Computer Deal Creates Controversy. SCANDAL IN JAPAN
AT first glance Cray Research Inc. appears to be receiving advertising manna from heaven. Every day the Japanese news media are plastered with pictures of Cray supercomputers. Cray's name recognition has skyrocketed in a country where it is eager to expand sales.
Far from basking in the glory of a boosted corporate image, however, Cray is in the midst of a public relations nightmare. The publicity surrounding the company is fallout from a stock and bribery scandal that is shaking Japan's political and business establishment.
Cray's woes stem from its business dealings with the telecommunications giant Nippon Telegraph and Telephone (NTT) and Recruit Company, an upstart information services company. Both are at the center of an unfolding story, which has touched about 170 Japanese politicians, government bureaucrats, and business leaders.
Hiromasa Ezoe, the founder of Recruit, is charged with trying to buy his way into Japan's establishment by distributing shares of a Recruit real estate subsidiary before their public offering. When sold to the public, these shares skyrocketed in value, raining profits on Mr. Ezoe's would-be benefactors. One alleged recipient of Ezoe's largess, former NTT chairman Hisashi Shinto, was indicted last week on charges of accepting bribes to help Recruit break into the telecommunications business.
No one has accused Cray of any wrongdoing. But Cray has been dragged into the affair because two supercomputers that it sold to NTT, one in 1986, the other in '87, were later resold to Recruit.
Investigators want to know whether NTT executives accepted bribes to resell the machines at an artificially low price. And opposition parties suspect that former Prime Minister Yasuhiro Nakasone, whose aides received Recruit stock, may have facilitated the deals by discussing the import of Cray supercomputers by NTT in summits with then-President Reagan in 1985 and '87. Mr. Nakasone denies the charge, but has refused to testify on the issue before the Diet (parliament).
Key details of the transactions remain a mystery, fueling speculation. The scandal, says Cray spokesman John Swenson, ``has cast a pall over the whole company.''
Cray's troubles could have important implications for United States high-technology industries. Cray remains the world's premier maker of supercomputers, the sophisticated machines that are used in everything from automobile design to nuclear weapons research. But Japanese electronics giants Fujitsu, NEC, and Hitachi have entered the market, and many analysts believe they will soon challenge Cray for technological leadership. Sales in Japan are important to Cray, both to slow the expansion of its competitors and to monitor their technological progress. Cray officials say it is too early to tell whether the scandal will hinder Cray sales in Japan.
Thus far, Cray has not made public its version of the events under investigation. The company will not comment on its dealings with NTT and Recruit, though it does provide general background on its business in Japan. (Cray chairman John Rollwagen declined to be interviewed for this story.) Koichi Kawada, a Cray salesman in Japan who worked on the 1986 NTT-Recruit deal, has been intensively questioned by the Tokyo prosecutor's office, but little is known about his testimony.
But important light has been shed on the affair by James Otis, who headed Cray Japan from 1984 to 1986. Mr. Otis now operates his own consulting company in Minneapolis.
Otis says he believes the tripartite computer deals among Cray, NTT, and Recruit amounted to a ``marriage of convenience'' for all involved. He says the deals originated in September 1985, when Cray Research Japan approached NTT and asked for introductions to Recruit, which was then negotiating with Fujitsu for the purchase of a supercomputer.
Cray was late to learn about the Recruit-Fujitsu talks, Otis says. He shot off a letter to Ezoe requesting that Cray machines be considered. To improve its chances with Recruit, Cray approached NTT, which was already assisting Recruit's entry into the field of telecommunication services, Otis says.
Otis says he was caught off guard by NTT's response. The telecommunications giant not only agreed to be a matchmaker, he says; NTT asked to buy the Cray machine itself and resell it to Recruit. At that time, NTT was under tremendous government pressure to import US products, pressure that had not subsided after its purchase in 1984 of a Cray supercomputer.
``What precipitated NTT's involvement was that Cray approached NTT,'' says Otis, an account that contradicts published reports that Ezoe initiated contact with NTT about importing the Cray machine.
FOR Recruit, purchase of the Cray machine was an opportunity to deepen relations with NTT, its important partner.
Cray, for its part, did not immediately agree to NTT's resale idea. Cray executives were concerned that NTT might sell the machine to Recruit at a very low price, thereby hurting Cray with its other customers. Cray, which eschews price discounts, insisted on retaining the right to establish the terms of resale, and NTT agreed.
Otis says he confirmed with Cray officials in Japan last January that NTT made a profit on the 1986 resale to Recruit, ``which erased a lot of questions'' in his mind. Otis says he was not involved in the 1987 deal.
Mr. Swenson, the Cray spokesman, insists that NTT's middleman role was ``routine,'' since other Cray customers have integrated Cray machines into larger systems for resale to third parties. NTT provided technical support to Recruit's inexperienced personnel. NTT also took title to the Cray supercomputer destined for Recruit and conducted stress tests for 30 days.
``Recruit got a machine hassle-free, which in itself is worth money,'' says Otis.