Chapter21 Establishing New Joint Venture Businesses

Establishing New Joint Venture Businesses

Ibuka and Morita sign the joint venture
agreement with Tektronix president
Howard Vollum

The choice of the name "Sony" can be traced back to the spirit of Masaru Ibuka and Akio Morita. Back then, the name "Sony" had no obvious connection to technology or the electronics industry. Ibuka and Morita explained that they did not want to limit themselves to electronics. Rather, they wanted to "be pioneers, to take on new fields, and build a corporate group recognized around the world."

Thus, Sony founded Sony Enterprise Co. Ltd. in 1961 to manage the Sony Building in Ginza. Over the next several years, Sony Enterprise added Sony Plaza, a retail chain to market imported goods, French restaurant Maxim's de Paris, Sony Travel Service, an insurance agency, and other services. Building on the theme "Not hardware, but 'heartware' for everyday life" to unite a diverse range of businesses, Sony Enterprise continued to move in new directions. It put together a plan to import fine foreign goods and, in the mid-1970s, started to import sports equipment and fashionable luxury items. Sony was at the time aggressively engaged in exporting products and expanding its overseas operations. However, Morita thought it was important for Japan to be more receptive to imports and foreign investment in order to foster more balanced relationships with other countries.

Most of Sony's diversification into new areas of business was through joint ventures with foreign companies. The first operation to be diversified involved products connected to Sony's electronics business.

In March 1965, Sony and Tektronix, Inc. of the U.S. formed Sony/Tektronix Corporation in Japan with equal start-up capital from each company. At the time, it was highly unusual for a foreign company to have more than a 49% share in a joint venture with a Japanese company. Tektronix was a well-known instrumentation and measuring equipment manufacturer commanding over 80% of the global market for oscilloscopes. In order to research new technologies, reliable high precision measuring instruments are needed. In fact, it is said that Leona Esaki's discovery of the semiconductor "tunneling effect" was made possible by the innovative oscilloscope technology developed by Tektronix.

Tektronix was aiming to expand its market into Europe and Japan during the post war recovery period of the 1950s. Tektronix president Howard Vollum felt that a joint venture was the best method of penetrating the heavily protected Japanese market. Thus, in 1963 he set out to look for a partner in Japan.

Fate directed Vollum to Ibuka and Sony's management team. He felt that Ibuka had a keen intelligence that he had not seen in other company presidents. After meeting with Ibuka, Vollum visited Morita, who was then president of SONAM. Vollum was very impressed with Morita. "An extremely energetic man. A passionate engineer with a sharp mind and strong curiosity. He even has laboratory equipment set up at his house to try out his latest ideas," thought Vollum. Tektronix was founded in the same year as Sony (1946) and the two companies had similar corporate cultures. They both placed priority on engineering expertise and had strong reputations for developing innovative products. Thus, although Sony and Tektronix had different core competencies, they seemed a good match. Both sides agreed that the potential was there for a successful joint venture.

Sony/Tektronix was housed in Sony's Osaki factory when it began operations. Morita was appointed president and Vollum vice president. They were joined by Masanobu Tada (who would later become president), Takashi Kumakura, and ten additional employees. Within ten years, production and sales of the company's main product, the oscilloscope, led the industry. Although initially established to conduct only production and marketing duties for Tektronix products, Sony/Tektronix eventually began to carry out R&D work. The company expanded its operations into new fields, including other electronic measuring instruments, graphic displays, broadcasting equipment, and optical devices. With such a variety of products, Sony/Tektronix was able to meet the needs of a wide range of customers.

Supporting the Electronics Business

Ceremony celebrating the 10th
anniversary of Sony-Eveready.
(From left: Morita, Ohga and

After measuring instruments, the next joint venture involved batteries. The catalyst for this next development came in 1972, when Union Carbide Corp. (UCC) responded to Sony's advertising campaign in the United States that offered to help companies trying to enter the Japanese market.

UCC, which manufactured and marketed batteries under the Eveready brand name, was the largest producer of batteries in the world and wanted to do business in Japan. At the same time, Ibuka and Morita wanted to have their own battery manufacturing facilities. Sony was relying on domestic battery suppliers for their transistor radios, transistor televisions and tape recorders. But the demand for batteries was growing as Sony focussed manufacturing on portable consumer electronics. If Sony had its own battery manufacturing facility, the company could not only meet its own requirements, but also tap into the rapidly growing market for small batteries used in cameras, watches, and calculators. Thus, both companies could benefit from a partnership.

In February 1975, after two years of negotiation, Sony and UCC established a battery manufacturing and marketing joint venture called Sony-Eveready Inc. The initial capital was contributed equally by both parties and Morita was appointed president. That summer, the joint venture began importing dry cell batteries from the United States and marketing them under the Sony-Eveready name. The other Japanese makers watched in anticipation as Sony and the largest battery manufacturer in the world flexed their marketing muscles. The batteries were distributed through Sony's retail outlets, wholesale supply chains, and camera outlets. Sales increased steadily as new outlets were added.

Junichi Kodera succeeded Morita as president of Sony-Eveready, and in June 1978, with the completion of the company's Koriyama, Fukushima factory, production of silver oxide button batteries began. Domestic demand for small-sized button batteries used in watches, calculators and cameras was growing rapidly. Sony and UCC had accurately forecast market trends and effectively combined their resources to reach the mass production stage ahead of the competition.

In the 1980s, Sony-Eveready continued to grow steadily under the management of President Koichi Tsunoda. Under the joint venture agreement, it was decided that UCC would be responsible for R&D activities. Even so, Sony's engineers made striking technological advancements after the establishment of the Koriyama factory, and were often praised for their innovations by visiting engineers from UCC. As a result, Sony began transferring cost-reduction related production know-how to UCC factories in the United States.

Eventually, the joint venture agreement was terminated in March 1986, and the company name was changed to Sony Energytec Inc. The newly renamed company continued to conduct R&D activities independently of UCC, and within four years Sony Energytec developed the world's first lithium-ion rechargeable battery, realizing Morita's dream of creating a highly reliable, long life rechargeable battery.

So while the initial success achieved in measuring instruments and batteries was the result of joint efforts with other companies, Sony utilized the experience gained through these ventures

In March 1968, Sony and CBS Inc. of the United States joined forces to establish CBS/Sony Records Inc. While different in nature from previous Sony projects, this venture also played a crucial role in Sony's overall growth. With the market full of players, CBS/Sony Records was predicted by many to be the last new music company that would ever emerge. Drawing from the concept that audio hardware needed more software development, CBS/Sony Records blossomed within ten years to become the number one record company in the world. The support provided by CBS/Sony Group (renamed from CBS/Sony Records) was critical to Sony's successful introduction of the Compact Disc system. The CBS/Sony Group grew to become a comprehensive entertainment company; moving into such areas as the mail order, publishing and marketing of various music related-products.

In addition to these joint ventures, Sony established a number of successful wholly owned subsidiaries. In 1962, Sony established the chemical manufacturing and marketing subsidiary, Sony Chemicals Corporation; and in 1969, Sony Magnescale Inc., to manufacture the precision measuring instruments used in magnetic scales. Both of these companies are now listed in the Second Section of the Tokyo Stock Exchange.

Making the Most of Human Resources

By the second half of the 1970s, Sony had established a number of joint ventures in a diverse range of fields, many of which seemed to have no relation to electronics products. At this time, the Japanese economy was growing steadily, and consumer tastes were diversifying as purchasing power increased.

In 1979, Sony's diversification reached its peak. In August of that year, Sony announced that an affiliate company of CBS/Sony, Sony Creative Products Inc., would begin production and marketing of cosmetics. In the same month, Sony established a joint venture agreement with U.S. life insurance giant The Prudential Insurance Co. and called the new company Sony Prudential Life Insurance Co., Ltd. The following month, Sony began importing and selling sports goods in Japan under the name Sony Wilson Inc.

Through Sony Enterprise, Sony had previous experience importing and selling sports equipment, and it built on this in its venture with Wilson. Wilson was a top manufacturer in the Pepsico group and Sony Wilson sold Wilson brand products for sports such as golf, tennis, baseball and softball. Morita's acquaintance with Donald M. Kendall, then chairman of Pepsico, provided the opportunity for establishing this new joint company. Unfortunately, six years later, Sony's association with Wilson came to an end and Sony transferred its shares in Sony Wilson to Pepsico.

As Sony continued to diversify its operations in publishing, luxury goods, cosmetics, insurance and restaurants, many voices expressed concern that Sony was spreading its resources too thin and that this could hurt its core electronics business. However, Morita had confidence in Sony's capabilities. He would say, "If we have the personal resources and management know-how to provide services that are of benefit to consumers anywhere in the world, there is no reason why we shouldn't. These new businesses are a plus for Sony." Also, Sony's new subsidiaries provided opportunities for its employees to work in smaller organizations, which helped to foster a spirit that was difficult to maintain in a large, single-unit corporation. The overwhelming majority of Sony's joint venture companies have succeeded in strengthening the corporate base of the Sony Group.

TI's Expansion into the Japanese Market

Signing of the agreement between TI
and Sony (Ibuka holding pen with Morita
standing by his right shoulder)

The rationale for the Texas Instruments joint venture differed from previous partnerships. Texas Instruments Japan Co., Ltd. was founded in May 1968, not to strengthen Sony's operational base, but to open Japan to foreign investment and solve a problem that had plagued all Japanese electronics manufacturers.

In January 1964, TI had requested permission from Japan's MITI to establish a wholly owned company in Japan to manufacture integrated circuits (ICs). In the 1960s, ICs were considered the next big step since the emergence of the transistor. Originally, IC technology was developed for U.S. military and space applications. By the mid-1960s, however, electronics companies had obtained the technology and expected these components to allow huge advances in the quality and miniaturization of products such as televisions, household appliances and radios. At the time, Japanese companies had fallen far behind their U.S. counterparts in IC technology R&D.

Japanese electronics companies felt threatened by the prospect of TI, the largest manufacturer of ICs in the world, setting up production facilities in Japan. With Japanese makers still in the IC research phase, they strongly opposed MITI giving TI permission to set up in Japan. "If TI is given free rein to manufacture in Japan, we're finished," was the general sentiment. MITI, which had supported and protected the growth and development of Japan's electronics and car industries, was opposed to conceding leadership in such key industries to a foreign company.

However, Japan was being pressured to liberalize restrictions on foreign investment. Looking at the situation from an international perspective, a skillful and well-thought response was needed. Would Japan always remain a closed, protectionist country or would it embrace an international perspective and accept foreign investment? Two years passed before MITI finally gave TI an official response. But finally, in September 1966, TI was granted special permission to establish operations in Japan under the following conditions:

* The business had to be a joint venture with a Japanese company with both parties contributing an equal amount of initial capital;
* TI had to make their IC patents available to Japanese manufacturers; and
* Manufacturing quantities had to be controlled for an initial three-year period.

But, TI would not change its policies to meet MITI's conditions. TI wanted to set up a wholly owned Japanese subsidiary and was prepared to make the patented information available only if MITI ceded to its requests. TI held significant patents for crucial IC technology and if TI did not make patented information available, Japanese manufacturers would not be able to export their own IC components for some time. Thus, the IC industry in Japan would remain at a standstill. But, with the passing of time, the R&D capacity of Japanese companies would increase, and the attractiveness of TI's proposed venture into the Japanese market would diminish.

TI and Japanese manufacturers dug in, ready to defend their positions. Then president Ibuka, and vice president Morita realized that if the situation deteriorated any further, all parties would lose. Dragging out TI's bid to enter the Japanese market and the associated IC technology patent problem was not good for the Japanese electronics industry, for TI, or for U.S.-Japan relations. While acknowledging MITI's position, Ibuka and Morita decided that Sony should take action to resolve the problem as a representative of Japan's electronics industry.

TI CEO Patrick Haggarty and Morita were on good terms. Morita approached him directly with an offer to establish a joint venture company to facilitate the initial entry of TI into the Japanese market. The capital contribution of both parties would have to be equal. There was no way for Sony to get around this issue. However, as Sony had the capacity to meet all its IC needs through in-house production, it would essentially leave the responsibility of managing the joint venture to TI. In addition, Sony pledged to approach MITI to gain permission to transfer its total stock in the joint venture to TI after three years. Thus in the long run, the joint venture company would effectively be a wholly owned TI subsidiary. There was also the general expectation that the Japanese IC industry would improve significantly in the three-year period.

In May 1968, five years after TI had made its initial application to MITI, Texas Instruments Japan Co., Ltd. (TI Japan), was formed as a 50-50 joint venture between Sony and TI. Haggarty was appointed chairman and Ibuka president. At the same time, TI signed contracts with Japanese companies agreeing to allow them to use TI patented IC technology. The agreement came on the heels of Sony's announcement that it would establish a records division through a joint venture with CBS Inc. The announcement of TI Japan caused a stir in the business community, because it represented the first step toward a full-fledged liberalization of foreign investment in Japan.

Free from the shackles of the TI patent problem, Japan's electronics industry moved full steam ahead toward the "IC age." And, three years after TI Japan was established, Sony transferred all stock in the joint venture to TI in 1971, making TI Japan the first wholly owned foreign company within Japan's IC industry.

Hardware, Content and Finance

Morita admired the prudential building in Chicago

Sony rode a wave of diversification as it watched its joint venture companies contribute to growth in new areas. Sony would eventually acquire its partners' stocks in Sony-Eveready and CBS/Sony Records and then further develop these businesses under Sony management. This fulfilled Akio Morita's long-term goal of bringing these key businesses under the Sony Group umbrella.

Norio Ohga was given the responsibility of guiding CBS/Sony Records from the outset. Morita had realized way back that it was going to take a lot of effort and investment to nurture the packaged media business. But he was determined to develop this new market alongside Sony's electronics business.

Morita believed that although Sony had grown considerably since its humble beginnings, the Sony Group would need to move into the financial business in order to support future growth. If Sony could establish a finance company, it would not only facilitate fund-raising, but also balance the Group's operations and enhance shareholders' trust in Sony.

Morita's dream of a Sony finance company sprung to life on a visit to the US in the latter half of the 1950s to promote Sony's transistor radio. On that trip he was stunned by a towering white skyscraper that soared into the sky above Chicago. He was surprised to hear that it was one of the Prudential Insurance Company's office buildings, "Why would a life insurance company have such an enormous building?" he thought to himself. It was later explained to him that the building represented a large financial warehouse and symbolized the strength of The Prudential which was the largest life insurance company in the United States. The association between financial institutions and skyscrapers would stick with Morita for a long time. "One day, we will also establish our own bank or financial institution and build a building like that," he thought.

Joint Venture with Prudential

Prudential CEO Robert A. Beck visits Sony Prudential
Life Insurance (from left to right: Morita, Beck and

In the first half of the 1970s, Morita had his eyes on life insurance companies. He was seeking partners to fulfill his dream of adding a finance company to the Sony Group and constructing a state-of-the-art head office building.

By the spring of 1975, Morita was still wondering if there were any life insurance companies in the United States that were interested in doing business in Japan. An opportunity suddenly presented itself when Donald S. McNaughton, CEO of The Prudential Company, dropped by Sony to say hello while on a trip to Japan. Morita and McNaughton were old acquaintances and on a first name basis. Prudential was one of the largest foreign stockholders in Sony through its holdings of American Depositary Receipts. During the course of their chat, Morita half-jokingly said that Sony would be more than willing to use its knowledge of the Japanese market to help Prudential should it be interested in starting business operations in Japan. No further discussion took place on the matter, but when McNaughton left Morita's office, he asked one of the people who was escorting him back down to the Sony entrance whether Morita was serious about helping Prudential. Morita learned of this and immediately contacted McNaughton saying, "I am serious about my proposition. Let's work together."

Morita asked Tamotsu Iba, head of International Project Planning, and Kunitake Ando, head of Corporate Planning at SONAM, to conduct confidential feasibility studies on the life insurance industry in Japan. The purpose of this was to assess the potential for a new entrant to the market. Before long Tetsuro Yotsumoto, who had worked as head of the International Division, was put in charge of this newly formed team. Soon, several more members joined, and the team began to lay the foundations for a joint venture with Prudential. Yotsumoto's group had two primary tasks: to obtain permission from the Ministry of Finance (MOF) to set up a life insurance company, and to establish a management plan for the joint venture.

In 1975, Seibu Group of Japan teamed up with Allstate Life Insurance Co. of the US to set up a joint venture life insurance company in Japan. Morita and the team thought that with such a precedent, their job of obtaining permission from the MOF would not be so difficult. However, this was not the case. It took until August 1979, before the MOF finally approved the establishment an equally owned joint venture between Sony and Prudential, and it took a further two years before Sony Prudential Life Insurance Co., Ltd. was granted a business license.

The life insurance industry in Japan was comprised of twenty-three companies led by giants such as Daiichi Mutual Life Insurance Co. Ltd. and Nippon Life Insurance Company. The activities of these companies were rigidly controlled by the MOF Banking and Insurance Bureau under the so-called "convoy system." This system ensured fair competition between both large and small insurance companies, and it guaranteed that there would be little difference between the services they provided. This was in stark contrast to the US market where over 1,800 firms were competing in a more liberal environment.

Given the company's revolutionary products and sheer size, insurance companies in Japan feared that they would be unable to compete with Prudential and they continually petitioned the MOF to refuse the application. Prudential was three times the size of Japan's largest insurance company, and its entry into the market was likened to the 1853 arrival of Admiral Perry and the black ships.

Although Allstate was also a leading company in the highly competitive U.S. market, their joint venture with Seibu sold life insurance products solely through the Seibu Group network. Thus, it did not conflict in any way with the existing insurance system in Japan or pose a major threat. In contrast, Sony Prudential planned to employ professional insurance salesmen to market the company's offerings. This totally new approach directly clashed with the traditional Japanese style of selling insurance through salesladies. The MOF was caught between the vehement opposition of Japanese insurance companies and the determined efforts of Sony to have its joint venture application approved. Morita explained to the MOF that Sony's approach was new and much needed in order to create new markets for life insurance in Japan. The Sony way would not interfere with the conventional system. Morita and the Sony team visited the MOF frequently to emphasize this.

The Life Planner: A New Direction for Life Insurance

Morita described the policy behind Sony Prudential Life Insurance in this way: "First, we do not think of Sony's core business as completely unrelated from the life insurance business. In English, the term 'buying insurance' is used, while in Japanese, we refer to 'new insurance products.' If developing innovative products and marketing techniques is a central characteristic of the life insurance business, then this matches Sony's current business objectives. We realize that profits will not be generated in the short-term and, as with our other business endeavors, we intend to carefully study the market and formulate plans that will enable us to achieve profitable growth in the long-term."

Prudential would supply the marketing and product expertise and draw on Sony's ideas of how to apply this to the Japanese market. While maintaining Prudential's business philosophy of developing essential products to satisfy customer needs, Sony worked to develop a system fundamentally different from other Japanese life insurance companies.

Sony's idea was to train professional salesmen in financial planning. They would offer a variety of life insurance policies to effectively meet the insurance needs of customers. In other words, Sony wanted to provide custom-made policies that met the changing needs of Japan's aging society. Sony chose the name "Life Planners" to describe their new type of salesmen. This name was essentially a reference to their role in structuring life insurance policies based on expert knowledge and careful analysis of individual requirements.

Sony thought the best way to achieve its goals would be to give Life Planners relative autonomy. They would not be bound by strict rules, but rather be given a more or less free reign to establish business bases. Salaries would be performance linked. Sony believed that creating a liberal working environment would encourage entrepreneurial skills and allow the most promising salesman to be promoted accordingly. In the first year of operation, twenty-seven Life Planners were hired according to the following criteria: competence, a full commission pay basis, and recruitment from outside of Sony. Although drawn from various industries, these candidates had a strong sales records in common. Moreover, all had dreams and enthusiasm for building a new life insurance system.

In February 1981, the MOF finally approved a business license for Sony Prudential Life Insurance. Morita was ecstatic at the news, and he shared his joy with the project members who had been waiting five long years for the approval. Morita had experienced many different projects and businesses, but never before did he have to go through such a difficult and time consuming ordeal to establish a small company. But, the path was now clear for Sony to realize Morita's dream of building a finance company. "It may take five or ten years, or even longer, but I urge everyone to do their best to make this a successful company," said Morita. Ibuka agreed saying, "Sony can finally leave an inheritance for the future."

Into the Black: Sony Life Insurance

Ceremony celebrating the 10th anniversary of Sony Life

Sony Prudential Life Insurance commenced its first day of operations with a newspaper advertisement: "Starting today, life insurance will change and 'Life Planners' will change it." Sony Prudential Life Insurance started operations with initial capital of 3 billion yen and four branch offices in the Tokyo area staffed by fifty-one employees. Morita was chairman of this new company; Tatsuaki Hirai, a former bureau chief from the MOF, was president; Kiyofumi Sakaguchi was vice president; and Kunitake Ando was a director.

The growth of Sony Prudential Life Insurance was driven by the success of its Life Planners. Compared with life insurance salespeople at other companies, Sony believed that Life Planners were three times more productive. Life Planners who excelled were well compensated through a salary system that rewarded them according to their level of contribution. They also managed their own expenses. The system of compensation was designed to encourage Life Planners' entrepreneurship in their approach to insurance sales. In addition, Life Planners ran their operations as if they were presidents of their own companies, employing and paying secretaries and other office staff out of their own salaries. Essentially, Sony Prudential Life Insurance was developing independent-minded business people.

The company changed its name to Sony-Pruco Life Insurance Co., Ltd. in September 1987, marking a turning point in the company's management. At that time, Prudential Insurance had informed Sony that it wanted to take over all of the Sony-Pruco Life Insurance stock and form its own wholly owned subsidiary in Japan. However, intense negotiations were held between Morita and Prudential over the issue. As a result, the MOF decided in Sony's favor and Sony and the bank that had serviced Sony Prudential since its founding took over 70% of the stock. Although Prudential retained 30% of the stock in Sony-Pruco Life Insurance, it had agreed not to interfere with the operations of the company. Immediately after, Prudential established its own subsidiary in Japan.

The MOF had granted the Sony Group permission to enter the life insurance industry precisely because it would do so through a joint venture with a foreign firm. However, in practical terms, Sony-Pruco had become a wholly owned subsidiary of Sony Group. Because of this, established financial institutions vehemently opposed Sony's full-fledged entry into the financial sector. Establishing the precedent of a non-finance company entering the financial sector would encourage the rash entry of other such companies and could cause instability, they argued. But Morita was undeterred. Through his unrelenting drive, he had moved one step closer to realizing his dream of thirty years -- a Sony-owned finance company. Expressing his jubilation at the Sony-Pruco inauguration ceremony, Morita stated, "A day will come when the letters Pruco will be removed from our company name."

That prediction came true. Under the leadership of former Sony director Chairman Kimio Ohkura and President Iba, Sony-Pruco celebrated its 10th anniversary with a total insurance portfolio exceeding 2 trillion yen and total assets of more than 90 billion yen. At the ceremony commemorating its 10th anniversary in April 1991, the company's name was officially changed to Sony Life Insurance Co., Ltd. Then in March 1993, its 13th year of operation, Sony Life recorded its first non-consolidated fiscal year profit.

Sony's success was based on the expert implementation of a system whereby Life Planners consulted with customers in order to identify their particular needs. It was a simple, basic system that has always been at the core of the life insurance business, but had never been tried before in Japan.