point in time still “unknown” only in the more conservative boardrooms of Japan, Inc.  Indeed, during that very year several notable deals were concluded between Israeli and Japanese entities.  Yaskawa Electric invested in Argo Medical Technologies in return for exclusive sales distribution rights in East and Southeast Asia for the Israeli firm’s ReWalk exoskeleton system for spinal injury victims.  Toshiba acquired solid-state drive manufacturer OCZ Technology Group.[8] At the end of 2013 Takeda Pharmaceuticals International GmbH, a unit of the Japanese pharmaceutical giant Takeda, announced the establishment of a wholly owned subsidiary for marketing in Israel.  This step was taken after Takeda had teamed with Johnson & Johnson and Orbimed to invest in the Israel Chief Scientist's new dedicated biotech incubator FutuRx, and Takeda also became involved in various collaborations with Israel’s home grown Teva Pharmaceutical Industries Ltd.[9]

The Possible Future Partners

Perhaps a harbinger of future pairings is the breakthrough agreement signed by Japan’s Minister of Economy, Trade and Industry, Toshimitsu Motegi, with Israel’s Minister of Economy, Naftali Bennett, in July 2014. The agreement called for reciprocal support in joint industrial R&D projects between Israeli and Japanese companies and organizations. On his visit to Israel, Motegi led a delegation of Japanese industrialists and senior officers of Ministry of Economics, Trade and Industry. Cyber security and homeland security seemed to be areas of particular interest to the Japanese dignitaries.[10]

The emerging romance between Japanese industrial perfectionism and Israeli innovation is still in the early stages. Yet American and European firms have long recognized the advantage of having an iconoclastic R&D partner in Israel to help jumpstart and improve on their own technology breakthroughs. Even the Chinese seem to be more willing to sample the technology that the “Start-Up Nation” has to offer. When the Japanese realize that small Israeli entities can help them leverage their large company capabilities to achieve what eludes them by going it alone, they too will jump on the technology partnership bandwagon in a major way. Should this occur, it will not only spark innovation in Japanese companies, but it will also stimulate a much-needed “0 defects” consciousness among their Israeli partners as well—a win-win for both sides.  Indeed, Israel’s high tech ecosystem requires generous infusions of investment and while the Israelis tend to accomplish a lot with a little, they still have a growing need for funding. In addition, Israel as a small country isolated from the most attractive markets needs to build strategic alliances with players who have access to those overseas markets, as well as the scale and resources to undertake long-term strategic campaigns in those countries. Japan has such companies in abundance, and thus could become Israel’s new channel for penetrating the growing Asian region. 

[1] Niv Elis, “Japan's Rakuten acquires Israeli tech company Viber for $900 million,” The Jerusalem Post, 14 February 2014.

[2] Ezra Vogel, Japan as Number One: Lessons for America (Cambridge, MA: Harvard University Press, 1979).

[3] Theodore Levitt, “The Globalization of Markets,” Harvard Business Review (May/June 1983), reprinted in Robert Dow Buzzell, John Quelch, and Christopher Bartlett, Global Marketing Management: Cases and Readings, 3rd ed. (Boston, MA: Addison-Wesley, 1995), 23.

[4] Sogo Sosha, which after World War II became the core element of the Japanese business model, are general trading companies that trade in a broad range of materials and products. There are seven such companies: Itochu, Marubeni, Mitsubishi Corporation, Mitsui & Co., Sojitz, Sumitomo Corporation, and Toyota Tsusho.

[5] "Japanese Economy Minister Toshimitsu Motegi Leads Delegation to Israel,” Jewish Business News, 6 July 2014.

[6] Levi Shapiro, “Global Telcos in the Holy Land,” The Jerusalem Post, 22 October 2013.

[7] Kenichi Hartman, “Japan Inc. + Start-Up Nation = It’s about time,” The Times of Israel, 28 April 2014.

[8] Hartman, “Japan Inc."

[9] Gail Weinreb, “Japanese co Takeda Pharmaceuticals Opens Israel Office,” Globes, 18 December 2013,http://www.globes.co.il/en/article-1000902793

[10] Viva Sarah Press, “Japan Signs Breakthrough R&D Deal with Israel,” ISRAEL21c, 11 July 2014.