Monday, Feb 09, 2004

The advancedmanufacturing plant in Kameyama, where Sharp manufactures liquid crystal display panels and TVs, sits in a remote mountain range, safely out of view of most prying eyes.

But a mysterious car has been seen weaving its way, once a month, outside the sprawling compound that is home to the Japanese group's closely guarded secrets of advanced LCD production.

Although the sightings of the car are not evidence that a rival company has been prowling in search of sensitive information, they are nonetheless a reminder of the challenges that Japanese high-technology companies face in protecting their most valuable trade secrets.

When it comes to industrial espionage, Japanese companies have long been better known as defendants in high-profile cases, such as the notorious incident in 1982 in which employees of Hitachi were accused of stealing intellectual property from International Business Machines. Hitachi admitted theft in the criminal case and settled a civil suit.

But increasingly, as new competitors emerge in industries they once dominated, Japanese companies are falling victim to industrial espionage that threatens to rob the country of a critical advantage over lower-cost rivals, business leaders and government officials warn.

Last week, the Japanese government detained Takashi Okamoto, a Japanese scientist charged in the US with stealing genetic material on Alzheimer's disease nearly three years ago.

The case, which is the first time the US Economic Espionage Act has been invoked, has led to changes in Japanese domestic law as well. In response to growing alarm in the business community, the Japanese government enacted legislation this month to make it a criminal offence to leak corporate trade secrets.

"The flow of technology out of Japan is leading to a decline in competitiveness and in employment," says Yoshinori Komiya, director of the intellectual property policy office at the Ministry of Economy, Trade and Industry (Meti).

"We believe that there is some technology that should be transferred, but what is happening now is that technology that top management does not want transferred is getting passed on," he says.

The problem is a highly sensitive one for the Japanese government, but is attracting attention as Japan's neighbours in Asia gain skills as manufacturers of high technology goods, forcing even the best Japanese companies on to the defensive. Consequently, intellectual property has become critical to Japanese companies in differentiating their products and keeping ahead of the competition.

"We are taking many measures to prevent technology leakage," says Yukio Shotoku, executive vice-president of Matsushita.

Rival Sony says: "We would certainly welcome a comprehensive regulatory system to protect intellectual property in countries such as China and South Korea."

Such is the level of concern within Japan about the competitive threat from foreign manufacturers that Japanese government officials privately express concern that Sony should be setting up a joint venture with Samsung of South Korea to make liquid crystal displays, used increasingly in personal computers and televisions. Sony says its joint venture with Samsung is basically a supply agreement. Others, however, are worried.

So far, it has been difficult to determine cases of outright spying, partly because until this year such activity was not a criminal offence in Japan unless it involved actual theft. But evidence from Japanese companies provided to Meti suggests they are reluctant to blow the whistle because they have more often been the victim of their own employees rather than intrusion from the outside.

To their horror, several Japanese companies have found that their own engineers were passing on sensitive information by working for competitors in South Korea and China at the weekends, according to industry and government officials. Japanese companies have recently cracked down on this, says Mr Shotoku, but "weekend part-timers still exist".

Some companies have also discovered that former employees have been going to work for Asian competitors and taking trade secrets with them, according to a Meti survey. The problem is exacerbated by a lack of awareness among Japanese companies of the risks they face.

In the west, it is normal to restrict knowledge of a sensitive project to a few leaders, but in Japan a large group of people usually has access to all the information, even for a very important project, says Mr Komiya at the intellectual property policy office. This makes the problem of technology outflow more difficult to control, he notes.

In the past, Japanese companies had little need to worry about technology outflow because Japan was a "village society" closed to the outside world. Lifetime employment and a lack of labour mobility ensured that sensitive information did not leak even if there were no formal rules prohibiting the transfer of trade secrets, Mr Komiya says.

But the country's prolonged economic downturn has triggered widespread restructuring and falling incomes, which have tested the loyalty of workers. "The Japanese business model is facing a turning point," Mr Komiya says.

It was pressure from the business community that led to this month's change in the law on corporate secrets, and companies themselves are also taking preventive measures.

Katsuhiko Machida, president of Sharp, says the group keeps its most advanced technology in Japan, in order to protect key pieces of intellectual property. Sharp also manufactures in-house some of the key pieces of production equipment it uses to produce LCDs rather than buy them in from outside suppliers.

This is because in the past it discovered that advanced production technology it had developed was quickly copied by competitors that were able to order the same production equipment from its suppliers.

Mr Machida subsequently vowed never to incorporate key production technology into the equipment but to keep it in the heads of Sharp's engineers.

Matsushita and Sharp both say they sometimes refrain from filing manufacturing process patents, for fear of giving away trade secrets that cannot be protected in the courts - it is virtually impossible to determine whether such processes are being copied.

And in a clear break from established practice to share information widely within the group, some companies have started to restrict key information to a handful of people directly involved in a project.

Such efforts will be critical to Japan's future competitiveness, industry and government officials believe. "If Japan can successfully transform into a country where companies protect their IP, it can stage a revival," Mr Komiya says.

By MICHIYO NAKAMOTO

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