Japan’s economy grows five quarters in a row, and Japan Post books losses of YEN 400.33 billion (US$ 3.6 billion) for an acquisition in Australia
by Gerhard Fasol
Japan GDP growth first quarter 2017, growth of 2%/year. Still, Japan’s economy is the same size as in 2000, while countries like France, Germany, UK today are double the size as in the year 2000
Japan GDP growth first quarter 2017: We have seen 5 quarters of economic growth in Japan, for the January-March 2017 quarter the consensus is that the Japanese Government is likely to announce economic growth corresponding to an annual growth rate of around 2%/year (update: Japan’s Government announced an annual growth rate of 2.2%/year).
Generally the business mood in Japan is optimistic now, personal consumption and industrial orders are growing. We see investments in preparation for the 2020 Olympics. Venture start-ups and venture investments are growing, while still at a low level, we see venture businesses developing not only in Tokyo, but also in regional centers around Japan.
One mid-term risk to Japan GDP growth is the potential implementation of the postponed consumption tax rate increase.
The big picture however is, Japan’s economy today is approximately the same size as 17 years ago in 2000. During the same 17 years most major economies, e.g. France, Germany, UK have doubled in size. France, Germany, UK’s economies today are about twice the size as in 2000, while Japan’s economy today is about the same size as in 2000. Quarterly GDP figures just measure the short term fluctuations of this long term behavior.
Rico Hizon: so what would Japan have to do to restart long term growth?
Gerhard Fasol’s answer
Japan would have to do three things to restart economic growth long term:
Population: Implement policies to make it easier for families to have children, shift spending from the aged to children, improve eduction, shorter work hours, build children’s day care centers, gender equality
Implement Prime Minister Abe’s “third arrow”, the reforms. Deregulation not just in a few “special zones” but nation wide.
Improve corporate governance to improve company’s growth, globalization and management.
Japan Post trips up on globalization: books YEN 400.33 (US$ 3.6 billion) losses due to an acquisition in Australia – with a Toshiba connection
Japan Post announced a loss of YEN 400.33 (US$ 3.6 billion), and a resulting net loss of YEN 28.98 billion (US$ 260 million) for the fiscal year ending March 31, 2017.
Japan Post Holdings was launched on the Tokyo Stock Exchange with the IPO on Nov 4, 2015.
Investors expect major growth of Japan Post Holdings into a global business, such as Deutsche Post has with privatization and later the acquisition and merger with the global logistics group DH about 20 years ago.
Around the time of the IPO Japan Post announced the acquisition of the Australian logistics group Toll for about YEN 620 billion (US$ 5.5 billion), while Toll’s market cap previous to the acquisition was about YEN 410 billion (US$ 3.7 billion).
Japan Post’s recent write-down at Toll is about equal its pre-acquisition market cap, or about 65% of the acquisition prize.
The deep problem of Japan Post’s steep write-downs at the Australian acquisition Toll, is that this casts doubts on Japan Post’s developments into a global business.
The Toshiba connection: Japan Post’s former CEO, Taizo Nishimuro (西室 泰三), previously served as CEO and Chairman of Toshiba
CEO of Japan Post at the time of the questionable Toll acquisition was no other than Mr Taizo Nishimuro (西室 泰三), former CEO and Chairman of Toshiba, now honorary advisor of Toshiba, who spent all his career at Toshiba, working at Toshiba since 1961. Toshiba is currently in severe difficulties caused primarily by Toshiba’s acquisitions of US nuclear construction firms, however Toshiba’s fundamental problems go back much much longer.
Japan Post Holding 
Japan Post Holdings was founded on 23 January 2006, following the path to privatization initiated by Prime Minister Koizumi of Japan’s national Post Office.
Japan Post Holdings is listed on the Tokyo Stock Exchange (No. 6178), IPO was on 4 November 2015, and has five divisions:
Bill Emmott and Gerhard Fasol about the future of Japan and the power of Japanese women
Bill Emmott is an independent writer and consultant on international affairs, board director, and from 1993 until 2006 was editor of The Economist. http://www.billemmott.com
Gerhard Fasol is physicist, board director, entrepreneur, M&A advisor in Tokyo. http://fasol.com/
women determine Japan’s future: A conversation about Japan’s future
I came first to Japan in 1983 as Economist Tokyo Bureau Chief, staying until 1986. Then in 1988 I came back on sabbatical leave and wrote “The sun also sets: why Japan will not be number one”, which against my expectation when it was published in 1989 found big resonance in Japan. The stock market was plunging, and mine was the most immediately available explanation. Ever since, journalists have constantly asked me what the sun is doing now! It also meant that even when I became editor in chief of The Economist in 1993 I spent much more time focused on Japan than I had expected, visiting as often as I could to keep track of the post-bubble developments, and wrote a book that appeared only in Japanese translation called “Kanrio no Taizai”, or the bureaucrats’ deadly sins. But later, with Prime Minister Koizumi consolidating reforms, and the banking system at last getting cleared up, I sent myself back in 2005 to research and wrote a much more optimistic special supplement for The Economist which became a book, “The sun also rises”.
Throughout the 35 years since I first came to Japan, I have both been fascinated and struck by the fact that although this is in so many ways an inward-looking self-contained nation, foreign observers are listened to and even have a chance of having a positive impact.
One element that had featured consistently in my writings ever since the 1980s had been observations and expectations for a growing role for women in employment and power. This seemed logical given that, at least before the bubble burst, Japan was heading for a labour shortage, but also the Equal Employment Law of 1986 had led to more females being recruited by major organisations. Japan’s excellent education surely meant that the underused half (= women) of the adult population would soon be used more productively.
Of course, this has developed a lot more slowly than I expected or hoped, partly for cultural reasons but also because Japan has not in fact had a labour shortage, until now.
I wanted to meet you, Gerhard tonight because we both are fascinated by the role Japanese women have in making Japan such a fascinating country, and how the many really strong Japanese women could have key roles in bringing growth and dynamic change back to Japan.
Could Japanese women have bigger roles for the development of Japan?
What is holding women back in Japan?
Who are the role models?
I am making interviews with high-achieving Japanese women to try to find answers, and plan to compile them into a book later this year. What would you say, Gerhard? And anyway, how did you end up here?
My path to Japan is quite different than yours, Bill. I came to Japan first in 1984 as Fellow of Trinity College Cambridge, and scientist at the Max-Planck-Institute in Stuttgart, part of a project to build a research cooperation with NTT’s R&D labs. I saw that Japan was very important in technology and weakly linked to the outside – and still is today, I think. So in 1984 I decided to make Japan my second professional focus in addition to physics and electronics. Like you – the deeper I get into Japan, the more I learn about Japan, the greater my fascination, and my motivation to contribute.
Now I am working on many different projects, working on international technology M&A projects, and I am also one of a microscopic number of foreigners on the Board of Directors of a stock market listed Japanese corporation – reforming Japanese corporate governance hands-on.
Could Japanese women have bigger roles for the development of Japan?
I think that the equal participation of women in leadership is directly linked to the population issue, ie the number of children born.
while in Sweden 44% of Members of Parliament are women,
37% in Germany and
26% in France –
the world average is 23% women in Parliaments.
In Japan the ratio of women in Parliament has increased from 1% in 1990 to 10% in 2016, so there is progress. If we extrapolate, and if the trend continues, then it might take another 30 years or so until Japan reaches world average in terms of women bringing women’s views into Parliament, and taking part in making the laws. And it might take Japan 100 years to reach Scandinavian standards of women’s participation in making the laws of the land – unless there is some acceleration in Japan.
Japan’s most powerful Ministry, the Ministry of Finance, did not hire any women into career positions for a period of about 10 years!
At the 2015 New Year event of Kyoto Bank, Keidanren Chairman Mr Sadayuki Sakakibara showed that Japan’s spending on aged people is dramatically higher than spending on children, and that this ratio is increasing with time, Japan spends more and more on aged people and less and less on children. There are two ways to look at this situation:
one way is to say: we have an aging society, therefore its only natural to spend more on the aged, and less for children
the opposite way to look at the same situation is to say: we are spending less and less for children, no wonder we have fewer and fewer children. If we did more for young people, maybe people will have more children….
Actually most Japanese women I talk to want 2-3 children, but many cannot for financial reasons.
By nature, women give birth to children, not men, so more women in decision making positions including Government and Parliament will bring children’s issues into decision making.
As an example, child birth costs in Japan are not covered by health insurance, while they are everywhere in Europe. There are many other open and hidden costs of having children in Japan compared to Europe.
The most important factor are mindsets. The key to give more power to women in Japan is to change mindsets, to change the way of thinking.
As an example, the Prefecture of Kanagawa in 2015 created the “woman act” committee, under the slogan “women, step by step, take more responsibility”, however this committee both in 2015 and also in 2016 consisted of 11 men – not one single woman leader: http://www.pref.kanagawa.jp/osirase/0050/womanact/ Why not create a committee of 11 women leaders to lead efforts on gender equality in Kanagawa Prefecture? Why not promote women to leadership positions in Kanagawa Prefecture?
Another factor holding women back are the very long working hours common in Japan. As an example, at a recent EU-Japan gender equality conference, the Danish polician Astrid Krag, who was Minister for Health and Prevention at the age of 29 – 32 years, and who has two children, explaned that in the Parliament of Denmark the decision was taken not to take any vote after 4pm, so that Members of Parliament can be back home by 5pm, collect children from daycare centers in time etc. So in the Parliament of Denmark it is guaranteed that Members of Parliament can leave at 4pm. In today’s Japan such action is unthinkable, age 29 – with young children – would be unbelievably young for a Government Minister in Japan. https://en.wikipedia.org/wiki/Astrid_Krag
Late-night or overnight sessions at work, including Parliament, makes life incredibly difficult in Japan for parents with young children, doubtlessly contributing to the small number of women in top positions in Japan.
Who are the role models?
Despite these difficulties, there is a substantial number of very strong women in Japan, who have worked their way up into leadership positions.
Examples are the Mayor of Yokohama, Ms Fumiko Hayashi, who succeeded in a very distinguished business career, and the Mayor of Tokyo, Ms Yuriko Koike, who won the election on her own as an independent candidate, because she did not receive the backing of her party.
That is great, as I have now interviewed Koike-san and plan to interview Hayashi-san during my next visit. Personally, as well as admiring women who have made it to the top in the tough political world I also admire and am interested in women succeeding as entrepreneurs and as executives in entrepreneurial companies. By starting and building their own companies, women can really create new realities, showing that new organisational cultures are possible in a Japanese context. Do you agree?
The tantalizing issue is that the key is to change mindsets, and thats at the same time superficially easy, but at the same time incredibly hard. Thus outstanding strong Japanese women – and there are many of them – have a choice either to work their way up to the top in Japan, start their own company in Japan, or on the other hand to move to Europe, elsewhere in Asia, or to the USA – I know several strong Japanese women, including several Japanese medical doctors, who have moved to Europe or USA. They might of course come back to Japan at a later stage bringing global views and experiences to leadership positions in Japan in the future. I am very optimistic for the future of Japan – sometimes I wish things were moving faster.
I agree entirely. I see Japanese women as both victims of the slow speed of change and as solutions to it. They really could make the Japan of 2030 look quite different, in all sorts of ways. It will be fascinating to watch.
Bill Emmott and Gerhard Fasol met at the restaurant MusMus in Tokyo
Copyright (c) 2017 by Bill Emmott and Gerhard Fasol. All Rights Reserved.
Governments best help economic growth by reducing friction, and by getting out of the way of entrepreneurs building, turning-round, and refocusing companies.
Some required action is counter to intuition: for example, in many cases reducing tax rates increases Government’s tax income, a fact known for many years. Effective education and research are key to create, understand and apply such non-obvious knowledge.
Economic growth for Japan: corporate leadership and governance reform
Companies need efficient leadership, leadership needs feedback, wise and diverse oversight by Boards of Directors, who ring alarm bells long before a company hits the rocks, or fades into irrelevance. Corporate governance reform may be the most important component of “Abenomics”. Read a Board Director’s view on Japan’s corporate governance reforms:
Japan’s electrical conglomerates are some of the poster children motivating Japan’s corporate governance reforms. In an interview about Toshiba’s future on BBC-TV a few days ago, I explained that Japan’s electrical conglomerates showed no growth and no profits for about 20 years, and the refocusing Toshiba has announced now should have been done much much earlier, 10-20 years ago (“Speed is like fresh food“). Refocusing Japan’s established corporate giants will release resources for start-ups, spin-outs and growth companies.
Economic growth for Japan: Japan can be very good at restructuring and turn-rounds
After Japan’s economic bubble burst in the 1990’s, Japan developed much know-how to successfully turn around failed companies:
On 9 December 2009, Volkswagen-CEO Mr Martin Winterkorn and Suzuki-CEO Mr Osamu Suzuki at a press conference in Tokyo announced a “comprehensive partnership”.
A Reuters photograph shows a beaming and smiling Mr Winterkorn, while Mr Suzuki looks the other way, avoiding Mr Winterkorn’s eyes. Mr Winterkorn and Mr Suzuki don’t seem to have any language in common, therefore can’t talk to each other. Wall Street Journal writes that details of their “comprehensive partnership” will be negotiated later, in weeks or in months. Looking back it is obvious that these negotiations never were successful.
Professor Ferdinand Dudenhoeffer, Director of the Center for Automotive Research at the University Duisburg-Essen according to Bloomberg, summarized: “Mr Suzuki didn’t want to be a Volkswagen employee, and that’s understandable”.
Lessons to learn from the Suzuki Volkswagen divorce: communication & respect
“Comprehensive partnership” without meeting of minds does not work
Partnerships are hard when CEOs on both sides don’t have any language in common, thus can’t talk to each other
Hidden agendas destroy trust
Without trust partnerships don’t work
Processes and methods (e.g. acquisitions of minor players all over Europe) successful in Europe often don’t work in Japan
Partnerships without respect both ways don’t work
Renault and Carlos Ghosn (at least before the 2018/2019 scandals), and Daimler with Mitsubishi-Fuso-Trucks show us how to build an Japanese-European car company alliance, Daimler (with Mitsubishi Motors) and Volkswagen (with Suzuki) show us how it does not work
Continues licensing relationship with Nippon Television Network Corporation
Hulu started Japan operations on August 31, 2011, and less than three years later, CEO Mike Hopkins announced in his blog the sale of Japan operations to Nippon Television Network Corporation (日本テレビ放送網株式会社).
During this time, Hulu Japan had grown to 50 content partnerships, offering 13,000 TV drama, movie and anime titles: about 1000 movies and 12,000 TV episodes.
In March 2015 Hulu Japan, now under Nippon TV ownership, achieved 1 million subscriptions.
Hulu-CEO, Mike Hopkins, did not announce why Hulu sold Japan operations to Nippon TV. We assume that Hulu, owned by traditional large media corporations (NBC, Fox and Disney) saw the need to partner with a large established Japanese media company to achieve wide penetration and long term growth. Maybe Hulu had expected much more rapid growth in subscription numbers in Japan?
On April 12, 2012, Hulu Japan reduced the monthly subscription charge to YEN 980.
On February 27th, 2014 Hulu-CEO, Mike Hopkins, announced the sale of Hulu Japan to Nippon Television Network Corporation (not the Nippon Television Holding company).
Thus the company operating Hulu services in Japan is HJ Holdings, LLC (HJホールディングス合同会社), and is owned 100% by Nippon Television Network Corporation (日本テレビ放送網株式会社), a subsidiary of Nippon Television Holdings, Inc. (日本テレビホールディングス株式会社).
On March 23, 2015, Hulu Japan achieved 1 million subscriptions.
Hulu – “Anywhere, Anytime”
Hulu was founded in 2007 to offer streaming video on demand (VOD) over the internet, and is a joint venture between:
NBCUniversal Television Group (Comcast) (32%)
Fox Broadcasting Company (21st Century Fox) (36%)
Disney–ABC Television Group (The Walt Disney Company) (32%)
The name Hulu comes from two Mandarin Chinese words, húlú (葫芦/葫蘆), “calabash; bottle gourd”, and hùlù (互录/互錄), “interactive recording” (source: Wikipedia.org)
Japan’s media market
Hulu is not the only company offering Video-on-Demand (VOD) services, and is facing considerable competition.
Burberry Japan – the start of a relationship: Sanyo Shokai started importing Burberry coats to Japan in 1965, and in 1970 partnered with trading company Mitsui to design, make and sell apparel, coats, suits and other fashion items under the Burberry brand under license from the London based Burberry company. According to trade sources, Mitsui licensed the Burberry brand from Burberry, and Mitsui then sub-licensed to Sanyo Shokai.
Sanyo Shokai independently developed the Burberry brand business in Japan, creating many products under the Burberry brand in Japan which did not exist anywhere else in the world. In particular Sanyo Shokai created the Burberry Blue Label brand for young ladies and the Burberry Black Label for young men. These products were developed by Sanyo Shokai specially for the needs of Japanese customers, and marketed and sold under the Burberry brand locally in Japan, but were not officially exported to other countries. Of course, tourists coming to Japan could buy these Burberry-Japan products and take them home, and still today there is a secondary online market for these Japan-only Burberry products, including Blue Label and Black Label.
A brand-disconnect was created between Burberry-Japan and the rest of the world of Burberry, which by Burberry, and fashion world insiders was considered as the “Burberry Japan problem”. However, the “Japan problem” yielded excellent sales and profits for Sanyo Shokai, and excellent license/royalty fee payments from Sanyo Shokai to Burberry, which made it hard for Burberry to consider other options in Japan.
Starting with the appointment of Rose Marie Bravo in 1997, who hired creative director Roberto Menichetti, Burberry changed the brand strategy, aiming to transform Burberry from a premium apparel brand to a luxury brand. Burberry’s Japan business became a problem in this transformation, since Burberry’s Japan business was not Burberry’s business at all, but Sanyo Shokai’s, and therefore was independently run by Sanyo Shokai with its own Japan-only products and sub-brands Burberry Blue Label and Burberry Black Label.
Burberry decided to carry out the transformation from the indirect license model, to the direct business model in Japan. Burberry’s license to Sanyo Shokai was meant to expire in 2020, but Burberry brought the termination of the license contract forward to June 2015.
Burberry’s challenge is now to build a different luxury Burberry business in Japan under the same brand name, while Sanyo Shokai’s challenge is to manage the pivot from the Burberry brand to the Mackintosh London brand as smoothly as possible: to move as many customers directly over from the Burberry brand to the Mackintosh brand and other brands used by Sanyo Shokai. Sanyo Shokai has the advantage that Sanyo Shokai keep almost all the former Burberry store locations and refurbishes them over summer 2015 into Macintosh and other Sanyo Shokai stores.
Burberry had to give up the 300-500 Burberry branded stores in Japan which it had no direct control over, most of which Sanyo Shokai will now transform into Mackintosh London and Mackintosh Philosophy stores. In addition, Sanyo Shokai will develop two sub-brands following on from Burberry Blue Label and Burberry Black Label, now under the “Crestbridge” brand:
With the expiry of the license agreement with Sanyo Shokai and Mitsui Trading company, Burberry operates the Burberry business in Japan direct. There is an approx. 1 year transition period where Sanyo Shokai seems to be permitted to sell remaining stocks which are still left from the validity period of the license.
Burberry is now building business in Japan both via its new flagship store in Tokyo Omotesando, other direct stores and indirect stores, and Burberry is also building direct online business via the internet and mobile phones/smartphones.
Burberry Japan luxury non-apparel joint venture
While the apparel license was terminated in June 2015, on 18 November 2008, Burberry, Sanyo Shokai and Mitsui entered into a luxury non-apparel joint venture for Japan operational for the Spring/Summer season 2010.
Burberry was founded by Thomas Burberry, designer of the famous Burberry trench coat in 1856 in London.
Burberry Blue Label was a sub-brand developed by Sanyo Shokai for women. Currently Burberry Blue Label products are traded online second-hand in Japan, and Sanyo Shokai is continuing the Blue Label Brand without the “Burberry” brand.
Burberry Black Label was a sub-brand developed by Sanyo Shokai for men. Currently Burberry Black Label products are traded online second-hand in Japan, and Sanyo Shokai is continuing the Black Label Brand without the “Burberry” brand.
The Mackintosh is a waterproof raincoat made of rubberized fabric invented by Charles Macintosh and first sold in 1824 (note that the inventor is named Macintosh, while his invention is today known as Mackintosh, with an added “k”).
The company was founded in Glasgow, Scotland around 1846. The company went through ups and downs, management buy-outs, and in the 1970s was mainly producing uniforms for British Rail and the London Metropolitan Police. British Rail and the Police procurement were looking for cheaper options, so Mackintosh had to reinvent its business leading to the reinvention of Mackintosh as a fashion brand.
In 2007 the Osaka firm Yagi Tsusho (八木通商株式会社) acquired the company and the brand Mackintosh, and created a new flagship store in Mount Street in London’s Mayfair.
Sanyo Shokai reached a licensing and business development partnership with Yaki Tusho regarding the Mackintosh London brand.
Sanyo Shokai’s strategy is to replace the lost Burberry license by the Mackintosh London brand. Sanyo Shokai opened the first Mackintosh London store in Yokohama in July 2015, and plans to open 263 Mackintosh London stores in Japan.
Sanyo Shokai plans a price range of YEN 120,000 – 160,000 for coats and suits. Most Mackintosh London stores will be Sanyo Shokai stores, which were operating under the Burberry brand previously, continuing business at the same locations with the same staff, converting from the Burberry to the Mackintosh brand identity, including the luxury floors in the main Japanese department stores. Sanyo Shokai plans to have converted approx. 170 stores in summer 2015.
Google play apps Japan ranking in Japan by gross revenues
AppAnnie showed that in terms of combined iOS AppStore + Google play apps Japan revenues, Japan is No. 1 globally, spending more than the USA. Therefore Japan is naturally the No. 1 target globally for many mobile game companies!
Android Google Play – Japan “Top Grossing” apps ranking of February 18, 2015:
AppAnnie showed that in terms of combined iOS AppStore + Google Play revenues, Japan is No. 1 globally, spending more than the USA. Therefore Japan is naturally the No. 1 target globally for many mobile game companies, and quite a few of the top grossing apps in Japan are of foreign origin – can you guess which?!
iOS AppStore-Japan “Top Grossing” ranking of February 10, 2015:
Masamoto Yashiro is a legend in Japan’s banking and energy industry. He built Shinsei Bank from the ashes of the bankrupt Long Term Credit Bank of Japan, and served in leadership positions (Chairman, CEO, Board Member) in Esso, Exxon, Citibank, Shinsei Bank, and the China Construction Bank.
Tonight a small group of about 60 people were invited to join Masamoto Yashiro and the President of The University of Tokyo, Professor Junichi Hamada, for an evening workshop and brainstorming event about globalization of Japanese corporations at The University of Tokyo. Participating were a selected group of The University of Tokyo graduates, faculty, and selected alumni from several elite Universities associated with The University of Tokyo, and currently working at major Japanese trading companies, Ministry of Finance, financial firms, global consulting firms and other global firms.
After The University of Tokyo President Junichi Hamada’s introductory words, we heard Masamoto Yashiro’s fantastic overview of how he thinks Japanese companies need to change and why, followed by Q&A, then by a brainstorming session in the format of changing groups of four on about 15 separate tables between the participants, and then followed by buffet and drinks reception.
Topic of the evening was the globalization issues of Japanese corporations, also discussed in our work about Japan’s Galapagos issues:
Masamoto Yashiro graduated from Kyoto University (Law Faculty) in 1954 and The University of Tokyo Graduate School in 1958, and entered Standard Vacuum Oil Company. In 1964 he became Director of Esso, and later Special Assistant to the Chairman of Standard Oil New Jersey, and in 1986 President of Esso Sekyu KK.
In 1989, Masamoto Yashiro moved to become Japan representative of Citibank NA, and Chairman of Citicorp Japan in 1997.
IN 1999, Masamoto Yashiro became CEO of New LTCB Partners CV, the company emerging from the bankruptcy proceedings of the Long Term Credit Bank of Japan, and was in charge of the revival of LTCB as Chairman and CEO, with investment from Ripplewood Investment Fund, creating today’s Shinsei Bank.
He resigned as CEO of Shinsei Bank in 2005, but returned as Chairman and CEO in 2008, from which he retired in 2010.
In 2004, he was appointed Director of the China Construction Bank.
Japanese management – why is it not global? What should we do? asks Masamoto Yashiro
Note: this record was reviewed personally by Masamoto Yashiro, who made some corrections.
Japanese management – why is it not global? Outline:
Some people may argue that Japanese companies need not be global. Why?
We must accept that English is an essential tool for international communication.
Some impediments that Japanese companies face:
The traditional approach is not effective in developing future leaders.
The Japanese-style board structure is not appropriate to ensure sound corporate governance.
Management structure needs to be changed to suit a global business.
The current limited role of foreign nationals in the management and board structure
What should be the most important corporate objective?
Summary of Masamoto Yashiro’s talk:
Some people may argue that Japanese companies need not be global. Why?
Some superficial discussions about “Japanese companies” contrast “permanent employment” and excellent pensions in Japanese companies with job-hopping and bad pensions in other countries, however, Masamoto Yashiro points out that during his time at Esso and later Exxon, most employees stayed 20-30 years at Exxon, and received excellent pensions, so “permanent longterm employment” or pension system has nothing to do with globalization, and Japanese leading companies are no different than leading companies in other countries in these respects. We have to search elsewhere for the causes of current problems most Japanese companies are facing.
Around 1990, about 20 years ago, Japan was extremely self-satisfied by the successful reconstruction after the war and economic growth and success, and Japan felt that Japan does not have anything to learn from others. This time is now over, Japan is in stagnation, and many Japanese companies are not globally competitive, and Japan and Japanese companies must change to become competitive again.
We must accept that English is an essential tool for international communication.
Masamoto Yashiro is convinced that Japanese companies must globalize, and must make English a business tool. He feels it is a great disadvantage that Japanese political and corporate leaders, when participating in international conference, such as Davos, mostly need to use interpreters, and this reduces their global impact and exchange of ideas dramatically.
Some impediments that Japanese companies face:
1. The traditional approach is not effective in developing future leaders.
The traditional approach in Japan is to rotate career employees every two years between totally different functions, in order to “develop well-rounded managers”. The result of this process are non-experts, which are not expert in anything.
As an example, during his leadership at Shinsei Bank, Masamoto Yashiro once requested a meeting with the IT Department leadership. To his great surprise 60 people turned up for the meeting (he had expected 2 or 3). He asked the Department Chief for particular information, and he could not understand the question and could not answer, same result one management lower. Only at the third layer from the top, Masamoto Yashiro could get his question answered – the top two management layers could not answer his questions about the work of the IT Department.
Quite generally there often far too many people at meetings at Japanese companies.
When at Exxon in the US as a relatively junior manager, Masamoto Yashiro, was asked about his opinion regarding the termination of a particular joint-venture relationship with a mid-size petroleum refining company in Japan known then as ゼネラル石油精製 who had financial trouble. Exxon had a 50% interest in this company and its relations goes back to very late 1950’s. In late 1985 at the Exxon Management Committee meeting in New York, all other managers favored to terminate the relationship with this joint venture partner in trouble in order to limit financial exposure, while Masamoto Yashiro argued that it was better to support the troubled partner and assist him with Exxon staff and expertise to return to profitability. To his great surprise the Chairman and his superiors at Exxon sided with his recommendation and changed their previous position following his advice. Generally he felt that in the USA his opinion as a Japanese manager was highly valued, because it provided a different view point.
In his experience in Japan the situation is totally opposite: Japanese senior management generally does not listen to junior employees, and particularly not to foreign nationals in the rare cases that there are any in Japanese companies. In fact, the most frequent question senior management at Japanese banks ask, is not for original ideas or creativity from junior staff, but instead: “What do other banks do?”
This deplorable Japanese situation even contrasts strongly with the situation in China, where Masamoto Yashiro was a Director of the China Construction Bank: in China leaders moved from Government agencies and Ministries to Banks, and to private industries and back.
Generally Masamoto Yashiro expressed the view, that the development of leaders is totally inadequate in Japan, and is better in China than in Japan.
In addition to the inadequate development of leaders in Japanese companies, the number of foreign nationals in management, Board and other leadership positions in Japanese companies is minute, there are no programs to attract and develop foreign nationals in leadership positions. On the contrary, when Shinsei Bank showed losses in the aftermath of the Lehman shock, Japan’s Financial Services Agencies ordered that Shinsei Bank must pay all foreign nationals on exactly the same pay levels as Japanese employees. Since foreign nationals typically have much higher schooling and other costs in Japan than Japanese staff, essentially all non-Japanese staff at Shinsei Bank left soon after.
Leaders can make a real difference.
How leaders are selected is of utmost importance.
At Exxon, senior management devote specially reserved time to identify suitable candidates for future leadership positions, “who can potentially be our CEO in the future”. The selected candidates are given special attention and special opportunities to train and develop their leadership abilities. Masamoto Yashiro has never heard about such special leadership development programs at Japanese companies.
2. The Japanese-style board structure is not appropriate to ensure sound corporate governance.
In Japan, Board Members are almost always managing employees of the company, so the question arises who’s interests they represent on the Board. Do they represent the interests of the institution (the company), the employees or the interests of the shareholders.
In Japan often the CEO of the company after his retirement remains as a Chairman for several years, keeps his office, secretary and company car, and creates large other expenses. Why? Probably because Japanese CEO pay is too low, so that the CEO does not wish to retire gracefully.
This is totally different in Western companies where retired CEOs leave the company and have no further role in the company in most cases. Masamoto Yashiro mentioned the retired Chairman of Exxon, who after his retirement naturally travelled by taxi. In Japanese it would be unthinkable according to Masamoto Yashiro that the retired Chairman of a major corporation would travel by ordinary taxi cab like ordinary people (Masamoto Yashiro did not mention subway or bus, or driving his own personal car….)
3. Management structure needs to be changed to suit a global business.
In non-Japanese companies in almost all cases have a thorough performance evaluation system. When performance is evaluated, the resulting distribution must be similar to a normal distribution, i.e. with considerable part of employees at the high end and substantial numbers at the low end of the performance curve. If this is not done, top performers cannot be sufficiently rewarded and will leave the company, while low performers would hold the whole company back.
In most Japanese companies on the other hand, if a thorough performance evaluation is done at all, in most cases a huge proportion of employees are just evaluated as average, satisfying performance, without clear distinctions between top and bottom performance.
Promotion and salary on the other hand in traditional Japanese companies is purely according to age, which leads to many problems, and causes under-performance of the whole company.
These problems are increased by the fact, that Japanese companies typically do not give the same evaluation or opportunities to non-Japanese nationals.
4. The current limited role of foreign nationals in management and board structure.
Even in the rare cases where foreign nationals are employed by Japanese companies in management or leadership positions e.g. in foreign subsidiaries, often junior Japanese employees which much lower rank and local knowledge do not respect and bypass non-Japanese management, and there is typically no fair evaluation system, evaluating Japanese and non-Japanese management according to the same standards of performance.
The change of this mindset (to keep non-Japanese out of management or leadership positions at Japanese corporations) is extremely important.
The change of mindset (to keep non-Japanese out of management or leadership positions at Japanese corporations) is not difficult at all and can be done quickly.
What should be the most important corporate objective?
When considering corporate governance it is important to develop a view on the objectives. When discussing the interest of shareholders, it is important to ask “which shareholders”? The interests of large shareholders who may own 10% or 20% of the corporation, or the interests of individual smaller shareholders? Other stake holders’ interests also need to be taken into account.
In general, Masamoto Yashiro expressed the view that both the institution’s (the company’s) and the shareholders interest are best served by stable long-term growth of the company. He mentioned as an example Exxon which showed triple-A rating and annual rate of growth of 15%-17% for over 100 years.
Around 1990 Japan was self-satisfied with the economic success, and Japanese people thought that they have nothing to learn from anybody. This time is over now, and Japan and Japanese corporations much change to regain growth and to become competitive again.
Japanese management – Q&A with Masamoto Yashiro (selected questions)
Q. You want Japanese companies to change. What are the good things you want Japanese companies to keep?
A. Loyalty. Consideration to stakeholders.
Q. Your work at Shinsei.
A. Communication was most important. When Masamoto Yashiro took over at Shinsei, the Bank has just gone through bankruptcy proceedings, so the moral was extremely low. Masamoto Yashiro had to reestablish optimism and moral. To do so, communication is most important. Masamoto Yashiro held weekly telephone conferences and every employee who wanted to could participate: from top management to cleaning staff/janitors. Everyone could come forward with his concerns.
Another fact was that there were so many traditions which made no sense. For example, female employees with University degrees would wear their own clothes, while female employees without University degrees would need to wear company uniform. There was an issue that lower paid staff had difficulty to afford appropriate clothing for bank work – so Masamoto Yashiro decided to award a clothing allowance to employees so that they could afford appropriate clothing.
Q. Many Japanese companies cannot hire young employees, because they cannot fire/discharge non-performing older employees.
A. Firing/discharge of non-performing employees can be done by paying adequate severance compensation. Considering that a non-performing employee who remains on the payroll for several years in addition to salary also creates a lot of secondary costs, it is typically cheaper to pay an appropriate severance package, and most people are happy to leave with an appropriate severance package, and often move to a more suitable position at a different company – this helps everyone. Of course some companies want to save money at all cost, and fire employees without adequate package and that can lead to problems.
Q. Having worked much of your career at global oil or energy companies, what to you think about Japanese oil companies?
A. Japanese oil companies are not really oil companies, because they do not invest enough upstream.
A. Japanese companies must change. The mindset must change.
Q. University of Tokyo?
A. University of Tokyo at the moment I think is ranked on 30th or 40th position globally in most rankings, maybe top in Japan or in Asia, but that does not count, we need to look at the whole world, not just Japan or Asia. I think University of Tokyo should make the changes necessary be at least in the top ten globally. To get into the top ten globally, University of Tokyo needs to hire outstanding Professors where the best students from the whole world want to come and study. To get the best Researchers and Professors University of Tokyo has to pay what is necessary. Does not matter which language, English or Japanese or any other language. No outstanding student from other parts of the world wants to study Japanese first before studying at University of Tokyo. University of Tokyo should make the necessary changes so that the best students from top Universities globally also want to come to University of Tokyo.
Mr Masamoto Yashiro’s talk and Q&A were followed by a brainstorming session in groups among all participants of four about globalization, and global leadership development.
Sir Stephen Gomersall: former British Ambassador to Japan and Chairman of Hitachi Europe
Sir Stephen Gomersall on UK-Japan business and globalization: Globalization and the art of tea
Hitachi – Japan’s most iconic corporation – under the leadership of Chairman & CEO, Hiroaki Nakanishi embarked on the “Smart Transformation Project” to globalize, to face a world where value creation has moved from manufacturing to innovation and solving customer’s problems, and to overcome long years of stagnation and low profits or losses, despite strong technology capabilities.
One of the most important brains behind Hitachi’s reinvention and globalization is Sir Stephen Gomersall. After a long and successful career as diplomat in the British Foreign Service, culminating in the years as British Ambassador to Japan 1999-2004, Sir Stephen joined Hitachi in 2004 as the first foreigner responsible for proposing and implementing Hitachi’s overseas regional strategy. Later Sir Stephen became responsible for all of Hitachi’s business in Europe as Chairman and Chief Executive of Hitachi Europe, and in addition Sir Stephen also served as Director on the Board of all Hitachi 2011-2014 overseeing all of Hitachi Group’s business as Board Director. With Sir Stephen’s leadership Hitachi achieved major business breakthroughs in Europe.
On March 5, 2015, Sir Stephen gave the “Princess Chichibu Memorial Lecture to the Japan British Society at Ueno Gakuen University in Tokyo with deep insights on Japan-British relations, on comparison of Britain’s and Japan’s position in the world, and on the challenges of globalization facing Japan and Japanese corporations – in particular Hitachi.
Sir Stephen is very clear that there is no alternative to globalization: “Globalisation poses tough challenges for Japanese companies, but is the only way forward”.
Fidelity: Japan market entry the patient and careful way
Fidelity’s Colt to acquire KVH for YEN 18.595 billion (€ 130.3 million = US$ 160 million)
Both Colt and KVH were founded with investments by Fidelity Investments and associated companies, Colt in London in 1992, and KVH in 1999 in Tokyo, as telecommunications service providers for the financial industry and other industrial customers. While KVH remained 100% owned by Fidelity and associated companies, Colt was listed on the London Stock Exchange in 1996.
Initially founded as telecommunications companies, both Colt and KVH have developed into “information delivery platforms” based on networking infrastructure, data centers, optical fibre networks and associated management and information services.
On November 12, 2014, Colt announced the plan to acquire KVH for YEN 18.595 billion (€ 130.3 million = US$ 160 million) in cash from KVH’s owner Fidelity Investments.
Since KVH is 100% owned by Fidelity Investments, and Colt have also been founded by Fidelity which is still a shareholder, the acquisition needs to be approved by independent Directors and by independent shareholders of Colt.
A General Meeting of Colt’s shareholder has been announced for December 16, 2014 at 10:00am in Luxembourg where the approval of shareholders of Colt will be sought.
Colt – the “information delivery platform”
Colt was founded by James P Hynes (Jim Hynes) with investments from Fidelity Investments and related companies in 1992 in London, and went public with an IPO on London Stock Exchange in 1996.
Colt operates 20 data centers and substantial optical fiber networks, and has more than 5000 employees.
Colt’s annual revenues are € 1,575.8 million (= US$ 2 billion) in 2013.
Colt market capitalization currently is UKL 1.19 billion (= US$ 1.9 billion).
KVH – “Asia’s information delivery platform”
KVH was founded by Fidelity Investments and related companies on April 2, 1999 in Tokyo.
KVH operates 9 Data Centers, owns optical fiber networks in Japan and to major financial centers in the world, and has about 590 employees.
KVH annual revenues are approx. € 133.6 million (= US$ 170 million) in FY2013, i.e. Colt is about 10 times bigger in terms of market cap and sales than KVH.
The planned acquisition values KVH at YEN 18.595 billion (€ 130.3 million = US$ 160 million), i.e. COLT is about 12 times bigger than KVH in terms of market capitalization/value.
Implications of acquisition of KVH by Colt – view as a Japan (and Asia) market entry by Colt
From the point of view of Colt, the acquisition of KVH – which has always been a sister company via the common investor Fidelity Investments, and common founder Jim Hynes – is a relatively low risk market entry into Japan and several other major Asian markets, and promises to have a very high chance of success for all parties.
We need to keep in mind, that essentially all other large scale market entries into Japan by infrastructure based telecommunication operators have failed: Vodafone, Cable & Wireless, WorldCom’s market entries into Japan’s telecom markets have all failed, and to our knowledge KVH is the only remaining internationally owned telecom infrastructure company in Japan today.
Essentially, both Vodafone and Cable & Wireless failed in Japan’s telecom markets, because they did not have the multitude of skills and know-how needed to manage a telecommunications business in Japan in a competitive manner. Colt with the acquisition of KVH acquires this know-how, and KVH at the same time has been an internationally managed company from the outset, so that Colt avoids the risks of acquiring a 100% Japanese companies such as Vodafone had done by acquiring Japan Telecom, with all the cultural issues that this entails.
At the same time, we also need to keep the scale in mind. While KVH has a market capitalization (i.e. the purchase price) of US$ 160 million, it can be argued that Vodafone-Japan could be expected to have a capitalization of around US$ 60 billion today had it been successful – i.e. about 375 times larger than KVH.
Japan’s largest telecommunication operator NTT currently has a market capitalization of US$ 62 billion, i.e. about 390 times larger than KVH, while SoftBank’s market capitalization is about 500 times larger than KVH’s.
Thus, if we see Colt’s acquisition of KVH as a market entry into Japan by a European telecom operator, then this is on an approx. 300-400 times smaller scale than Vodafone’s failed market entry into Japan, and with far better circumstances, and a far higher chance of success, and in our view with very carefully controlled risks.
Without doubt, a merger of KVH with Colt was on the minds of Fidelity Investments and Jim Hynes, when they founded both KVH and Colt in the 1990s.
What can we learn from Vodafone’s failure in Japan?
by Gerhard Fasol
Had Vodafone been successful in Japan, Vodafone’s Japan business could be worth € 40 billion (US$ 50 billion) today
In a separate blog post “EU-Japan Management: What is the value of good management?” we analyze what the value of Vodafone’s Japan business might be today, had Vodafone succeeded in Japan, based on current market values of the comparable companies NTT-Docomo, KDDI and Softbank, and we conclude that it is not unreasonable to assume that Vodafone’s Japan business could be worth € 40 billion (US$ 50 billion) today, had it been successful.
Vodafone Japan? Why did it fail and sell to SoftBank? – Quick answer
Vodafone Japan failed not for one single reason but for hundreds of reasons, which can be grouped into soft factors (mainly lack of understanding Japan and Japan’s telecom markets and it’s true size) and hard factors (mainly far too low investment) – read more details in our SoftBank-report:
choice of management structure (there were attempts to correct the management structure, however too little and too late).
attitude displayed both privately e.g. within the Japanese industry sector and publicly via marketing messages and advertising
choice of executives and lower ranking managers and their knowledge and experience in Japan’s telecom sector (or lack thereof)
lack of sufficient know-how and experience to manage a large Japanese company, and particular the chain of retail stores
lack of management and execution know-how in Japan: tried three (3!!) times to introduce / roll-out 3G services in Japan, and failed every time to attract sufficient subscribers. As a result Vodafone Japan was far behind in 3G introduction. Only after sale to SoftBank, did SoftBank succeed in implementing the transition to 3G
too high expectations for profitability and margins from HQ, which were out of line with profitability and returns usual in Japan, and out of line of competitor’s margins
and many more
far too low budgets for infrastructure investment resulting in much lower coverage and network quality compared to competitors NTT-DoCoMo and KDDI/au and TuKa, Willcom and others. As a consequence of far too low investment budgets, Vodafone failed three times to introduce 3G services in Japan. (3G services were not successfully introduced until after the acquisition by Softbank, and after conversion of Vodafone KK to Softbank-Mobile).
mobile phone handsets were inferior to the handsets offered by competitors NTT-DoCoMo and KDDI, and TuKa
and many more
Vodafone Japan? Why did it fail and sell to SoftBank? – Detailed answer
Find a long answer in this blog post below, in our other blog posts, and in some detail including statistics and financial data in our Softbank Report.
On Friday March 17, 2006, Vodafone and Softbank announced that Vodafone sells Vodafone KK (the totality of all Vodafone operations in Japan) to Softbank.
It has been reported that on Monday March 20, 2006, Softbank started to move all Vodafone KK staff, furniture and equipment from Vodafone KK’s former headquarters in the top floors of the Atago-Greenhills-Mori-Tower to Softbank headquarters in Shiodome (near Shinbashi). Also Softbank arranged very quickly that essentially all foreign expatriate managers left Vodafone KK – some stayed in Japan working for other IT companies, some returned to European Vodafone divisions, and some pursued telecom careers in USA, India, Bangladesh, or elsewhere.
By total coincidence, I had dinner with a high-level manager of Vodafone KK, of European nationality, at the indian restaurant Moti’s in Tokyo-Roppongi on exactly the same day, the Friday March 17, 2006 a few hours after the sale of Vodafone KK to Softbank was announced.
I asked him: “Which of the following is true:”
Vodafone never did any market research in Japan?
Vodafone did market research in Japan, but the quality was low?
Vodafone did market research in Japan, but nobody read it?
This Vodafone KK (Vodafone Japan) manager’s answer at the indian dinner was (3): market research was done about Japan’s mobile phone market, but the market research was not sufficiently taken into account in the business and strategy planning.
Fact is, that Vodafone KK (Vodafone Japan) took many major strategy and market decisions in Japan, which were not related to the realities of Japan’s market. Here one example. When “rebranding” (=changing the company / product / services names) from J-Phone to Vodafone, this “rebranding” campaign was centered on global roaming, i.e. Vodafone enabled Japanese customers to use Japanese J-Phone/Vodafone mobile phones in a very large number of countries outside Japan as well as inside Japan. This was at a time, when Japan’s mainstream mobile 2G phone system which both DoCoMo and J-Phone used was PDC, while much of the rest of the world, especially Europe used GSM. However, what Vodafone overlooked was, that at that time DoCoMo had about 30,000 roaming customers, out of approx. 50 million subscribers, i.e. only about 0.1% of Japanese mobile phone users used international roaming at that time. Thus Vodafone KK in Japan focused their main nation-wide poster and TV and other media campaign on about 0.1% of the Japanese market (and about 0.02% of Vodafone KK’s accessible market, given Vodafone KK’s approx. 20% market share) – less than a niche. (The reason we know how many roaming customers DoCoMo had at that time, is because one of Vodafone KK’s competitors in Japan engaged our company Eurotechnology Japan KK to analyze Japan’s roaming market, and help our client to develop strategy to better compete with Vodafone KK’s roaming products, which were aggressively marketed, and the core of Vodafone KK’s marketing focus).
Another example was Vodafone KK’s strategic focus on Japan’s prepaid market (find detailed statistics and market shares and analysis of Japan’s prepaid market in our JCOMM report). In 2006 there were about 2.6 million prepaid mobile phone customers in Japan, i.e. about 2.7% of the market, while DoCoMo had about 45,200 prepaid subscribers, i.e. about 0.09% of DoCoMo’s subscribers were prepaid customers. Since the prepaid market in Europe (especially Italy where about 1/2 of the market is prepaid) is extremely important and highly profitable, Vodafone decided on the strategy to focus strongly on the development and growth of Japan’s prepaid market. Almost at the same time however, a national campaign started in Japan linking unregistered and illegally traded prepaid mobile phones to crime, and a law was proposed in Japan’s parliament to outlaw any type of prepaid mobile phones. Thus Vodafone KK found itself on the one hand promoting and investing to develop prepaid mobile phone services in Japan, developing, purchasing (as was the business model in Japan at that time) and bringing to market special prepaid handsets, and organizing national media campaigns promoting Vodafone prepaid mobile phones, while at the same time on the other hand facing the possibility that Japan’s parliament would outlaw these same prepaid mobile phones, and a broad press and TV national discussion on how prepaid mobile phones are linked to crime. The end result was, that instead of outlawing prepaid mobile phones, it was decided to introduce far stricter registration requirements and ID requirements for mobile phones and especially for prepaid mobile phones, and the unauthorized/unregistered sale or transfer of prepaid mobile phones in Japan was made a crime. The end effect for Vodafone of course was a commercial failure of Vodafone’s prepaid mobile phone campaign, in addition to a general decrease of ARPU (average revenue per user).
Instead of focusing on its core business in Japan, Vodafone KK focused management resources, and other resources to try to influence political decisions concerning 2.7% of the market: Japan’s minute and decreasing prepaid market.
Vodafone had many other management issues in Japan, which included recruitment and personality and retain issues of top executives, many kinds of HR issues, management issues at the retail stores, handset planning issues, branding and brand management issues, localization issues and much more.
As a consequence of these and other factors, Vodafone KK’s market share continuously decreased, subscribers moved from Vodafone KK to DoCoMo and KDDI/au, and the financial performance of Vodafone KK deteriorated, in the end convincing Vodafone that the best option was to sell Vodafone’s Japan operations and terminate business activities in Japan.
You can find further details and statistics, financial performance and market share data during this period in our Softbank report and in our JCOMM report.
Japan energy policy: interview for The Economist on YouTube
by Gerhard Fasol
Japan energy policy – interview outline:
Japan energy policy Question: Is the new energy policy of Japan’s Government an appropriate response to the situation or a missed opportunity
Answer summary:The Government in its new strategy summarizes Japan’s energy situation and proposes a cocktail of different energy sources. Everyone knows that Prime Minister Abe is pro-nuclear energy, but that does not mean that he is against other energy sources, such as renewables. The new energy strategy paper though misses KPIs, Key Performance Indicators. There are no many numerical targets.
Japan energy policy Question: It is often repeated that Japan is poor in energy sources, is this true?
Answer summary:Yes, that is often repeated without thinking, and thats also the case in the introduction of the new policy paper. This is only true as long as we restrict our view to traditional carbon based primary energy sources such as oil, gas, or coal. But if we widen the view to renewables such as wind, water, solar, biomass, and geo-thermal energy sources, then Japan is actually very rich in primary energy sources, and could even aim for energy self-sufficiency. Off-shore wind alone would be sufficient to make Japan energy self-sufficient.
Just by repeating the statement many times, that Japan is poor in energy sources, does not make this statement true.
The new energy policy paper also starts out by saying the Japan is poor in primary energy sources. This is not true if we widen the view to renewable energy sources.
Japan energy policy Question: Re-engineering the electricity grid. Can you explain the concept?
Answer summary:The electricity grid has evolved over many years, maybe 100-150 years. The traditional architecture of the electricity grid is a top-down one-way distribution network from large central power station such as large coal-, gas- or oil-fired power stations or nuclear power stations, to consumers. The traditional electricity grid is similar to the arteries in the human body, where there is the heart in the center, and the arteries distribute the blood to the extremities. This traditional top-down grid has served us very well for a long time, but the time as come now to evolve the grid to the next stage. There will be more distributed power generation, which feed in electricity in the opposite direction from the extremities, and there will be more intelligence in the grid.
Japan energy policy Question: How do you see Japan deal in the future with supply and demand management, how do you see electricity prices evolve in Japan?
Answer summary:With the liberalization there will be more flexibility in the pricing of electricity and supply and demand management. Prices will not necessarily go down, but will depend much more on the timing of demand, on demand/supply management, or on the value of electricity. For example, mission critical electricity consumers such as data centers or hospitals will need a different type of electricity supply, than washing machines in households. Demand/supply management and smart grid will manage the timing of less critical electricity usage.
NASDAQ and London Stock Exchange both hope to build stock markets in Japan. And both failed for similar reasons and with similar end results
by Gerhard Fasol
NASDA and LSE: in both cases the stock markets NASDAQ and LSE created are still continuing business in Japan after there departure
Initially, London Stock Exchange and Tokyo Stock Exchange created Tokyo-AIM as a joint-venture company in order to create a jointly owned and jointly managed AIM Stock Market in Tokyo, modeled according to the very successful London-AIM model.
“Tokyo Stock Exchange has learnt enough from the London Stock Exchange to set up a similar market on its own” NIKKEI on March 26, 2012
However, on March 26, 2012 NIKKEI reported that “Tokyo Stock Exchange has learnt enough from the London Stock Exchange to set up a similar market on its own. TSE plans to improve the rules of its own new market, so that TSE can create a more welcoming market” (our translation of the original Japanese NIKKEI article to English).
LSE withdrew from the Tokyo AIM joint venture, and sold all to Tokyo Stock Exchange
London Stock Exchange withdrew from the venture, and Tokyo Stock Exchange took over 100% of Tokyo-AIM. Essentially, London Stock Exchange AIM’s venture into Japan failed, while the stock market created by the venture continues without London Stock Exchange’s involvement. As explained in our blog here, these events are very very similar to what happened with NASDAQ about 10 years earlier!
In 2012 Tokyo AIMS’s name was changed to TOKYO PRO Market and TOKYO PRO-BOND Market
In 2012, the name was changed from Tokyo-AIM, to TOKYO PRO Market and TOKYO PRO-BOND Market. Details can be found here:
Professor Takeo Hoshi, Professor of Economics at Stanford, about Abenomics success probability
Abenomics success probability is 12%, 88% probability of failure
Takeo Hoshi, Professor at Stanford University, who devotes his life to work on Japan’s economy at US Universities, gave a talk at the Swedish Embassy organized by the Stockholm School of Economics on Monday, October 21, 2013 entitled:
Will Abenomics restore Japan’s growth?
What is Abenomics?
Will Abenomics restore growth?
Why did Japan stop growing?
Will Abenomics succeed in regenerating growth?
Summary – Abenomics success probability:
Professor Hoshi explained that Abenomics is essentially nothing new, its the classical response for a Government to take a country out of recession. However, monetary policy cannot restore growth – in order to restore growth structural reform is needed.
Why did Japan stop growing? Until 1990-1995, Japan was in catch-up mode, catching up with the more technologically and economically advanced Western countries, like European countries and US. Catching up was relatively straightforward, because Japan’s Government could look which industries were most successful and most important in US and Europe, e.g. car industry and electronics industry, and steel making, and then implemented these industries in Japan. However, as soon as Japan had reached the same stage of development as Western countries, Japan’s economic growth stopped, because different methods were necessary, and they seem to be lacking in Japan. So Japan stopped growing around 1990-1995, and has not grown since.
Growth strategy is the “third arrow” of Prime Minister Abe’s Abenomics. Professor Hoshi explains that a growth strategy is nothing new, but every Japanese Government of recent years had a growth strategy, but nothing happened because the implementation did not happen – implementation is the key. Abenomics’ “third arrow” lists more than 100 growth areas, however, Professor Hoshi sees a lack of priorities, too much Government directionalism, and a lack of strong Key Performance Indicators (PKI’s).
When asked during Q&A how high Professor Hoshi estimates the chances for the success of Abenomics, Professor Hoshi said that he estimates that the probability for success of Abenomics is about 12%, and the probability of failure is about 88%. The most likely scenario according to Professor Hoshi is that something similar will happen as under Prime Minister Koizumi, about 1% economic growth
What is Abenomics:
Expansionary monetary policy
Flexible fiscal policy
Prime-Minister Abe replaced Shirakawa by Kuroda as Governor of the Bank of Japan, who introduced quantitative and qualitative easing, and an inflation target of 2% within 2 years in order to overcome “deflation” (which in Japan can have two distinct meanings, see below).
Fiscal stimulus was provided by supplementary budgets, financed by new Government bond issues.
Fiscal consolidation plan:
The medium term fiscal consolidation plan aims to:
reduce the budget deficit to 3.3% of GDP by FY2015, to half the level of FY2010, and
to eliminate the budget deficit by FY2020.
If the 2013-2022 economic growth rate is 3.4% per year, 1. (reduction of budget deficit 10 3.3% by FY2015) will be achieved, but 2. (elimination of budget deficit by FY202) will not be achieved. If the 2013-2022 growth rate is 1.3% per year, neither 1. nor 2. will be achieved.
The “Japan revitalization strategy” (JAPAN IS BACK) was approved by the cabinet on June 14, 2013, and provides: 3% average nominal economic growth 2% average annual real growth YEN 1.5 million increase in nominal national income per person
Three action plans:
Industry revitalization plan
Strategic market creation plan
Strategy of global outreach
Abenomics aims to overcome “deflation”. Deflation really has two meanings:
Falling prices, because of low demand for goods and services
Economic stagnation in combination with falling prices
In Japanese policy discussions, usually “deflation” has the second meaning – thus its important to restore growth in order to eliminate “deflation”.
Is Abenomics new?
Not really. It is the standard policy to get out of recession and to restore growth. Its a combination of demand policy and a supply side policy for growth. What is new in Japan is that until Abenomics, the Bank of Japan did not expand aggressively, and it could be new in Europe, where fiscal austerity is a problem.
Why did Japan stop growing?
Mainly because Japan’s catch-up phase with Western countries has been a success, and Japan reached the same level of technology and economic development as Western countries around 1990-1995. The catch-up was straightforward by imitating in combination with lower wages. As soon as Japan reached the same level of development as Western countries, Japan’s economic growth stopped.
However, US and UK and other Western countries continue high growth of GDP even at high levels of economic development, while Japan does not.
Why does Japan grow much less than US, EU and other Western countries?
Because Japan’s population is aging more rapidly than Western countries, because of lower fertility rates and lack of immigration
Because the export led growth has reached its limits, and internal growth would be necessary
Because Japan’s Government make policy mistakes:
Japan’s Government protects zombie companies, that hurt allocation of capital and productivity
Regulatory policies impaired productivity growth
Macroeconomic policy mistakes
Will Abenomics restore Japan’s economic growth?
Fiscal policy cannot restore economic growth, only structural reform can – thus Abenomics’ “third arrow” is the important one.
Japan revitalization strategy – too many areas, too little focus, fuzzy Key Performance Indicators (KPIs)
Prime Minister Abe’s revitalization strategy has three action plans:
Industry revitalization plan
Strategic market creation plan
Strategy of global outreach
Regulatory reform aims to reduce the costs of doing business, to stop protecting zombies, and “special zone” policies.
Trade agreement talks are held with under the TPP program and with the EU to open up Japan’s economy to global competition.
Macroeconomic policies aim to stabilize the Japanese Government debt and to stop “deflation”.
According to Professor Hoshi, the Prime Minister Abe’s Revitalization Strategy has around 150 different action areas, and some of them are very good ideas, but others are terrible.
In particular Professor Hoshi criticizes that there are far too many action areas, and there is a lack of clear priorities and a lack of focus. It would be better to select fewer priority areas, and take strong effective action in these most important areas.
Professor Hoshi also sees a return to Government selection of “winning industries”. Unlike the time, when there was no internet, and when growth was a matter of copying the US or UK, Government today is in no better position than private industry to know which industries are which are likely to be the winners of the future.
One of the worst examples is the “Cool Japan” initiative: as soon as the Government supports anything, its not “cool” anymore, says Professor Hoshi.
Abenomics- Lack of strong Key Performance Indicators (KPI): only 19% of reform areas have any numerical KPI within 5 years
Growth strategies need clear numerical Key Performance Indicators (KPIs) – for many areas there are no KPIs at all, for others the KPIs are fuzzy and ill-defined (e.g. “Japan will become the most innovative country in the world”), or the KPI target date is so far in the future, that it is irrelevant for the current Prime Minister or the current Government, e.g. 2020.
Of 52 reform areas in the Government’s growth strategy program:
10 areas have no KPIs at all, i.e. the Government cannot measure if any progress is achieved at all in these areas
Only 10 of 52 areas (only 19%) have any numerical KPI within 5 years.
In many cases the KPIs are ill-defined and fuzzy: e.g. “Japan to become the most innovative country in the world”, or target dates in 2020, i.e. irrelevant and out of the responsibility of the current Government and the current Prime Minister
Special zones – risk to redistribute economic activity geographically within Japan with zero net effect.
Special zones where regulations and approval conditions are relaxed are ideas which have been floated for a long time in Japan. The disadvantage of “special deregulated zones” is that economic activity is just redistributed in Japan, moving from regulated zones to deregulated “special zones” with zero net effect on Japan’s economy, or even increasing the total cost of doing business in Japan.
Abenomics – Reheated pizza?
In conclusion of his talk, Professor Hoshi showed the following slide, which shows the vision of a transition from present Japan (left) to the Japan of the Future (right):
The image of this slide is from Prime Minister Koizumi’s revitalization plan of 2001, i.e. 12 years ago. Professor Hoshi uses this slide to make the point that in his view not much has changed since 2001, that Prime Minister’s Abe’s revitalization plan is not very different from Prime Minister Koizumi’s revitalization plan 12 years ago, and he remains skeptical of Abenomics and its chances for success.
Abenomics success – Q & A
Q. What is the probability for Abenomics to succeed?
A. I was asked this question previously and from the top of my head I instinctively answered that Abenomics has about 10% probability to succeed. I got intrigued, and sat down to work through a decision tree of different policies, and the result was: Abenomics has 12% probability to succeed, and 88% probability of failure
Q. What do you think is the most likely scenario?
A. Something like what happened under Prime Minister Koizumi. About 1% economic growth, but not 2%-3%
Q. Management of Japanese companies?
A. Many major Japanese companies pile up too much cash, should invest more, and pay more to shareholders.
Originally posted by ACCJ Journal on January 15, 2011 in “Chamber Events” based on a talk given by Dr. Gerhard Fasol to the Members of the American Chamber of Commerce (ACCJ) on July 12, 2010, at the Westin Hotel, Tokyo.
(c) 2011 Copyright by The American Chamber of Commerce in Japan (ACCJ). Reproduced with kind permission of ACCJ.
Dr. Gerhard Fasol, the founder and CEO of Eurotechnology Japan KK, spoke to ACCJ members about Japan’s “Galapagos Effect” at the Westin Hotel in Tokyo. The “Galapagos Effect,” for those unfamiliar with the term, is used to describe Japan’s unique culture of technology that has not expanded beyond Japan’s borders, in the same way that the Galapagos Islands exemplify unique evolutionary developments in nature.
Where Japan Leads
Investment is a prime reason why such developments as Internet-related mobile communications are so advanced in Japan. As Fasol pointed out, Japan has seven times the number of 3G base stations as the United Kingdom. Many of the related technical developments in mobile handsets that are only just coming onto the market outside Japan have been standard for many years in this country—Fasol gave high-quality camera phones as an example.
Quoting a Nokia spokesman, he claimed one reason for this leap was that Europe is conservative in regards to standards, which take a long time to develop and ratify in contrast to Japan. He amplified the Galapagos analogy by stating, “Japan is a Galapagos island, and doesn’t have to care about standards.”
Fasol also claimed that Japan is 10 to 15 years ahead of other nations in its use of electronic money. He contrasted Europe’s fragmented and overly bureaucratic nature with Japan’s, where large decisions—such as i-Mode and Suica—can be made by a mere two or three people, which may come as a surprise to those who see Japan as a bureaucratic nightmare.
The reverse side of the Galapagos effect, however, is that Japanese phones designed for the home market fail to find buyers outside Japan. Electronic money is another area where Japanese technology seems destined to remain within the borders of Japan, despite the fact it is now quite common and accounts for a relatively large proportion of currency in circulation at about two percent. Fasol claimed that the U.S. and Europe are not yet ready for the mass introduction of such a payment system like Japan. In the long term, he believes, non-Japanese global giants will probably win out over the Japanese innovators.
Shedding Light on Genius
Another area where Japan has led innovations in the commercialization of technology is the revolution in lighting, which is poised to offer new environmentally-friendly illumination options. Based on the invention of the blue LED by Shuji Nakamura, the new lighting systems are also wallet-friendly in that they offer a 6,000-fold advantage in terms of price for the same amount of light over kerosene-powered lighting, still a staple in many parts of the world.
However, Nakamura was largely ignored by the Japanese business community; he is not even named on the website of the company that employed him (Nichia), and is now working at a university in California—Tokyo University claimed they wanted more “ordinary professors.” According to Fasol, the “Galapagos effect” means that there is no room or need for geniuses like Nakamura in Japan.
Up to 1995, Japan’s economy was growing, but is now static, a unique situation within the G8. Indeed, extrapolated from present trends, South Korea’s economy could overtake Japan’s in 2022.
Japan has a huge electronics sector, from giants to smaller specialist makers with a $600 million market about the same as the Netherlands. However, the growth is almost zero compared with that of 10 years ago. The net income of the top 20 companies of the sector is actually less than that of a single U.S. company, GE or of Korean rival, Samsung. This has a disadvantageous effect on pension funds, who are the major shareholders of these companies, but the governance of Japanese corporate affairs by shareholders is much less than, say, in the U.S. Still, Japan enjoys a very large national market (unlike the UK, for example), which can help companies survive. On the other hand, this may have prevented companies from “going global” as their internal market has reached saturation. Fasol mentions rice cookers as an example of a consumer durable that is not purchased frequently, and accordingly has a relatively small and finite market footprint. Even so, every major electrical manufacturer designs and produces a range of rice cookers, with a very low profit margin of well under one percent, which may be part of the legacy of the zaibatsu (the large pre-war conglomerates). This legacy means that most present-day conglomerates feel the need to do everything—for instance, there are three global makers of trains, but ten in Japan.
The Galapagos Study Group
Fasol then went on to describe the 26-person interdisciplinary Galapagos Study Group—of which he was the only non-Japanese member—which met monthly for a year and concentrated on the mobile phone industry.
The results of these meetings were summarized in three sets of recommendations to telecom carriers, electrical manufacturers, and content companies, with the second category receiving the recommendations that Fasol described as most radical.
He surprised his listeners by saying, “I think it would be best for Japan if in five years or so there were no more Hitachi, or Fujitsu, or Toshiba.” This, of course, was not meant as a direct attack on these specific companies, but as an attack on their conglomerate nature. Instead of the current state, he suggested a move towards smaller companies, focused on profitable businesses, would be preferable and would restart growth.
On the content side, Fasol claims that Japan is the only country in the world with the intellectual and creative resources to create characters that can stand up to Mickey Mouse and the Disney empire, but has not succeeded in creating global businesses based on Pikachu or Doraemon. Accordingly, the committee made a recommendation that platforms similar to Disney be created in order to create global businesses using such characters.
Coming to Japan from the Outside
On the subject of breaking into “the Galapagos market,” Fasol pointed out that good foreign companies can succeed in Japan if they know the market. As an example, he cites traffic lights, whose specifications in Japan are controlled by the police. Any company failing to recognize this kind of local quirk, no matter what its global standing, is doomed to failure when it comes to Japan. Examples of dramatic failures he cited were Nokia, Nasdaq, and Vodafone. To paraphrase the traditional real estate tag, Fasol claimed that the three biggest mistakes foreign companies coming to Japan make are “arrogance, arrogance and arrogance.” He claimed that this has nothing to do with Japan’s closed markets, quoting the iPhone’s success as an example.
He pointed out that there are other reasons for the failure of foreign entrants. Apart from the failure to listen to customers and understand the market, reasons include partnership with the wrong joint venture partners, and the management of Japanese ventures by managers who fail to understand the country.
However, the Japanese service lifestyle, allied with what he terms a “fashion society,” is a great opportunity for outsiders to break into the Galapagos market, and Fasol claimed that foreign companies can tap Japan’s creativity and use it to their advantage.
He also claimed that the relative isolation of Japan from global standards and practices in some cases actually enriches the global experience. But at the same time this also introduces life-threatening issues for Japan and this isolation must be addressed through two-way dialog from inside and outside of Japan.
(c) 2011 Copyright by The American Chamber of Commerce in Japan (ACCJ). Reproduced with kind permission of ACCJ.
Thank you to all those who attended the event “Japan’s energy – myths vs reality” at the Embassy of Sweden – an event organized by the European Institute for Japanese Studies of the Stockholm School of Economics.
We had about 120 registrations for 100 seats in the Alfred Nobel Auditorium of the Embassy of Sweden – participants included an official from Japan’s Prime Minister’s Cabinet Office, Officials from several Embassies including the Swedish, US, Norwegian, Swiss, Hungarian and more Embassy, executives from Japanese and European telecom and energy companies, including also several independent power producers (IPPs), legal professionals, and groups of students and MBA students from Tokyo University, Hitotsubashi University and others.
We had very vivid discussion, and continued the discussions over nijikai.
Detailed data, statistics and analysis of Japan’s energy markets:
All the data of the talk are from our reports on Japan’s energy sector:
Japan’s electricity companies earn about US$ 200 billion annually in revenues, and until the Fukushima nuclear accident, about 30% of energy was generated by nuclear power plants, which are currently switched off except for two nuclear plants in Kansai region. Renewable energy sectors expect the rapid built-up of renewable sources in Japan to continue, ie; solar energy, wind, geo-thermal and other sources to follow. METI is also working on liberalization of Japan’s energy markets. Japan’s energy sector undergoes rapid changes and presents large opportunities. In the presentation, we will hear some of the myths about electricity and energy in Japan, and the realities. We will also hear how foreign companies can succeed in Japan’s energy sector.
About the speaker:
Dr. Gerhard Fasol is physicist and entrepreneur who has worked since 1984 with Japan’s high-tech sector. He worked on the entrance strategies into Japan’s environmental and energy sector for one of Europe’s largest engineering multi-nationals, and for US investment funds and venture companies on market entry into Japan’s energy sector. Gerhard also organizes annual “Ludwig Boltzmann Symposia on Energy” for CEOs and leaders of Japan’s energy sector.
Gerhard graduated with a PhD in Physics from Cambrige University/Trinity College. He was tenured faculty member in Physics at Cambridge University, and Associate Professor at Tokyo University’s Electrical Engineering Faculty and led a JST-Sakigake project on spin electronics before founding Eurotechnology Japan KK.
Diseno Textile SA (ZARA) entered Japan’s market earlier than H&M and can now collect some fruits from timing advantage: Diseno succeeded to obtain a license for Sanrio’s Hello Kitty character, and plans to market Hello Kitty branded goods.
Will be interesting to see if H&M will do quid-pro-quo and seek to license other famous Japanese characters?
It’s not all doom and gloom here in Japan. Nintendo’s sales and operating profits are rising 8.8% year-on-year. KDDI saw its net profits increasing 59% year on year. Yahoo Japan increases dividends by 22%-25% for 2008. Who are today’s winners in Japan’s IT industry? Gerhard Fasol will show us how and why some great Japanese companies excel in today’s crisis.
The talk reviews today’s status of Japan’s electrical companies, the telecommunications sector and the internet sector, and introduces seven different companies, which show rapid growth of revenues, operating income and net income despite the crisis. These seven companies we introduce turn the crisis into an opportunity.
Mr Fasol is one of the best specialists of Japan’s IT industry. After 12 years in Japan working for the most prestigious Japanese institutions and companies (the University of Tokyo, NTT, Hitachi…), he founded the strategy and M&A firm Eurotechnology Japan KK in 1996. Mr Fasol has advised some of the greatest companies, including NTT, SIEMENS, Deutsche Telekom, Cubic, Unaxis and about 100 fund managers on strategy for Japan, as well as the President of Germany. He helped a French pharmaceutical company acquire a factory in Japan. He comments regularly on CNBC on Japan’s tech sector.
Many see the current financial crisis as a period of unique opportunities. Several foreign companies are currently entering or seeking to expand business in Japan. At the same time, there is a wave of Japanese acquisitions abroad. Arthur Mitchell is a lawyer who has worked on a very large number of M&A deals and financial transactions involving Japan, and shares some of his 40 years of experience with Japan below.
Arthur Mitchell is Senior Counselor at the law firm White & Case in Tokyo, and registered as foreign lawyer in Japan. Arthur has worked on a large number of private equity investments and many other joint ventures and financial transactions involving Japan. He was General Counsel of the Asian Development Bank (ADB) where he managed 42 attorneys from 18 countries. Previously he headed the Japan practice for Coudert Brothers and the Pacific Practice Group for Chadbourne & Parke. Arthur also was founder and CEO of a New York based consulting firm, which launched the first ever hedge fund offered in Japan! Arthur was educated at the Harvard Law School (JD), UC Berkeley (BS) and Kyoto University, Faculty of Law.
1 Question (Fasol):
Arthur, you have been involved with Japan for 40 years now. What are the mega-trends you see for M&A over these years? What has changed over these years?
Of course, the biggest change during that period was the mind-set of Japanese management. In the 70’s and early 80’s, M&A was virtually a dirty word. That was because of what we might call the “village-mentality” of managers. The idea was that you look after your group and minimize outside influences on business decisions. More recently, certain types of M&A have come to be seen as a practical way of achieving corporate objectives. For a period of time following the bursting of the economic bubble, the cross-shareholding levels of listed companies went down but in recent years, the trend has reversed and these holdings are on the rise again. While friendly acquisitions are now readily accepted among the Japanese themselves as well as with foreigners, hostile acquisitions are still less well received in Japan.
2 Question (Fasol):
I think one of the most interesting manifestations of this change in thinking is the potential acquisition of Sanyo by Panasonic, but there are many more.- What is your take on the current crisis? Doesn’t our crisis now create opportunities as well?
The current crisis is not a natural disaster. It’s a man-made debacle that originated with the sub-prime loan and securitization process in the United States and is properly understood as a major market, policy and regulatory failure. Japan suffered a long recession due to the failure of its “bank-centric” financial system and the U.S. has now aptly demonstrated that capital-market-centric frameworks can produce unacceptable systematic risk. As recently as a few months ago, it looked like Japan would not suffer too much because Japanese companies and banks were on the sidelines when it came to investment in sub-prime and exotic securitized products. Now it is apparent that Japan can not remain as a tranquil island in a sea of financial trouble. The Japanese stock and commercial real estate markets were heavily dependent on foreign investors who are either hesitant about investing in Japan at this time or have too many problems back home, which prevents them from focusing on Japan. On the other hand, Japanese companies are relatively cash-rich and are keenly interested in making overseas acquisitions in order to make up for the time lost during the last 15 years. Depressed asset prices in other countries, as well as a strong yen, make these acquisitions particularly attractive. The question is whether Japanese managers will be able to transform these opportunities into a strategic advantage.
Preparations, finding deals:
3 Question (Fasol):
As long as I have been working with Japan – on one ear I hear foreign fund managers complaining (in English) “that there are no deals”, but on my other ear, when I talk with my Japanese business friends (in Japanese) I hear about so many deals happening all the time – one of my friends, a Japanese private equity investment manager, has done tens of deals up to US$ 1.5 billion in size within Japan. What advice do you have for these fund managers complaining that there are “no deals in Japan”?
As I just mentioned, the number of M&A deals among Japanese parties has increased dramatically in the last 10 years. Acquisitions in Japan by non-Japanese have also increased over that period but over-all foreign direct investment in Japan by comparison with international standards is still relatively small. FDI in Japan has been consistently between 2-3% of GDP, far below the level for other OECD countries. As a general rule, Japanese managers are still rather reluctant to sell divisions or the company itself unless there is a compelling strategic logic to the combination or the firm is under financial stress. The chief motivation for doing these deals is rarely related to purely financial concerns as more focus is placed on market share and company standing in the marketplace. The key to accessing deals is to have the relationships with important decision-makers at companies that are likely to be interested in M&A for strategic reasons. This is why it is important for funds to be represented in Japan by senior Japanese executives and advisors with long-standing ties.
4 Question (Fasol):
Same with companies – I know some foreign companies who have to tried to make acquisitions in Japan for 10 years without success. What’s your advice? Look harder? Put more resources into searching and preparing?
As just mentioned, relationships are of paramount importance even today. Among the Japanese themselves, these relationships originated with school, social or company ties. Given this reality, it is very hard for foreigners to duplicate this process. Some foreign private equity funds have tried to address this by hiring rather young Japanese bankers who literally and figuratively “speak their language” but the unfortunate reality is that many of these individuals do not have credibility with the decision-makers. Some years ago, foreign firms also had difficulty hiring senior Japanese to work in these firms. That is less of a problem these days but finding the right ones still presents challenges. For example, if they have a background in the financial services industry, they may not know the business of the manufacturers. If they come from a manufacturing background, they may have contacts only in a narrow industry. One way to bridge this gap is to form an advisory board of senior people-both Japanese and foreigners-who can serve as the bridge.
The M&A Transaction:
5 Question (Fasol):
When a foreign company acquires a Japanese company, which are the points critical for a successful transaction?
From a legal perspective, the initial question is always whether there are any governmental regulations that would restrict or prevent the investment. Prior to 1980, investment in numerous industries was highly regulated but following reforms in that year, with the exception of a very short negative list, legal barriers were relaxed. Until recently, no foreign acquisition was blocked on “national security” grounds. For the first time this year, the Japanese government blocked an increase in the shareholding by the Children’s Fund, a U.K. private equity fund, in J-Power, an electric power company, on the dubious grounds that foreign ownership above 20% would be harmful to “social order”. The Japanese legislature is now debating whether Japan will restrict ownership of a single shareholder to 20% in Narita and Kansai airports when they are privatized in the near future. In the context of Macquarie’s ownership of 19.9% of the facilities at Haneda airport, this move has obvious anti-foreign overtones. As economies around the world deteriorate, it would not be usual to see even more protectionist measures in Japan as well but, for the moment, I do not think that we can say that there is a discernable trend. Therefore, overall, adequate planning is the most critical step that needs to be taken to ensure a successful transaction.
6 Question (Fasol):
I have discussed both the Children’s fund and the Macquarie issues with senior Japanese leaders, and found that their opinion is quite devided, some are for, some are against. So I guess its a question of doing enough ground work and preparations, and finding the right allies. Can you tell us some points to watch out for, which could become a problem down the road?
As just mentioned, planning is key. Understanding the Japanese counterparties and what motivates them and the lay of the land is imperative. Foreign investors should not assume that their usual company practices can be imported on a wholesale basis to Japan. Many aspects of law and regulation are very similar to those of other countries but labor relations is one area that can be quite different. For example, most Japanese employees, including senior managers, do not have written contracts but virtually all companies have company policies and rules that govern the employment relationship. Problems can arise if the foreign investor seeks to impose employment contracts which are at variance from the existing rules or practices. The law provides that employees generally cannot be dismissed except for cause. In the case of tech-companies, it is normal in many foreign countries to expect that any intellectual property created by the employee on the job belongs to the company. In Japan, the employee has the rights to an invention made on company time but the company will have non-exclusive license. If the company considers that the invention is critical or important for its business, the company should purchase the intellectual property for a fair price. Accordingly, it is important to observe local practices in these areas.
7 Question (Fasol):
What is your experience with joint-ventures to enter Japan’s markets? Lots of people will advise to avoid joint-ventures at all cost. What is your advice?
Foreign companies seeking to enter the Japanese market have a number of options now. In almost every industry I can think of, it is now legally possible for a foreign firm to set up “greenfield” operations (Fasol: recent examples of “greenfield” start-ups in Japan are IKEA and H&M, and also GOOGLE). Of course there are costs and risks associated with that method but it should not be automatically dismissed. Short of an acquisition, it is also possible to have joint ventures or strategic alliances with Japanese counterparties that may be mutually beneficial and can reduce costs and risk (Fasol: a dramatically successful case is YAHOO in Japan, however in this case it was not YAHOO Inc seeking a joint-venture entry in Japan, but it was Masayoshi Son with Softbank investing in YAHOO Inc and building YAHOO-Japan, which is now arguably far more successful than the original company). If this is coupled with the introduction of off-shore business opportunities, this may lead to a mutually beneficial working relationship that might mature into an acquisition in the future. In order to be successful, foreign companies need to nurture relationships with Japanese companies in their industry and think of ways in which they can “add value” to each other. An interesting example of this is what the Kirin Beer Company is doing with the San Miguel Corporation of the Philippines. Kirin owns about 20% of San Miguel. In the future, they plan to make a number of joint ventures for beverage production in Asian countries. This is a strategic relationship where the parties add value through exchanges of technology, marketing and manufacturing techniques and finance. This model can be used in Japan and can lead to even closer business integration.
8 Question (Fasol):
The devil is in the detail…. which details should you watch out for in an M&A transaction?
Yes, the devil is in the details—and there are thousands of devils that have to be dealt with. But in this regard, there is nothing unusual about Japan. I think that the most important thing is to build a common understanding about how the venture will be managed and what the goals are going to be post-acquisition. I do think that the Japanese generally have a somewhat longer term perspective on business. When foreign investors acquire an interest in a Japanese company, they tend to expect better financial performance over a shorter period of time. This can cause tensions in the relationship. For example, if the foreign investor intends to make staff reductions or spin-off divisions after the acquisition in order to improve over-all performance, these matters should be thoroughly discussed and agreed upon well in advance of the closing.
Post-merger phase, integration
9 Question (Fasol):
In my experience, the M&A transaction is the easy part – the really difficult part is to make it work post-merger. There are plenty of gigantic ship wrecks lining the M&A road into Japan. What are the most critical mistakes to avoid to crash into one of the many cultural and other rocks and icebergs? What is your advice?
While failures certainly make the headlines, there are numerous foreign companies that have been very successful in Japan over a long period of time (Fasol: and numerous successful acquisitions as well, the prime example is Renault’s investment in Nissan). These include IBM, Coca Cola and Microsoft and many others. To my mind, successful ones have a long-term perspective, good Japanese managers and a home office that truly understands the local environment. As there have not been a tremendous amount of large-scale foreign M&A deals yet, it is hard to say at this time if this will prove to be the most successful way to enter the market. What we can say is that, with the exception of hostile deals, M&A is a viable route that has yet to be tested in larger deals. As the Japanese market for most products is fairly saturated, and the population is shrinking, Japanese companies (both large and medium-sized) are now looking for major opportunities abroad. With the exception of those who can introduce new products and technologies in Japan, it probably makes sense for foreign strategic investors to look at their Japanese counterparts as partners who can help them pursue global strategies. Financial investors are likely to find more opportunities in Japan as the economy weakens in the next few quarters.
10 Question (Fasol):
In my work I often see that foreign managers make huge mistakes in Japan which they would never make at home. An outstanding example is the fraud case, where Lehman Brothers seems to have been defrauded of US$ 350 million by someone who seems to have pretended to be an employee of a huge trading company which he was not (its unclear what really happened, and we might never know).
No, I am not sure that I agree. I think that fraud happens everywhere. You may have read recently about the former Chairman of NASDAQ who perpetrated a $50 billion fraud on his fund investors. I think that what happened to Lehman Brothers in the case you mentioned is that someone forgot to do the normal due diligence that accompanies transactions of that nature. Actually, it’s emblematic of the new “Gilded Age” which has just ended with the collapse of many of the pillars of the U.S. financial system, including Lehman Brothers. In some very serious ways, America has gone off the rails and has taken most of the world with it. I think that in the aftermath of the financial debacle, we will see a return to basics-less leverage, fewer complex financial products and lower appetites for risk. This is now a global trend which will affect deals in the U.S. Japan and throughout the world.
11 Question (Fasol):
What is your advice to foreign companies in Japan to avoid such dramatic traps.
I do not think that there is anything particular or peculiar about Japan even though some things may be done differently. What is important is to understand attitudes and why people think the way they do. As an example, Japanese shareholders do not always vote in favor of things that many Westerners might think are in their economic interest. We might call that irrational behavior. An example might be the vote that the Sapporo Beer shareholders took when they voted down a generous offer by Steel Partners, an American activist fund. I think it shows that values other than “pure economics” are at work. But this is not unique to the Japanese. German shareholders have similar views. For that matter, I don’t think that “Joe the Plumber” in the recent American election really voted in accordance with his own economic interest. What is important to understand is that people often have multiple motives which are influenced by history, culture and their views of the world. It’s imperative to understand the context in which they are making decisions. That is the only thing that will help a foreign investor avoid “local traps”.
12 Question (Fasol):
Which is your greatest success story working with Japan or Asia over all these years and why?
I have been a lawyer for over 35 years so I have seen a lot of deals. What I like most is finding a unique solution to a problem, creating a new financial product or adding value by helping a client to visualize a new business opportunity. Perhaps one of the most unique things I have done was to help create a strategic alliance between a major Japanese bank and a U.S. real estate firm to assist Japanese investors crack the U.S. market. This led to a front page feature article in the Wall Street Journal. But that was a long time ago. More recently, when I was General Counsel of the Asian Development Bank, I played a significant role in the response to the tsunami that affected a number of Asian countries. We had to deal with a new situation, when there was no road map and very little time. I had to conceptualize the framework that led to the final response and negotiate with numerous stakeholders both within and outside of the bank. And real lives were at stake. I think that that is what lawyers should do and I was glad to have the opportunity to help.
13 Question (Fasol):
Lots of EU-Japan and US-Japan complain that Japan is still closed today, and they make recommendations for changes in Japan to encourage more inward investments into Japan. Which changes in Japan would help most to increase foreign investments in Japan?
I think that there are very few formal barriers, other than some tax disadvantages, which might discourage foreigners from acquiring Japanese companies. The real issue is one of mind-set. It’s fair to say that the attitudes of Japanese managers have changed over time. For example, attitudes toward shareholder value have evolved. Japanese managers are not just giving “lip service” to the idea that they need to balance the interests of customers, employees and shareholders because key players among the bureaucracy and politicians as well as leaders in the press and academia are calling for focus on shareholder value as a means of making Japanese companies more global and more competitive. But in order to be competitive, companies need to properly motivate and compensate their employees to create the desired results. It’s unclear that Japanese managers will be able to manage non-Japanese employees or will recruit senior foreign managers to work within their companies. The recent take-over of Lehman’s operations in Asia by Nomura will be an interesting test case.
14 Question (Fasol):
In your view, what is the greatest challenge faced by Japan?
Japan faces a major demographic problem in its low birth rate and rapidly aging population. Despite the obvious risk to its standard of living, there is really very little public debate concerning what to do about this problem. Japanese companies have tremendous technologies and manufacturing experience. Clean tech is a notable advantage. But Japan’s technological edge probably will not be a sufficient engine of growth. And it seems unlikely that the birth rate will increase dramatically. This means that Japan will have to find creative ways to use women and seniors more productively in the economy. Immigration will present another challenge and an opportunity. If Japan can make the social accommodations that are required by this demographic situation-and companies open the doors to the best managers they can attract from all parts of the world, Japan can become a leading country in the 21st century.
NOKIA’s Japan subsidiary was founded on April 3, 1989 – almost 20 years ago. On November 27, 2008 NOKIA announced to terminate selling mobile phones to Japan’s mobile operators, effectively withdrawing from Japan (except for purchasing, R&D and VERTU).
NOKIA’s sales figures in Japan were a well kept secret until last week when several Japanese newspapers wrote that NOKIA sold 200,000 phones during FY 2007: thus NOKIA’s market share was 0.39% – after 20 years of market entry efforts.
Considering the disastrous collapse of mobile phone handset sales in Japan, NOKIA’s move to quit sales in Japan actually makes a lot of sense. Nothing prevents NOKIA from re-entering Japan again in the future.
Opaqueness of Japan’s SNS was a point of discussion at the Next Context Conference. When you use Japan’s social network systems, instead of portrait photographs and real names in Western SNS, in Japan you’ll find that most people use phantasy names and pictures of churches, cats, airplanes, clowns and cartoons instead of passport photographs. Japanese people prefer to keep there privacy intact in this and several other ways. For example mostly you cannot join Japan’s SNS unless you are invited in by a friend, and you can’t join unless you live in Japan (verified by your Japanese mobile email address).
Looks like Western SNS will have difficulties to thrive in Japan’s SNS unless they make some adaptations of their Western functionality for Japan – or unless Japanese people change their preferences.
A few days ago the New Context Conference was held here in Tokyo, mainly about social network systems (SNS), top executives including CEO of LinkedIn, Facebook, and some exciting new photo, video conference and e-learning companies discussed market entry to Japan.
Takeshi Natsuno, one of the three key DoCoMo managers who together started i-Mode and arguably started the world’s mobile internet revolution launching i-Mode back in February 1999 gave the keynote discussion. Natsuno shared his very interesting observation, that Japan consists of two markets:
new Japan = people below 50 years age and
old Japan = above 50 years age
…and having managed i-Mode (today: 48 million paying subscribers) for almost 10 years Natsuno-san is certainly one of the best to know. (Natsuno-san’s main job today is to make Japan’s very cute equivalent of YouTube profitable – read more about this in a future issue of our newsletters).
Actually, you’ll find a similar observation about “old Japan and new Japan” in my presentation entitled “New opportunities versus old mistakes: foreign companies in Japan’s high-tech markets” which I gave some years ago at Stanford University to faculty, students, alumni and silicon valley managers.- (You can view and download the slides of the presentation below.)
Natsuno-san talking at the New Context conference in Tokyo about old Japan, new Japan, the future of the mobile internet, and the mobile industry. Natsuno-san is one of the three inventors of i-Mode.
The Israeli company Iscar has completed the acquisition of Japanese competitor Tungaloy Corporation. Iscar acquired more than 90% of outstanding shares for around US$ 1 billion from Nomura Principal Finance Co.
Iscar is the world’s second largest maker of tungsten carbide cutting tools, and competitor Tungaloy is the world’s fifth largest. Iscar is controlled by Warren Buffet’s Berkshire Hathaway Inc. – Berkshire Hathaway acquired 80% of Iscar for US$ 4 billion in 2006.
The merged Iscar and Tungaloy will be better positioned to compete with global leader Sandvik AB, which has sales on the order of US$ 4 Billion.
Tungaloy Corporation emerged via a management buyout from Toshiba Tungaloy, with Nomura Principal Finance Co. as the largest share holder. Tungaloy has sales of YEN 50 Billion (approx. US$ 500 million), was founded in 1934, and has 2618 employees. Tungaloy is the fifth largest maker of Tungsten Carbide cutting tools in the world.
Iscar entered Japan’s market by opening a 100% owned subsidiary company in 1994, about 14 years ago.
To my knowledge this acquisition is also far larger than any acquisition in Japan by any European Union (EU) company this year (last year, in 2007 Permira announced the acquisition of Arysta LifeScience Corporation for US$ 2.2 Billion and completed the deal during 2008). The three largest acquisitions ever of Japanese companies by EU companies have been Vodafone’s acquisition of J-Phone (transaction value: about US$ 20 Billion), Daimler’s acquisition of Mitsubishi Motors (transaction value: about US$ 2-3 Billion), and Renault’s investment in Nissan (initial transaction value: about US$ 3 Billion) – of these three, only the Renault investment in Nissan was successful, the other two failed.
H&M Japan entry – H&M opened the first store in Japan in Ginza on September 13, 2008:
by Gerhard Fasol
Long queues on opening day: 8000 people/day visit the store in the first few days
H&M entered Japan’s fashion market initially using a green field strategy, opening stores. On September 13, 2008, H&M opened the first store in Japan in Ginza, and is planning two more stores in Shibuya (see picture below) and in Harajuku.
H&M Japan entry – adapt to Japan:
H&M adapted it’s global way of doing things to Japan’s market needs – for example, H&M introduced “Quality Managers in it’s Japan store, in order to match Japan’s consumers high expectations for quality (and I guess also to avoid problems with Japan’s recently introduced product liability laws).
H&M Japan entry – 8000 customers per day:
One week after opening, customers are queuing in line to enter the store – typical waiting time is about 2 hours, daily number of visitors to the store are estimated to be about 8000/day.
Closest foreign competitors in Japan include US retailer GAP, and Spanish retailer Inditex (Diseno Textil SA)’s ZARA.
Biggest Japanese competitor is Fast Retailing’s UNIQLO.
H&M is preparing to open the second and third stores in Shibuya (photo below) and in Harajuku.
H&M Japan entry – comments:
H&M has had a very successful start and has created a successful opening “event”. To be successful longterm H&M will have to:
Three years after market entry XBOX has achieved 0.2% sales market share in Japan
Will XBOX price cut help?
Microsoft introduced the original XBOX game console in the USA on November 15, 2001, in Japan on February 22, 2002, and in Europe on March 14, 2002.
During the period January-June 2005, three years after introduction of the XBOX to Japan’s market, SONY sold about 2.4 Million game terminals in Japan, Nintendo sold about 1.9 Million, and Microsoft about 9000 XBOXes, about 0.2% marketshare.
As of August 24, 2008, Nintendo has sold about 6.7 Million Wii, SONY has sold about 2.3 PS3, and Microsoft about 380,000 XBOX-360 in Japan, a 4% share in this segment.
A few days ago, Microsoft announced a price cut of 30% for XBOX-360 in Japan – the video below gives our comments on this price reduction on CNBC.
Here is a short summary of the CNBC-TV interview:
Q: Do you think the price reduction is going to do the trick?
A: No. In other markets maybe, but not in Japan.
Q: Do you think XBOX can be successful in Japan? What will it take before Microsoft will give up and say it just isn’t working
A: Of course Microsoft can be successful in Japan with XBOX. There is no law that XBOX cannot be successful in Japan. Microsoft generally is a company that never gives up. But they have to change their strategy for Japan.
Q: So Microsoft isn’t doing the right things. What would the right things be?
A: Difficult to say of course, if it was easy Microsoft would already have done this. The situation is that Nintendo has completely changed the business paradigm of the game industry. Microsoft’s XBOX is still operating under the old paradigm.
Q: How long do you think Nintendo’s sweetspot is going to last?
A: Nintendo have reinvented the game industry, and completely changed the business models. They also make a lot of their own software. All this puts Nintendo into a very good position.
What can we learn about strategy for Japan from Microsoft’s XBOX experience: Global products, not adapted to Japan’s market, often do not succeed in Japan. Microsoft’s XBOX is a very good example. Microsoft has one of Japan’s most famous brands, so its not a problem of the brand.
Microsoft faces three problems in Japan:
XBOX is not made for Japanese users in mind
Nintendo changed the paradigm of the game industry, and XBOX is still on the old track
Of three global game console companies (Nintendo, SONY, Nintendo) two are both much stronger than Microsoft in games, and both are on their hometurf in Japan. Microsoft would need to invest more and focus efforts much more on Japan to succeed in Japan with XBOX.
In his presentation, Dr. Fasol will explain the essentials of Japan’s mobile phone market, why and how it is so different to Europe’s. He will also talk about some of the reasons why it is so difficult for European companies to succeed and uncover opportunities and the keys to success for European companies in this important market.
Success stories vs failure. Why some foreign companies succeed in Japan’s high tech sector, and why others fail.
High-tech market entry to Japan: Stanford University Japan Technology Center lecture by Gerhard Fasol
New opportunities vs old mistakes – foreign companies in Japan’s high-tech markets
Stanford University lecture, given on October 28th, 1999
This lecture was given on October 28th, 1999 to an audience of Stanford University faculty, students, post-docs and alumni working in Silicon Valley firms. Although this lecture is now some time ago, much of what was said still is true today. As an example, our recognition of the interplay of “old Japan” vs “new Japan” is still extremely relevant today, with old traditional corporations coexisting with new venture start-ups, some of which, like SoftBank and Rakuten have grown to very large size even on a global scale.
Stanford University Japan Technology Center lecture: outline
(note that some statistical data have changed since this lecture was given, the main change is the growth of China, for example today Japan is not the second, but the third largest economy after China).
Why is Japan important?
Japan is the world’s second largest market
60%-70% of Asia’s economy is in Japan
10%-20% of the world’s internet/telecom/e-commerce markets are in Japan
Some important recent high-tech breakthroughs come from Japan, e.g. blue LED and lasers)
For US corporations Japan is in general the most important/largest foreign market & competitor & partner
“Old Japan” versus “New Japan”
The “old official Japan” may fade into irrelevance, large sections (60%) of Japanese society were excluded from equal access to the “old Japan”, e.g. women, Korean residents, foreign nationals, “half”-people….
A “new Japan” is emerging: e.g. Nichia, SoftBank, Don Quichote, etc
Education is a major problem
Foreign corporations should tune into the “new Japan” new
Opportunities which never existed before
Foreign corporations for the first time ever can hire top Japanese performers
For the first time ever foreign corporations can acquire Japanese corporations on a meaningful scale
Some typical mistakes of foreign companies in Japan
Manage Asia from Singapore or Hong-Kong (thats like managing All-Europe operations from Tel-Aviv or Reykjavik)
Hire the wrong people (wrong Japan-CEO, wrong peronnel, e.g. too much emphasis on English vs true performance or technical excellence)
Partnerships or joint ventures with wrong partners or wrong expectations
Enter Japan, build R&D labs etc without first planning strategy and aims
Forget to do the homework (there is Gigabytes of information you better learn about Japan before you start, training on the job increases risks)
Be too fascinated by cherry blossoms & be too optimistic or too pessimistic about Japan
Taking things for granted in Japan, which are not:
Japanese consumer & customer habits and needs
Assume global corporations have the same depth as you are used to elsewhere in the world