Tsurezuregusa

Changing Japan

2011-06-03T18:48:00.000-07:00

Many people expected the events of March 11th and the subsequent mismanagement and deception by the government and TEPCO to provoke a revolution of sorts; a backlash from a long-suffering public against the corruption and incompetence of the ruling politicians and bureaucrats.

So far there is no sign of this happening.

A documentary on national TV exposing inaccurate calculations over many years by politicians and the bureaucracy over the official figures for the relative costs of nuclear and renewable energy which showed a far greater benefit for nuclear power than actually exists, provoked little reaction. The Japanese media do not have a particularly good record of investigative journalism, but if nobody reacts to what you write or broadcast, why risk your career to expose the facts?

Protests at the mishandling of the aftermath of the tsunami at the Fukushima reactor have faded away. TEPCO is still in business with taxpayers' support.

Nobody wants to rock the boat, but in avoiding rocking it, it seems to have escaped most people's notice that it is slowly sinking.

Even with an enormous stimulus to action such as the recent disasters Japan can't change.

Or can it?

The reaction by ordinary people and businesses has been remarkable. The speed of the rebuilding efforts astounding. The flexible responses to the shortage of electricity exemplary - without any fuss, factories and offices have shifted the working week and now take days off on weekdays.

And in a quieter, less attention-grabbing way than the events at Fukushima, major changes are taking place in working practises. From highly-relaxed dress codes (to reduce the need for air-conditioning) to home working and shorter working days, the crisis has pushed organisations into a very different way of working.

Very nice for the hard-working salaried employees , but does it make any difference to the big picture? Surely this can't have any effect on the underlying problems of poor government? Consider for a moment though, that one of the reasons put forward for Japan's incredibly low voting rate in elections is that people don't have time to listen to politicians and choose the best candidate. If people have a little more time to think about the current state of affairs and a little more time to listen to and influence politicians, perhaps these changes will have unexpected knock-on effects. My Japanese friends believe that there are good politicians in both parties - the challenge is to break free of the current smothering political institutions (official and unofficial) and create a credible opposition (third?) party.

Maybe all the changes in working conditions will be reversed in the autumn, and people will go back to the same narrow environment they were constrained to pre-crisis, but maybe this brief pause and opportunity for reflection will be enough to provoke the changes needed to move Japan in a better direction...

Effect of the Economy

2011-03-14T20:55:00.000-07:00

There is a lot of pessimism about the economy, but there may be a positive side to the disaster.

If the nuclear plant situation doesn't escalate, the sense of purpose and investment in re-building may have a positive effect in the slightly longer term. The contribution of the Tohoku area to GDP is only 1%. The major negative impact is from power cuts, but the Japanese are very good at matching consumption to supply.

Disaster Management

2011-03-14T19:09:00.000-07:00

The events of the last four days have put an enormous strain on the government of Japan.

Politicians and TEPCO managers are struggling to find a balance between preventing panic and providing necessary information to the public at the same time as managing the multiple crises facing the country. They are hampered by a lack of credibility stemming from decades of misinformation and by a tendency to hide the truth rather than release the information necessary to allow the public to make informed decisions.

Looking beyond this unfortunate incompetence, however, we should remind ourselves that, in the face of a natural disaster of terrifying proportions, the social fabric is holding together and many brave, committed people are working to repair the damage in all areas.

Whether or not it was wise to build a nuclear power plant on a fault line in an area exposed to tsunami is a question for the generation of politicians and managers who took that particular gamble (continuing to operate it was, of course, a more recent decision), there is little the current team can do other than fight to bring the situation under control.

This morning's news that the Fukushima Daiichi plant No.2 reactor compression chamber is probably damaged following an explosion follows the news yesterday that the cooling water in the reactor had been allowed to run down, exposing the rods, due to human error. Poor management again compounding a serious situation.

The Japanese government has finally asked for outside help. Hopefully the combined efforts of experts from around the world can bring the situation under control.

Adapting to the Rise of China and India

2010-10-23T18:24:00.000-07:00

Both inside and outside Japan there appears to be a widely held view that economic decline due to relative lack of competitiveness, hollowing out of manufacturing and demographic change is inevitable. This seems to me an analysis based on the current situation, extrapolated forward on the assumption that nothing will change in Japan. Whether this scenario becomes reality or not depends on choices that have to be made in the near future.

The Japanese economy has adapted to external change successfully in the past (oil shocks, currency shifts) and has consciously directed itself through internal coordination over many years Europeans complained in the 70's and 80's about METI's "laser-beam focus" targeting key industries and before that Japan surprised the world by successfully shifting focus from low cost to reliable quality in manufactured goods.

The capacity for change exists, the difficulty is in identifying how to change and this is a daunting challenge comprising very difficult choices. Encourage "guest workers" as Germany did? Allow immigration to rise? Allow off-shoring to continue, decreasing the size of the domestic workforce required? Continue to compete at all levels in manufacturing or focus on higher value-added activities? Continue to manage capital through the establishment or unlock it for use by small, entrepreneurial companies? Emphasise social discipline and absorption of facts in education or shift the focus towards the skills required to prosper in a world where flexibility and "cloud teams" are the norm.

The odd recent focus on the Galapagos effect (somewhat reveling in Japan's inward-looking economy and celebrating its creation of standards that prevent it from succeeding globally with otherwise good products) is a step in the wrong direction.

Japan can create a socio-economic model built on existing cultural strengths (consistency, reliability, the ability to refine and innovate, for example) and can add a degree of flexibility to create an edge over emerging manufacturing and service industry competitors. Many businessmen who have worked both in Japan and outside have a similar view - the strengths are clear, but the will to make them the basis for change and growth is lacking. There is an opportunity for Japan to define standards, set benchmarks in quality and design of goods and services and play a leading role in global teams but, currently, the tendency is to turn in the other direction - to globalise manufacturing, but to become more insular culturally.

Rather than allowing the current opportunity to be lost, Japan should look outwards, make changes within and embrace a role as a gateway to Asia and beacon of order in the region.

Yes we Kan

2010-06-11T04:25:00.001-07:00

Mr. Kan replaces Mr. Hatoyama as Prime Minister and effectively Mr Ozawa at the head of the Japan Liberal party. Mr. Hatoyamaa and Mr. Ozawa were ousted for financial irregularities. Mr. Kan was also forced to resign a few years ago for a few missed social security payments in his student days. He then embarked on a pilgrimage around the temples of Shikoku island and has clearly atoned for his misdoings. Perhaps the LDP politicians who engineered the review of his contributions and the bureaucrats who aided and abetted them should also go on a pilgrimage...

Hopefully, Mr. Kan can compensate for the embarrassing Hatoyama effect and allow the experiment with a non-LDP government to continue. The alternative is too horrible to contemplate.

As the owner of a Japanese business, I am praying that the Liberals will last long enough to push through the planned reduction in corporation tax. At 5% it's not world shattering, but sends a very positive message.

Negotiating in Japan

2010-01-30T21:49:00.000-08:00

The end of 2009 was very busy for AKI Japan. We supported strategic negotiations for two clients and negotiated agreements with suppliers from Europe and Asia.

One interesting point arising from these various activities was the range of negotiating styles and targeted outcomes. These divided along national lines and again within national borders according to company culture. Hardly groundbreaking discoveries, I hear you say, and, of course, you're right. But I found the experience and the outcomes interesting, not least because it all happened in a short time-period. I will write about this in more detail in future.

Going into 2010 we see a lot of cross-border activity: VW-Suzuki, Peugeot-MMC, Geely-Volvo, Autoliv-Delphi Asia and possibly Nissan involvement in the proposed Daimler-Renault technical tie-up.

All these activities will involve intensive negotiations and integration activity and experience shows that the outcomes will vary widely according to the quality of the integration. plan and the skills of the integration teams. These are both elements which can be optimised as long as the cross-border element is handled correctly. This is particularly true in Japan. The words of Stuart Chambers, former CEO of NSG Pilkington during a presentation at the FCCJ last year sum this up nicely: "For two years I said that Japan was just another culture, now, in my third year, I am beginning to think Japan is more different than other cultures".

Those who take the trouble to listen to managers experienced in bridging cultures positively and who assemble and educate the right teams will succeed.

Auto Supplier Consolidation

2009-08-14T23:21:00.000-07:00

From the steamy heat of mid-August Osaka, o-hisashiburi (it's been a while).

Continuing on the consolidation theme, it's interesting that there don't appear to be any large Japanese funds buying up companies to drive consolidation. This is happening in the USA and Europe either driven by companies pursuing consolidation as a strategy or by funds assembled for the purpose.

Is this because Japanese management shrewdly recognise the extreme difficulty in achieving real value from M&A activity, because they are simply too risk averse or because they recognise that they lack the breadth of management talent to make cross-border, post-merger integration work?

Probably all of the above.

In the past, this was not a problem. Hanging on to the coat tails of Toyota, Nissan, Honda et al was as good a strategy as any. These days, the rallying cry across Japanese industry is "Globalise or Die". Easier said than done (the former, that is).

Some deals have taken place (Takata - Petri, NSG - Pilkington), but many more have failed (purchase of FAG, purchase of Karmann, purchase of SKF....) and many have not even got as far as identification of a potential partner/target.

M&A managers in the big Japanese financial institutions complain constantly of the difficulty of getting even as far as due diligence.

Interest remains high despite the problems, but is mainly focused on individual deals.

So should Japan Inc focus on getting more two party deals successfully through to closure or start thinking big and looking at industry consolidation on a global scale?

Let me know what you think.

Reactions to reactions to reactions to the flu

2009-05-17T17:53:00.000-07:00

The sequence of events has been interesting.

First, people fall ill and die in Mexico. The government closes down significant parts of Mexico City. The WHO issues a level 4 pandemic threat alert.

Japanese newspapers report the threat.

The WHO raises the pandemic threat alert to level 5.

Japanese media report the increased threat alert level and run articles on the reactions to the threat around the world.

Japanese media are vilified by the Japanese government and public for over-reacting and exaggerating the threat level.

Following mass travel to infected areas by the Japanese public during the Golden Week holidays, permitted by the Japanese government, the disease starts to spread in Japan and local governments react by closing schools in Kobe and Osaka.

One wonders how the media is expected to report this...

Automotive Consolidation - Asian Influence

2009-04-09T20:16:00.000-07:00

Ashvin Chotai of Intelligence Automotive Asia and I have just given a seminar at Chatham House in London on the outlook for automotive M&A activity in Asia and outbound from Asia.

Although activity has dropped (90 deals in 2007, 30 in 2008), companies are still picking up some of the opportunities thrown up by the global turbulence. In the first quarter we saw purchases by Motherson Sumi - Visiocorp of Europe, Geely -DSI of Australia and BeijingWest - Delphi Brakes and Suspension business. Geely is now rumoured to be looking at SAAB. We expect to see more activity from Chinese and Indian companies although they face serious challenges in managing the assets purchased.

The prevailing view in Japan is that companies have to expand overseas or die, due to the unfavourable demographics in their home market. The currently strong yen should help, once the effect of the drop in production volumes has passed.

Japanese companies face problems in completing purchases, however. The prospect of an NSG - Pilkington situation, where NSG concluded that they lacked the management resources to run the combined global business and handed over the management to Pilkington executives, is seen as a serious obstacle. Nevertheless, many companies are trying to implement a strategy of overseas expansion by acquisition. One recent non-automotive example is the purchase of myonic, a small German specialist bearing producer, by Minebea.

Korean companies face a number of obstacles in purchasing overseas assets, not least, a weak Won. They also lack experienced international managers to run the acquisitions. Nevertheless, the conventional wisdom seems to be that companies will have to expand abroad or lose out to Chinese competition. This perception should continue to drive M&A activity. The assembly of a war chest for overseas acquisitions by the KDB is a positive sign of this strategy.

More information: david_s@akilimited.com

Copyright to this blog: AKI Limited 2008 -2009

Recession in Japan

2008-12-04T17:41:00.000-08:00

As with the last recession, it's hard to tell there's actually one on. The restaurants and izakaya are still full and the shoppers are as indefatigable as ever. Nevertheless, politicians are talking about extending the social safety net.

One reason for this is the move away from full employees to contract and part-time workers over the past two decades. This flexible workforce acts as a useful safety valve for companies as they can easily be fired in downturns, but exposes those people "downsized" to life without medical insurance or unemployment benefit.

People have now started questioning the morality of this arrangement. In a recent Sunday morning TV political debate a number of participants criticised the "lack of social responsibility" shown by companies which have shed large numbers of temporary staff recently.

Perhaps we will see the establishment of a European-style safety net on both sides of the Pacific simultaneously.

Farewell Fukuda

2008-09-13T22:05:00.000-07:00

Well, we saw his arrival as a return to grey nothingness so his departure is hardly grieved.

The "all-star" line-up on the LDP side presages a return to power for a non-LDP coalition - a rare event to be treasured, but, unfortunately not inspiring much hope. The chances of such a coalition ramming through sweeping reforms are not high.

The best hope would be for the LDP to stay out of power for a couple of terms forcing them to seek a Koizumi-style radical to win back power. This might put a serious shake-up of the political, bureaucratic and legal structures back on the table.

Domestic Challenges for Japan's Automotive Industry

2008-05-24T19:00:00.000-07:00

The blog name "Tsurezuregusa" is the title of a Japanese book written in the form of jottings and notes of the thoughts of a retired courtier in the 14th century. Donald Keene translated this as "Essays in Idleness".

From my long absence you may deduce either an excess or a lack of idleness.

This month I'd like to share a few mental jottings and notes on some of challenges to the Japanese automotive industry which are less-visible from outside Japan. Whilst many of us are aware of the global-scale challenges such as maintaining technical competitiveness, managing global expansion and creating strategies for diverse markets, there are some interesting challenges on the home-front as well.

Currently, a much-talked-about point is the decline in new vehicle registrations. Although not yet a serious concern, there is potential trouble ahead. The general attitude of car buyers is not positive.

A big factor is the reliable and relatively inexpensive rail transport infrastructure. People in cities have less need for a car. It is also expensive for them to keep one due to the high cost of renting a parking space. This situation will be exacerbated by the aging of the population. A likely scenario is fewer young people buying cars and older people ceasing to use them.

In addition, there is the widely held view that cars are not an enjoyable form of transport. Anyone who has driven in Japan will understand this view. I am sure that Japan's roads have more traffic signals per kilometre than any other country, slowing journeys even in the countryside. Many are narrow and offer few areas for pedestrians to walk. Electric cables are not buried and the poles carrying them protrude into the driving area. Water drains are open and a hazard for motorists. On top of all these factors, Japanese cyclists and pedestrians are always assumed to be in the right in the event of a collision and seem to draw a conviction of immortality from this. Motorists have to be constantly on the lookout for people ignoring the rules of common sense and popping up in absurd places.

Another factor affecting sales is the heavy burden of taxation and inspection. A recent attempt to repeal the "temporary" petrol (gasoline) tax - in its 30th year - was repelled by entrenched, vested interests. The cost of the regular "shaken" vehicle inspections is a significant burden on owners and the high tolls for using expressways are also stubbornly resistant to reduction. Help in reducing these disincentives to car sales seems unlikely to come from political circles.

Why should a decline in domestic sales matter though, as long as exports and overseas production are strong? Well, one problem is the source of profits and the location of manufacturing and development. Japanese vehicle makers make over 50% of their profits in N. America. A significant part of sales to the USA (over 40%) comes from cars produced in Japan. Nearly 6 million vehicles per year are produced in Japan for the domestic market - this is close to the entire production volume of Germany. Another 6 million are produced in Japan for export. A reduction in the lower-profit domestic sales might well translate into reduced economy of scale on export models. Development costs, investment and overhead will be spread over smaller volumes with a consequent reduction in competitiveness.

Another problem could be the decline in the influence of the world's most-demanding consumers on quality standards and new model introduction rates. Will Japanese manufacturers be able to maintain their standards in laxer markets?

The Japanese vehicle industry has globalised rapidly, but the effect of the home base should not be underestimated.

David Syrad
25th May 2008
Copyright: A.K.I. Limited
www.akilimited.com

Petrol Tax

2008-01-23T03:14:00.000-08:00

Here's an interesting demonstration of how things in Japan often follow a different logic from elsewhere.

In the oil shock years of the 70's, Japan imposed a temporary petrol tax to discourage excess consumption.

Subsequently, throughout the (almost) uninterrupted rule of the LDP, the ruling governments forgot to repeal the "temporary" tax despite the fall in oil prices. Not such a serious problem as not many people use their cars for work here. The daily commute is usually by train or bicycle for most people.

Suddenly, though, this month, the government, facing a situation similar to the oil shock- oil $100 a barrel, has decided to repeal the "temporary" tax. The stated reason is to ease the burden on consumers. Discouraging petrol consumption is, apparently, no longer a priority. And the Kyoto protocol?

For most people the tax reduction won't really make that much difference and it comes against the background of rumblings about the need to increase consumption tax, which will affect a broad swathe of consumers. Puzzling.

The real thrust of the reduction is to break up the "Road Gang". A group of politicians spend the tax on useless projects designed only to enrich themselves and their cronies.

Of course, there might be other motivations. There is a worrying decline in car ownership among younger people in Japan. Without going into the reasons for this, suffice it to say that the decline is real.

To some degree, the Japanese car industy's export strength stems from low-profit domestic sales which cover overhead. The profits are made outside Japan. If the domestic base decreases, this can only have a negative effect on export competitiveness. Perhaps the needs of Toyota and Honda are part of the reason for this initiative, rather than the the desire to ease the burden on the long-suffering consumer...

The next post will look at why car ownership is decreasing.

Will the Rat bring Wealth?

2008-01-14T01:12:00.000-08:00

The Year of the Rat might sound negative to Western ears, but actually these furry charmers are supposed to bring wealth. They are admired for their industriousness among other traits.

There are mixed predictions for the Japanese economy this year, but "not bright" seems to be the consensus.

Having noted all the reasons for the gloomy predictions, let's focus on a couple of more optimistic points:

There is the feeling of a New Deal in the air, with even the Keidanren saying higher wages would be good for re-kindling domestic demand.
There appears to be a desire to re-enter the economy among those Freeters who chose not to join it through the traditional Salaryman route 10 years ago. An example is the transfer of ownership of convenience stores to their Freeter managers under franchise deals.

There is a push from both ends to get things moving domestically, which should help to counter the potentially negative influences from the global economy.

I leave it to Grumpy Old Pedant to expound on matters demographical should the whim seize him.

Wishing you success in 2008

Turning Leaves

2007-11-08T19:05:00.000-08:00

As the baby-boomers start to retire, receiving their retirement bonuses from their grateful employers, the opportunities in the financial sector in the next year or two are great for the well-prepared.

There are also widespread predictions of greater leisure spending, but a counter-trend is emerging of companies re-hiring the retirees for a number of reasons:

To cover the skills gap
To prevent know-how being transferred to competitors in other N E Asian countries
To utilise a low-cost resource

For some time now, retired Japanese managers have been working in Korea and China, passing on the know-how gained in thirty years of working life.

Japanese companies' strict retirement rules forced them to retire, but at the same time, these companies were complaining of lack of skilled personnel.

Recently, the penny has dropped and many companies have realised that , as they can pay re-hired retirees lower salaries than they were previously receiving, they can kill several birds with one stone by re-hiring. Many employees are happy to have the opportunity to keep working and take up the offer either from their former company or one in the same sector.

The upshot of this is that the boom in leisure activity might not be as great as predicted. Given a choice between sitting in a hot spring sipping sake and continuing to commute to the office, it seems that many prefer the latter.

Chilly September

2007-08-27T06:09:00.000-07:00

The hot weather has continued, but the world of politics is looking distinctly chilly.

No sooner had we started to celebrate Abe's resolve than it crumbled.

The messy appointment of Fukuda indicates a return to the old system. He talks a good reforming game, but is unlikely to be able to deliver much. If Abe san lacked charisma, Fukuda's score must be negative. His ability to work outside the LDP machine is nil.

This is a sad situation for Japan. Continuing with reform might have unleashed the country's entrepreneurial power. Now we look set for two years of status quo.

Hot August

2007-08-27T05:40:00.000-07:00

It has been a sweltering summer with record temperature highs, especially around Nagoya and Tokyo. Measures to reduce electricity use are in place to try to ensure supply at peak demand times.

It’s not only the weather that’s been challenging though.

The elections sent a strong message of dissatisfaction to the majority Liberal-Democtratic Party (LDP) – returning a significant number of Democratic Party representatives.

Unfortunately, the LDP, having suffered through the Koizumi period, during which the members were unable to rein in the charismatic prime-minister, is now trying to re-assert the old backroom boys power system. Consequently, their reaction to the falling popularity of the government is not to call a halt to pork-barrel politics or to start listening to the needs of the electorate, but rather to insist that Prime Minister Abe take responsibility and resign.

Mr. Abe is not as charismatic as Mr. Koizumi, so cannot appeal over the heads of the LDP to gain direct support from the voters. Even if he could, not much support would be forthcoming, given the strange raft of policies the party is proposing.

Nevertheless, with surprising stubbornness and contempt for consensus, he has refused to resign. There is perhaps some chance that, between the voting shift towards the Democrats and the refusal of the prime minister to cave in, a return to pre-Koizumi smoky-room, power-politics may be avoided.

On top of the political turmoil has come the unwanted intrusion of the world economy into the cozy, export economy supported by the weak currency. The profligacy of US lenders has finally been seen for what it is and the (US) housing market has shown signs of structural cracking. The cracks extended into the stock market last week, sending the Dollar down and the Yen rocketing (albeit briefly) and consequently casting a shadow over the profit figures of all those Export Samurai making their money in the US market.

What lies ahead, as the summer heat dissipates and the cool winds of autumn start to blow across the country?

Much depends on the appetite for risk of Japanese investors. The fall caused by the housing market uncertainty not only caused a retreat from the Yen carry trade, it also cast a shadow of risk across the foreign investment portfolios of Japanese investors. If the repatriation of funds were to continue, the Yen would strengthen and corporate profits would suffer.

This seems unlikely to become a sustained trend, however. In an economy with a near-zero return on savings and a tradition of passivity on the part of shareholders, overseas investments are likely to become popular again despite the risks.

What then of the perceived structural weakness of the Japanese economy? It is true that domestic consumer spending has dipped and the retirement of the baby-boomers, starting in 2010, is cause for some trepidation. As Japan’s corporations start to focus on a greying domestic population and have fewer young people in the workforce, will this weaken their focus on “young-economy” businesses and drive investment offshore? Or will it give rise to additional, world-beating “Silver Economy” products. Perhaps a combination of the two.

Japan’s well-known strengths in design, manufacturing-quality and attention-to-detail are likely to support continued strength in products such as cars, machine tools and home appliances, but production will continue to move offshore. Replacing this lost manufacturing, we will probably see an increase in the emergence of “Silver Products” enabling an ageing population to continue with their daily activities in comfort and with dignity. These products will be eminently transferable across borders.

At the same time, we are seeing a drive to move beyond the traditional manufactured goods into biotechnology, robotics and nanotechnology (and it's not all robot pets and dancing humanoids).

In Japan, new businesses have not generally grown out of garage operations started by a couple of geniuses and financed by funds with a high risk-threshold, but they do grow as divisions of and spin-offs from large corporations and we are also starting to see small venture-capital funded start-ups in IT and biotech.

These factors, combined, suggest that the economy will prove more resilient long-term than the conventional wisdom believes.