GE Unit Scandal Raises Issue of Japan’s Fairness : Commerce: Five employees are accused of bribing university decision makers to win orders, a practice some doctors say is common. The case threatens to undo a rare U.S. success story.

TOKYO — A major bribery scandal rocking Japan’s medical world is raising new questions about whether this nation has double standards for Japanese and U.S. companies. It also raises questions about whether the Japanese are willing to let foreign firms succeed here--even if they play by Japan’s rules.

Japanese authorities have arrested five employees of General Electric’s medical equipment subsidiary in Japan and temporarily barred the unit from selling to university hospitals. The employees are accused of bribing university professors to win orders of medical testing equipment.

But Japanese doctors and analysts say those actions represent standard practice in Japan.

“If the company becomes a social leper because of this incident in a way that wouldn’t happen to a Japanese company,” the matter could be taken up as a trade issue, one U.S. official says. “This could affect sales of American-made equipment substantially.”

The scandal could also ruin a rare American success story about doing business in Japan. GE has succeeded in a cutthroat market by doing things the Japanese way: selling good-quality products cheap, servicing them well and entertaining key customers lavishly.

Two professors involved in university hospital buying decisions have been arrested for allegedly accepting thousands of dollars worth of air tickets and travelers checks from salesmen of Yokogawa Medical, GE’s 75%-owned Japanese subsidiary. The suicide of a University of Tokyo professor last year is being linked to the Yokogawa scandal.

Professors around the country who have accepted similar free travel from Yokogawa are under investigation by police. The Ministry of Education has advised university hospitals against doing business with Yokogawa for the time being, a move that could have longer-term consequences on the company’s image and market position in Japan.

Medical companies commonly court professors because they not only have influence over buying decisions of their hospitals but also frequently have control over purchases by former students at other hospitals. Newspapers have quoted cases of medical equipment salesmen giving professors antiques, entertaining them with golf and travel, and even helping to get their kids into universities and good jobs.

Hoichi Fujikawa, who makes decisions on medical equipment purchases at Hiroshima General Hospital, says it is common for Japanese companies to offer huge sums of money to influence procurement decisions.

“They would offer to give me money for research and say I could do anything I want with the money,” Fujikawa says.

He adds that he has made a personal decision to turn down all such offers but says there is no hospital requirement that he do so. Low-paid university professors are particularly vulnerable to such offers, he says.

The Yokogawa case is “just the tip of the iceberg,” says Osamu Murayama, the reporter for the daily newspaper Asahi Shimbun who broke the story. “Most companies and most professors probably do the same thing.”

So why was GE singled out? Murayama says GE’s Yokogawa Medical just happened to be the one company where police could find evidence.

In some respects, the company was too honest. When investigators raided Yokogawa’s office in late January and demanded to see the company’s accounts, says one Yokogawa employee, the company had only one set of books with a relatively straightforward accounting of their activities.

“We haven’t tried to hide anything,” a Yokogawa official says.

Japanese companies, accountants say, would have had two sets of books, or at the minimum would have couched the payments to professors in such vague terms as “cooperative research.”

But GE’s outsider position also made it vulnerable to exposure. Yokogawa brought attention to itself by marketing aggressively in a society where no group or industry warms quickly to new entrants.

GE smashed the status quo. Less than a decade after establishing itself in Japan, Yokogawa Medical has moved to the top ranks in the industry. In the $240-million Japanese market for magnetic resonance imaging equipment, the latest technology for making computer images of organs inside the body, Yokogawa is in first place in dollar sales with a 34% market share.

In the $245-million market for CAT scanning equipment, the older imaging diagnostics technology, the company has a 30% share and is second only to Toshiba.

The market share didn’t come cheap. Although most American companies in Japan typically seek a small market share and focus on maintaining high profits, GE decided it wanted to be tops in medical electronics and matched Japanese discounts blow for blow. MRI machines that cost $1.5 million in 1988 have dropped to less than $700,000.

As a result, although Yokogawa’s sales shot up to $462 million last year, nearly double its 1986 sales of $246 million, its operating profits during the period actually fell to $33 million from $39 million.

GE’s aggressive climb created a lot of enemies. Industry leaders like Toshiba have frequently complained that prices have fallen too low. Shimadzu Corp., which has discounted heavily in an effort to stem losses of market share to Yokogawa, expects to see its profit drop 20% in the fiscal year ending March 31. Toshiba executives have frequently been quoted complaining about the sharp discounting.

There is widespread speculation that Yokogawa’s competitors leaked information about its activities.

Japanese scandals typically break after reporters are fed information designed to undercut outsiders trying to undermine the status quo.

The Recruit scandal, in which a Japanese employment company made secret payments to numerous politicians, brought down Prime Minister Noboru Takeshita. The scandal was widely seen as an effort by industry insiders to reduce the rapidly spreading influence of the founder of Recruit Co., an enormously successful employment and publishing empire.

Similarly, many scholars believe that information leading to the Lockheed bribery scandal in the mid-1970s, which brought down Prime Minister Kakuei Tanaka, was released by bureaucrats who felt that Tanaka was elbowing in on their turf.

In recent years, numerous articles have appeared suggesting that Yokogawa unfairly used the power of the American government to break open the Japanese market.

Indeed, although technological leadership has given GE a big edge in the fight for market share, Japan was long able to keep foreign products out of its markets by using high tariffs and complex production and import procedures.

After years of trade talks beginning in the late 1970s, the barriers have gradually come down, although procedures for approval of imports is still cumbersome. In part because of such procedures, Yokogawa Medical manufactures 80% of its products in Japan, importing the remainder from its parent, GE.

GE established Yokogawa Medical in 1982 as a joint venture with Yokogawa Electric, keeping a 51% share in the venture. In 1986, the company raised its share to 75% and pushed more aggressively in the market.

What got the company in trouble was its effort to woo professors. Investigators have been quoted in the press as saying Yokogawa kept a list of influential professors for salesmen to target.

Two Yokogawa employees reportedly approached Sadao Uematsu, a professor at Chiba University Medical School in charge of the university hospital’s X-ray department. Investigators have reported that Uematsu had previously supported purchases of Toshiba equipment but appeared to change his mind after contact with Yokogawa executives. He reportedly received $16,000 to pay for a trip to America, of which $2,220 was in traveler’s checks.

Another professor, Kengo Matsui, one of Japan’s top radiologists, was arrested for accepting $28,000 to pay for a trip to the United States with his wife. Investigators say the bidding process was rigged in favor of Yokogawa.

Matsui also received $14,800 from a Japanese medical company, but prosecutors have not released the name of that company.

The disclosures surprised few in the industry. It is standard practice for medical equipment companies to pay for the foreign travel of professors for academic conferences and visits to the company factory.

“You are not a full-fledged salesman in this industry until you have reached the point where the professor will accept your gifts and agree to meet with you,” one salesman was quoted in a recent article in the Asahi Shimbun.

According to the doctor in charge of the X-ray division of a Nagoya hospital, most bidding at the hospital is meaningless because the doctors decide in advance what systems they want to buy and then set the specs so only that system will be accepted.

The hospital uses Toshiba equipment and wants to keep the same system from the same supplier to make servicing easier. Although he would love to see the hospital buy a GE system, he says the director of the hospital wants to stick to existing systems. “The feeling is that even if GE has it (what we want) now, Toshiba will have it in two years,” he said.

Yokogawa is reacting to the deal as a true Japanese company would. It has promised to be more careful and has kept its mouth shut. When American officials called the company and asked if it needed government help, the company responded that it was a matter between it and the Japanese government.

But if business gets worse, as company officials expect, GE may ask for U.S. government help. That won’t help improve Yokogawa’s tarred image.

“This is going to hurt GE’s business in Japan,” says Colin Mills, analyst at the Tokyo office of W. I. Carr, a British securities firm. “Those who buy equipment will be very cautious in their dealings with Yokogawa.”

YOKOGAWA MEDICAL AT A GLANCE

Sales and profits in millions of dollars.

Sales Profits 1986 $246 $39 1987 NA NA 1988 355 54 1989 387 46 1990 462 33

Source: Yokogawa Medical

BOOM IN TESTING EQUIPMENT

Total value of Japanese production of diagnostic imaging equipment in billions of dollars.

1986 1.31 1987 1.38 1988 1.60 1989 1.78 1990 1.88

NA: Not available because of change in accounting year.

Source: Japan Industry Assn. of Radiation Apparatus