THE JAPANESE CONSPIRACY (House of Representatives - July 12, 1989)

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The SPEAKER pro tempore. Under a previous order of the House, the gentlewoman from Maryland [Mrs. Bentley] is recognized for 60 minutes.

Mrs. BENTLEY. Mr. Speaker, from time to time I have read portions of Marvin Wolf's book `The Japanese Conspiracy' which details how the Japanese businessman, working with the Government, have targeted American businesses.

I think of Marvin Wolf and his book each time I read news stories about United States-Japanese trade. He has shown us the road map on how we have lost our industries.

Today, I want to read the last of chapter 2 on the electronics industry. I think we can all understand better what has happened with Marvin Wolf's explanation.

Before personal-size microcomputers went on sale in retail stores, the word `computer' was usually preceded by the initials `IBM.' Big Blue, as IBM is affectionately known in the industry, was the dominant presence. IBM was no less dominant in Japan, where its share of the market for large, business-oriented machines hovered near 75 percent for most of the 1960s and into the early part of the next decade. The reasons were obvious: IBM made the best computers for the tasks required; IBM provided reliable software; IBM's service was first rate.

But by 1970, MITI had decided it wanted to foster a domestic computer industry that could compete with, and ultimately replace IBM. This was a key reason behind the MITI campaign to match and pass the U.S. in semiconductor technology. But Japan's computer manufacturers found that competing with IBM was not easy. `We tried to sell our machines,' recalled Taiyu Kobayashi, chairman of Fujitsu, in 1982. `However, the installed base of IBM is so large and the users, quite naturally, want to use the software base they have built up over the years. The relative value of software in the computer system has risen to in excess of 70 percent of the cost of the system. Being compatible was the only way to get started in the computer business.'

Kobayashi confirmed that the Japanese sales strategy--compatibility with IBM's hardware--was the keystone of an effort to cut into IBM's share of the market. But in the early years plug-compatible Japanese-made computers were not received well, even in Japan. Despite the unpopularity of their products, the Japanese industry continued its efforts to improve them. `MITI put out R&D funds and brought together the various companies for joint development projects,' confirmed Kobayashi. `When domestic makers began building products and it wasn't clear whether what we made would work or not, MITI went around to the industries that had benefited from its patronage--automobiles, steel, etc: and said, `Here, use these.'

While they set about rationalizing the Japanese computer industry, MITI also restricted the import of foreign-made IBM computers. `There was considerable pushing and hauling about how to restructure the Japanese industry to compete with IBM,' Kobayashi explained. Some in Japan wanted to merge all the companies into one giant computer corporation, but a decision was finally made to align the companies into three groups. Fujitsu was paired with Hitachi to pursue large computer development. and just about that time, someone important quit at IBM.

Eugene Amdahl was one of IBM's top computer engineers, chief architect of the team that had designed the IBM 360. When he left IBM to form his own company in 1970, Fujitsu saw an opening. `We got word that Amdahl had quit IBM,' recalled the former Fujitsu chairman. `That was the time when Fujitsu was feverishly attempting to get hold of IBM's architecture. The friend of one of our top people at the time was a close friend of Amdahl, and Amdahl was intending to make machines that would use IBM's software but offer higher performance for the money. We couldn't afford not to get in on this.'

In 1971, Fujitsu built a research laboratory in a corner of Amdahl's building, and two years later they bought 24 percent of his company's stock. Several managers at Fujitsu opposed the plan to go IBM-compatible, partially because of the huge investment, and also because of fear of legal retaliation by IBM. Kobayashi decided to seek a partnership on the project with Hitachi and met regularly with his opposite member at Hitachi. `We felt around, asking whether Hitachi would care to join us,' Kobayashi remembered. `Hitachi
said `No, we'll go our own way.'

To place Japanese business ethics in American perspective, one must imagine that this conversation had taken place between the presidents, say, if Intel and Advanced Micro Devices. `That alone would be enough to put both of them in jail,' say John A. Calhoun, a senior officer at Intel.

By 1974 Fujitsu had acquired enough computer technology to introduce its Model 370M, which ran twice as fast as the IBM 370 and used the same software. Hitachi, too, belatedly adapted the IBM-plug-compatible approach in its new products. By 1979 IBM's share of the Japanese market had declined to 27 percent. To put this into context, outside the United Kingdom, where Big Blue provides 43 percent of the business computer, and the communist countries where its products are not sold, IBM's market share is at least 50 percent in every country in the world. Fujitsu passed IBM to become itchiban in 1979, trailed at a distance by Hitachi. IBM's immediate answer to the Fujitsu 370M was a machine called the 3033, which was better than its own 370, but which represented only incremental improvements in technology.

But IBM, the competitor, was not yielding the Japanese market. This was only an interim machine for Big Blue, something to keep it in the market until its next generation was ready. IBM's new series of highly advanced machines was being developed in great secrecy under the code name Adirondack, and known collectively as the 308X. The first of this generation, the 3081, was scheduled to be delivered in October 1981.

When a computer company decides on a business strategy of developing machines that imitate those of a competitor and run on the competitor's software, it is in a classic good news/bad news situation. The good news is that it can reap the considerable benefits of not having to invest in expensive R&D. It can wait for the competitor to bring out his computer, buy several, and through reverse engineering get the benefit of most of his efforts for a few cents on the dollar. It can then build machines that cost far less to develop, correcting the inevitable minor design errors that find their way into anything as complex as a computer system. The result is a product that can be sold to the competitor's customers for substantially less than the competitor can sell his own, and at a substantial profit.

The bad news implicit in this strategy is that the company has to wait for the competitor's product to appear before it can build a copy. That can take three or four years, by which time the competitor might have another technological shoe to drop. But if, by some means, the rival company can get advance information on the competitor's new generation of computers, it can reduce the time spread. Even a few months' head start is worth millions in sales.

Fujitsu was in an enviable position in that it employed many former IBM employees. But Hitachi, which had turned down the opportunity to join Fujitsu, would have to wait for the new IBM machine to appear, or it would have to find some other means.

When ten of IBM's 27 secret workbooks describing the 308X series illicity came into Hitachi's possession, they realized their value and set out to get the rest. Those ten workbooks, each a three-ring binder of 40 to 200 looseleaf pages, were, according to federal prosecutors, spirited out of IBM by Raymond Cadet in November of 1980. Cadet, then a 45-year-old computer scientist, left IBM's research labs at Poughkeepsie, New York, and was next employed by National Advanced Systems (NAS), A Silicon Valley subsidiary of National Semiconductor. Cadet's boss at NAS, an Iranian named Barry Saffaie, learned about the ten IBM workbooks and allegedly made several photocopies of them. In the summer of 1981, Saffaie flew to Japan, where, says the Justice Department, he delivered one set to Hitachi, whose computers are marketed by NAS in the United States. The indictments against Cadet and Saffaie were later dismissed when the government refused to produce certain documents.

Kenji Hayashi, then 40, is a very thin, bespectacled man somewhat taller than the average Japanese, a man with a fifties crewcut and what a U.S. Justice Department attorney describes as a `hideous' laugh. Hayashi was one of Hitachi's senior engineers. A few weeks after the stolen IBM workbooks were delivered to Hitachi, he inadvertently acknowledged their existence to Maxwell Paley, a San Jose, California, computer consultant. Paley, another former IBM employee (21 years with Big Blue) had offered Hayashi, his regular contact at Hitachi, a legitimate study of the 380X project, a report that his consulting firm had developed from other sources. Hayashi told Paley that he didn't need the study; he had volumes 1, 3, 4, 8, 9, 10, 11, 12, and 15 of the Adirondack series. If Paley had other
workbooks, Hitachi was interested. Paley was immediately aware that something was quite wrong. The notebooks, his 21 years at IBM told him, were not supposed to be at Hitachi.

Approximately 20 percent of the business of Paley's firm, Palyn Associates, was with Hitachi, but loyalties to his country and his former IBM colleagues proved stronger. Paley phoned a close friend at IBM, Bob O. Evans, a vice-president in charge of engineering, programming, and technology. He told him that he was sure that Hitachi had somehow acquired IBM's `crown jewels.'

IBM is a company that spends `substantially more' than $50 million a year just on security. Learning that Hitachi had the notebooks galvanized Big Blue into action. IBM's top troubleshooter, a rugged, silver-haired ex-Marine captain, ex-FBI agent, and ex-T Man (Bureau of Narcotics), Richard A. Callahan, was put in charge of the initial reconnaissance operation. It was imortant to IBM to verify that Hitachi actually had the notebooks in their possession before going further. To gain access to Hitachi's Hayashi, IBM enlisted Paley, who agreed to act as a double agent for IBM.

Paley telexed Hayashi that he might be able to deliver more of the secret IBM notebooks, and set up a meeting in Tokyo for October. With an associate, Robert Domenico, and IBM's Callahan, Paley flew to Tokyo. On October 2, Paley met Hayashi in a room at the Imperial Hotel, where Paley gave Hayashi a handwritten index to the whole set of IBM workbooks. He also told the Hitachi engineer that while his firm was not in the business of securing confidential, proprietary information, he might be able to find someone who could. But, Paley told Hayashi, he needed to know precisely what Hitachi was looking for. What did these notebooks look like, exactly? Could Hayashi get him some to look at, so he would know if what his contact brought in was the genuine article?

Hayashi could. On the 6th of October, Hayashi brought Paley three of the ten notebooks. He also brought him the first in what would be a long series of `shopping lists'--the IBM items that Hitachi desperately needed to get their copycat computer system up and running so it would compete with IBM's. When Paley turned the notebooks over to Callahan, he was immediately able to identify them as stolen IBM property.

Now that IBM's security people were assured that Hitachi did indeed have its `crown jewels,' they were left with three courses of action. They could ignore the theft. They could sue the Japanese company in civil court for damages. Or they could turn the case over to the Justice Department for possible criminal prosecution. If they had chosen to ignore Hitachi's theft, it would encourage others to steal. For this reason, not incidentally, IBM has long followed a hardnosed policy about theft of its secrets. The policy was well known: IBM goes after those who steal from it with a vengeance. It prosecutes.

The second course of action, a civil suit, would be appealing only if there was a certainty that IBM could get justice. But if Hitachi were sued in the U.S., it might take years to resolve the case. To sue them in Japan might well take decades, assuming a Japanese court could be expected to render a judgment against one of its own companies. Moreover, initiating a civil suit might encourage Hitachi to settle our of court, a settlement that would also likely include a `no publicity' provision. IBM wanted Hitachi to get all the publicity it deserved.

IBM decided to go to the Justice Department with its evidence. The FBI and IBM were old friends. IBM was then training FBI agents how to act like legitimate electronics purchasing agents for an FBI sting operation, whose cover was Glenmar Associates in San Jose, California. The FBI was investigating the `gray electronics' market, where stolen electronics components, including computers, are bought and sold. The operation, code-named PENGEM (Penetrate Gray Electronics Market), had already begun; the machinery to incriminate Hitachi was in place. The emphasis, the Justice Department decided, would be temporarily switched from theft of high-tech items destined for the Soviet bloc countries, which was PENGEM's initial focus, to similar goods headed for Japan.

In November 1981, Hayashi left Tokyo and came to Las Vegas, where Paley introduced him to IBM's Callahan, who was posing as a somewhat disreputable, but very able, retired lawyer. A few hours later Callahan introduced Hayashi to `Al Harrison,' as a source who might be able to get him the secret IBM materials. Al's real name was Alan Garretson and he was an FBI agent.

The FBI went out of its way to impress on Hayashi, and each of the Hitachi employees he brought into his scheme, that what they were doing was illegal. Transcripts from hundreds of hours of video and audio tapes make it clear that Hitachi's people were fully aware
of this, but it did not reduce their zeal to make their company, and their nation, itchiban in the computer market.

Theft did not preclude bargaining, something the Japanese cultivate with the same patience they devote to the art of bonsai dwarf trees. Not only did Hitachi want IBM's secrets, but they wanted them at the lowest possible price. Hayashi and his fellow Hitachi conspirators bargained endlessly with the FBI agents. They held out the inducement of future employment to the federal agents if they did good work. To Paley, whom the FBI had deftly moved aside as soon as he introduced Callahan under the cover name `Richard Kerrigan,' they displayed the stick. In a letter to Paley written on December 7, 1981, exactly forty years after Pearl Harbor, Hayashi wrote: `I have no idea to pay your travel fee if you don't have the suitable information for us.'

Hayashi revealed his business instincts later, when the filched information and hardware were being shipped back to Hitachi's headquarters in Japan by another person drawn into the conspiracy, Tom Yoshida, a U.S. citizen and president of a small American firm. As a faithful Hitachi salaryman, Hayashi directed Yoshida to send the stolen goods out on Japan Air Lines and intentionally undervalue the shipping documents. `From $10,000 the usual cost, for example, to $500 . . . if he say `$10,000,' you must pay more taxes in Japan,' Hayashi told the FBI's Garretson in a videotaped conversation. Stealing secrets was risky business, illegal business, but it was still business.

Initially, the FBI thought they could close the case in `two weeks or so.' But as it unfolded it became apparent that it would take more time to draw the maximum number of Hitachi employees into the FBI net. This meant that IBM would have to continue supplying trade secrets and hardware beyond their original intentions. Some of the information Hitachi requested was now available from IBM customers. One evening in November 1981, FBI agents `bribed' their way into a secret-filled room at Pratt & Whitney's Hartford, Connecticut plant to allow Hitachi's Jun Naruse to photograph a new IBM disk drive memory device installed there for testing.

Other information was less accessible. IBM was understandably hesitant about continuing to supply Hitachi with its trade secrets, but Callahan and the FBI told IBM officials that to make an airtight case, and to demonstrate publicly that the conspiracy had reached Hitachi's highest management levels, IBM would have to satisfy Hitachi's `wish list.' IBM reluctantly agreed. Between November 1981 and June 1982, when the FBI arrested Hayashi and Isao Ohnishi, a Hitachi software expert, Hitachi paid out some $600,000 to the ersatz spies. In return they got substantial amounts of IBM hardware, software, and proprietary information, secrets that IBM had spent hundreds of millions of dollars developing.

The passage of time made each secret a little less valuable to Hitachi. But once the first few secrets had made their way across the Pacific, Hitachi's demands grew more insistent. This made IBM even more anxious; the requested material was scattered among research labs, customer sites, and various manufacturing facilities. Each time it had to be collected without alerting IBM employees who, for security reasons, were not aware of the FBI operation. By June, a concerned IBM told the FBI `no more.' In any case, they explained to the FBI, much of what Hitachi still wanted would be legally available through purchase in a few months.

The FBI agents were convinced that the Hitachi conspiracy was not just the work of over-eager low-level employees. They were sure that the highest echelons of Hitachi were involved in the plot. To learn which top Hitachi executives were controlling the scheme, Callahan and Garretson offered enticing bait. They told their Hitachi contacts that they were able to get their highly confidential hardware, software, and manuals out through IBM's thick security blanket through a pair of passeurs who were very senior IBM execs about to retire. As it often happened, the FBI told Hitachi, both had access to virtually anything the Hitachi people wanted.

These high-level IBM executives, Callahan insisted, could not compromise their identity. `One is on leave from IBM and is president of a college,' he told Ohnishi and Hayashi. `Which college?' Hayashi asked, several times, but Garretson and Callahan sidestepped the question. These IBM men, they said, were interested in a steady extra income for a few years, but `only if they could be paid in cash,' Callahan stressed. `They have to pay a lot of taxes on their retirement funds, and they want to avoid taxes on this money.' But, Callahan added, the IBM men would not agree to the deal unless they could meet a Hitachi official of comparable rank. They would have to have his personal assurances of confidentiality. Hayashi agreed and suggested payment by bank check sent by air express.
`No good,' said Callahan. `Wire the money directly to the bank, it's faster.'

Hayashi concocted an elaborate strategem to bring Dr. Kisaburo Nakazawa, head of Hitachi's computer factory at Odawara, into contact with Garretson and Callahan. He was careful not to alert anyone at Hitachi who was not already privy to the scheme. It was arranged for Nakazawa to make a trip to Hitachi's San Francisco offices; a full schedule of activities was published as a cover. They meet at the St. Francis Hotel where Callahan, in an effort to learn who else at Hitachi was in on the plt, asked Nakazawa to draw diagrams of the Hitachi organizations. Callahan also professed concern about keeping word of the stolen materials from getting back to IBM. Nakazawa assured the FBI agent that he would personally handcopy the information from the pilfered documents, each marked with the red ink `IBM Secret' stamp. No photocopies would be made.

As the scheme gathered momentum, the volume of IBM materials grew. Computer tapes inscribed with IBM's new software package were to be provided to Hitachi, which paid $250,000 for a program they could have bought openly for $100,000 if they had waited a few months. Tapes were smuggled into Japan by Ohnishi, who left his country with blank tapes on IBM reels, which he then told Japanese Customs `had a value of only $10.' On his return to Japan, Ohnishi was to carry the same reels with the IBM tapes, and show the customs document to prove that he had brought the same number of tapes out of Japan. `Very clever, very smart, good job,' said Garretson when Ohnishi told him what he was going to do. But Ohnishi never had the opportunity. On June 22, 1982 he and his Hitachi colleagues were arrested at the FBI cover office in San Jose.

But at times the Hitachi thieves were surprisingly inept. An IBM tape was `stolen' for the weekend and would have to be `returned' on Monday, Hitachi had one of their San Francisco people come down to HAC Semiconductor to duplicate the tape. `It took your man seven hours to do a five minute job,' Garretson complained to Ohnishi and Hayashi.

On another occasion, Nagazawa asked for a large piece of hardware called a backboard. `It's too big to sneak out of the IBM lab at Poughkeepsie,' complained Callahan, `It's this big,' he said, demonstrating with his hands far apart. `How you gonna sneak that out? Should I get somebody with a big overcoat?' Nakazawa giggled and shrugged.

The FBI investigation revealed direct participation by a total of 11 Hitachi executives, ranging from Ohnishi and Hayashi up to Nakazawa. `Hayashi told the FBI undercover agent that he had the authority to spend up to $1 million,' says special prosecutor Herb Hoffman. `Nakazawa is Hitachi's leading computer developer.'

No decision has been made by the Justice Department concerning whether it will seek to extradite to America the nine Hitachi employees who had returned to Japan before the arrests. `As soon as the charges were filed, Hitachi filed five binders full of motions. The essence of them was that IBM had set Hitachi up, that it was strictly an anticompetitive situation, that the U.S. government joined hands with IBM and let IBM control the investigation for competitive reasons,' says Hoffman. He then asks: `What does that say about Hitachi's credibility when they made all these allegations, then before the motions were heard by the judge, they plead guilty. What does that say about their credibility?

`When it was time for sentencing, the judge said he would not have the individuals put in jail. This was a situation in which Hitachi employees were acting at the behest of their superiors. It was very important that the company be convicted,' Hoffman points out.

Ultimately, however, Hitachi paid little for its trangressions. In San Francisco, on February 8, 1983, Judge Spencer Williams fined Hayashi $10,000--the maximum fine--and Ohnishi $4,000. He also levied a fine of $10,000 against Hitachi, which paid its employees' penalties. The total cost in damages was only $24,000. `The only thing they could be convicted of was stealing trade secrets, since IBM gave them everything they took out of the country,' says Hoffman. `But the important things was for Hitachi to stand up there in court and admit that they were guilty of trying to steal IBM's plans.'

In the early fall of 1983, Hitachi settled the civil suit brought by IBM for the theft of their trade secrets. The agreement included the return of all the stolen IBM materials in its possession, and a provision that IBM would have the right to inspect all new Hitachi data-processing products before they are released for sale during the next five years. They also agreed to disclose the identities of all the individuals who offered IBM secrets to Hitachi. But Hitachi has yet to admit that any of IBM's secrets were used in the development of
new products, and they have not yet compensated IBM for the huge expenses involved in settling the case.

The Hitachi `operating expenses' for the conspiracy were only $600,000, a pittance compared to the value of the technology gained. None of the other Hitachi employees involved were tried here or in Japan; they were merely transferred to other jobs. Even Yasukichi Hatano was allowed to keep his seat on the board, though he was relieved of his duties as head of computer operations. `Mr. Hatano is now a `director without portfolio,' commented Yasushi Sayama, a Hitachi spokesman. Nor did Hitachi suffer much loss of face in Japan; perhaps even the reverse. The Japanese press, which tends to act in concert with official policy, saw the case as evidence of an attempt by IBM to frame Hitachi. `Jap-baiting,' most of the influential dailies complained.

Since `sting' operations are illegal in Japan, except in drug cases, the Hitachi theft of IBM secrets provided a good opportunity for a discussion of America's loose morals. The Japanese papers insisted on calling it the `IBM industrial espionage' case, as if IBM had been the offending party. Shoichi Saeki, a Tokyo University professor of American literature, reported the comments he overheard in the sauna of his sports club. `It was a really filthy trick,' said one man. `It was entrapment. The Japanese government must protest against this,' said another. `The American methods go too far,' said a third. They were criticizing IBM for having Hitachi's spies arrested.

Saeki himself likened the FBI operation to the activities of a con man. `The FBI set up a bogus consulting company. This is an old trick of con men,' he said. `In America, where many ethnic groups coexist and the restraining influence of traditional social ties has weakened, con games are widespread.' He added, `My experience in the United States convinces me of this. . . . In many areas of American life, tricky methods similar to con games are used. . . . Modern advertising and public relations, with their hypes and hidden persuasion, originated in the United States.'

The theft of IBM secrets apparently did not tarnish Hitachi's image as an innovative company. In fact, the editor-in-chief of Nikkei Computer, a prestigious Japanese bimonthly, reported that `many users of IBM machines have told me they're thinking of switching to Hitachi.' Hitachi's sales actually rose in the months following the revelation that Hitachi had stolen IBM's secrets. The U.S. Social Security Administration, which had been shopping for computers bought two Hitachis for $7 million. `They were cheaper, and performed equally' to the IBM models, a U.S. government spokesman explained.

On June 18, 1982, four days before the IBM case made headlines around the world, Fujitsu's two-page ad in the Nippon Keizai Shimbun, a trade newspaper, announced that it had completed a new model computer, which was compatible with the new IBM 3081K. Nikkei Computer, in its July 26 edition, quoted a former Fujitsu employee as saying that virtually all of IBM's secret documents were in Fujitsu's possession. `The era in which many little stars revolve around the great IBM sun is coming to a close; thus a new era in international business is dawning,' said Taiyu Kobayashi, Fujitsu's chairman.

The New Era of Japan has arrived, much to the confusion and detriment of the businessmen and workers of the Western world.

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[TIME: 1810]


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