Disaster Management

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

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

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

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

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

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

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

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