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LOACKHEED IN JAPAN

When Mr. Carl Kotchian, president of Lockheed Aircraft Corporation, made a trip to

Japan in August 1972, the company he headed was in a very precarious financialsituation. Lockheed has failed to get contracts with several major European carriers.

Cost overturns on the C5A Galaxie transport place and performance problems with the

Cheyenne helicopter had avoided bankruptcy in 1971 only with $250 million loan

guarantee from the federal government. The survival of Lockheed as a company was

riding on the effort to sell the new L-1011 TriStar passenger jet to All Nippon Airways

(ANA).

Shortly after landing in Tokyo, Kochtian asked a representative of the Marubeni

Corporation, a trading compmany that Lockheed has engaged to aid in negotiations

with All Nippon Airways (ANA), to arrange a meeting with Kakuei Tanaka, the PrimeMinister of Japan. Kotchian knew that Tanaka would be meeting with President

Richard Nixxon in Hawaii in a few days and that Nixon would ask him to improve the

U.S. balance of payments by buying more American products. He felt that it was

important for the prime minister to be informed beforehand about the merits of the

TriStar.

The representative of Marubeni, Toshiharu Okubo, informed Kotchian that a pledge

of 500 million yen (about $6.1 million) would be required to set up such a meeting.

Without specifically being told the destination of the money, Kotchian assumed that itwas intended for the prime ministers office. Kotchian was hesitant about making an

irregular payment of this size to the highest official in the Japanese government, but

he knew that refusing to do so would hamper Lockheeds efforts and that the blame

for any failure would rest squarely on his shoulders. So he agreed to pledge the

amount requested, and a meeting was held at 7:30 in the next morning. At the

meeting, which Kotichain did not attend, the president of Marubeni allegedly secured

Tanakas help on behalf of Lockheed with an offer of 500 million yen.

After more than two months of complex negotiations, executives of ANA were on the

verge of placing an order for six planes with an option to buy eight more. Late in theevening of Sunday, October 29, Carl Kotchian received a telephone call from Okubo

informing him that the sale was assured if he would do three things. Two of them

were minor, but the third was a bombshell. Kotchian was asked to have $400,000 in

Japanese yen ready the next morning. Of this amount, $300,000 or 90 million yen,

was to be paid to Tokuji Wakasa, the president of ANA. The figure was based on

$50,000 for each of the six planes ordered. The remaining $100,000 or 30 million yen,

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was to be divided among six Japanese politicians. When Kotchian protested that it

would be impossible for him to raise that much cash so quickly, he was told that the

30 million yen for the politicians was essential; the rest could wait.

By 10:00 the next morning, 30 million yen in cash was delivered to Okubo, and the 90-

million-yen payment to the president of ANA was made a week later. Kotchian

returned to the companys headquarters in Burbank, California, amid general

celebration and apparently forgot about the pledge of 500 million yen for Prime

Minister Tanaka. Eight months later, though, Okubo called Kotchian to say that now

was the time to follow through. Kotchian asked whether the payment was necessary

because the deal had been concluded such a long time ago. Okubo assured him that if

he did not honor the pledge, Lockheed would never be able to business in Japan

again, and he hinted darkly that the president of Marubeni, who has made the offer to

Tanaka, would have to leave the country.

In an account of his experiences, Kotchian wrote: After hanging up the telephone, I

went home and thought about the matter overnight. I decided on the basis of what

Okubo had told me that we could not possibly risk any retaliation against Lockheed or

against Marubeni. If we did not make the payment on the matter, Hiyama [the

president of Marubeni] would be forced into exile, Lockheed might not be able to sell

anything in Japan again, and our relations with Marubeni might be completely

distupted. Consequently, the more I thought about it, the more I was convinced that

there was no alternative but to make the payment. In the end, after talking it over

with other Lockheed executives, I called Okubo and told him we would honor the

pledge.

Later, when All Nippon exercised the option to buy eight more TriStar planes, Okubo

requested $400,000 per plane. Kotchian again, felt that he has no choice but to

comply and ordered that the payment be made. In all, Lockheed paid about $12.5

million in bribed and commissions to sell 21 TriStar in Japan.

This case has been retrieved from the book titled Ethics and The Conduct of

Businessby John R. Boatright.