Japan holds Kodak up to the light

When photo company Eastman Kodak laid off eight graduates three weeks before they were due to start work in its Japanese research centre, the story made headline news and caused a public outrage. The jobless recruits had to wait a year for industry to take in its next wave of applications. Such callousness towards the careers of Japan's youth was an unprecedented public relations gaffe.

According to Fuji Photo Film, Kodak's Japanese rival, mistakes like that caused the dramatic fall in the US firm's market share from around 20 per cent to less than 10 per cent.

Until a few years ago, Kodak officials were willing to admit they had botched things. "The biggest frustrations came from our own errors - packaging, labelling, even dirt," said former Kodak Japan vice president, William Jack.

But the company's new chairman, George Fisher, reckoned the problem was that Japan is a closed shop and launched an aggressive strategy to open it up. Kodak complained under Section 301 of America's trade legislation, demanding that Japan liberalise the market for photo film or face punitive retaliation.

Mr Fisher had used section 301 in his old job as head of Motorola to bully his way into Japan's pager and mobile phone market. Given Japan's record of giving in to US demands over cars, microchips and cellular phones, it was reasonable to assume it would give in to charges of collaboration between Fuji and MITI, Japan's infamously interventionist Ministry for International Trade and Industry.

Uncharacteristically, the Japanese told the Americans - in diplomatic language - to get stuffed. Even more surprisingly, Washington seems to be responding to Tokyo's tough new line. Instead of implementing its Section 301 ruling last summer, it has turned the case over to the World Trade Organisation. British and other European trade officials are eager to participate in the hearings which signal a mellowing of America's notorious belligerence and which will affect Europeans trying to pry open other sectors of Japan's economy.

The danger is that this ground-breaking battle may be fought on the wrong issue. Kodak's case against Fuji is far from watertight.

Kodak's marketing efforts in Japan have been plagued by poor decisions and a general misreading of the market. It stopped undercutting Fuji on price - partly because it feared re-exports of cheap film into its home market - and refused to pass on exchange rate savings to Japanese customers. It also resisted demands to change its colour formula, which the Japanese felt made skin tones look unnaturally sallow.

One of Kodak's complaints is about a Japanese law designed to limit construction of large shops, not unlike Environment Secretary John Gummer's effective ban on out-of-town shopping centres in Britain. Kodak argues that superstores are more likely to carry foreign goods. True or not, the link with its conspiracy theory is tenuous: there are far more compelling reasons for limiting suburban commercial sprawl.

Another Kodak whinge is that Fuji has exclusive agreements with the country's four largest distributors, the tokuyakuten. Fuji counters that, unlike the US where film tends to be sold through chains of department stores, the Japanese market is dominated by small retailers, who are supplied by small independent wholesalers. Kodak, says Fuji, has made little effort to take advantage of them.

Kodak also complains that its competitor gives illegal rebates to retailers, an issue which should more properly be taken before Japan's competition watchdogs. And it is not happy with Japan's premiums law, which it says prevents normal promotional activities. The law is the same for Fuji, however, and is aimed at blocking deceptive advertising and over-the-top giveaways.

Further weakening Kodak's position is its own anti-trust reputation. Two years ago, Kodak won a court ruling with overturned decades-old decrees which stopped it building a vertical monopoly by buying photo finishing labs. The US now faces calls for its own film industry to be examined by the WTO.

The two markets are almost mirror images of each other. Kodak has some 70 per cent of US film sales, while Fuji has a domestic market share of just under 60 per cent. And Fuji's share of US sales, at less than 15 per cent, is not much better than Kodak's performance in Japan.

The American retreat, like its previous trade assaults on Japan, is driven by domestic politics. Senator Alfonse D'Amato, a Republican from New York, Kodak's home state, was initially one of the company's fiercest supporters, calling on patriotic citizens to boycott the foreigners. More recently, like the American government, he has moderated his demands. Only cynics would link this to the relatively large investment Fuji has made in the US, including a pounds 150m photographic paper plant in Greenwood, South Carolina and its regional headquarters, employing 5,000, in Senator Amato's own New York state.