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As previously blogged, March is an anxious time in Japanese companies. Not only are most corporate restructurings and promotions announced at the beginning of April, but pay rises for the new financial year will kick in.
Prime Minister Abe has been pressurising Japanese companies to increase wages for some years now, and yet Japanese companies are still sitting on piles of cash. Japanese wages have not increased more than 5% a year since the early 1990s, mostly averaging around 2-3% wage rises a year. The Japanese economy has been in a period of deflation since the late 1990s until the past year or so, so these are real wage increases. Nonetheless, there is a vicious circle between deflation and low pay increases, which Abe wants to break as part of his 3 Arrows for reforming the Japanese economy.
Low Japanese salary levels
Although I knew Japanese salary levels were not that high relative to other developed economies, I was surprised to see in the Nikkei Business magazine that average British salaries for the head of R&D at a pharmaceuticals company (£400K) or a CFO of a multinational (£390K) are so much higher than Japan (less than £200K) and even the USA (£200K to £250K). I wonder if these figures are net of any bonuses. Traditionally, Japanese companies paid 1/18 of salaries monthly, retaining the remaining 6/18 for twice yearly bonuses. Increasingly these bonuses are performance related, particularly at management levels.
Earnings distributed to shareholders or retained
Nikkei Business then goes on to analyse how earnings are distributed in Japanese companies, between labour, retained earnings and shareholders. The proportion paid to shareholders has been steadily increasing for Japanese companies, recently outstripping the proportion paid to labour (which has been in decline since 2008), but still below the retained proportion, which has been fairly steady these past 10 years. In the US retained earnings is the lowest proportion, declining since 2009, whereas shareholders have the highest share, increasing since 2008, with labour’s share declining since 2000, with a slight bump upwards around 2007/8.
Root causes of labour’s declining share
Root causes for this might be that labour’s negotiating power has fallen – unionization in Japan has fallen from nearly 60% of the workforce in the immediate postwar period to under 20% by 2017. Also thanks to Abe’s labour reforms, companies are not paying out so much for overtime – theoretically at least there is less overtime being done – but this is not being replaced by increases in base salaries.
Who could pay their employees more?
The juiciest bit of Nikkei Business’s feature is in the listing up and analysis of companies who have the biggest potential for increasing salaries:
1 . Tokyo Electron (scores highest on Return on Equity 10, net cash 9 and revenue growth 9 with a 3/10 on returns to labour
2. Nintendo (Dividend payouts 9, capital to asset ratio 9, net cash 10, returns to labour 2)
3. Kakaku.com (ROE 10, capital to asset ratio 9, revenue growth 9, returns to labour 4)
4. Subaru (net cash 10, revenue growth 8, dividend payouts 8, returns to labour 2)
=5. Start Today (revenue growth 10, ROE 10, dividend payouts 7, returns to labour 3)
=5. Chugai Pharma (capital to asset ratio 9, net cash 9, dividend payouts 8, returns to labour 3)
=5. Yahoo, Recruit, with MonotaRO and Fanuc at =9.
Other companies in the top 30 who are also active in Europe include Murata, Kao, Keyence, Shimano, Astellas and Hoya.
It’s an intriguing mix of new internet companies, growing fast, but perhaps preferring to pass on success to shareholders rather than employees and traditional, older companies who are preferring to retain earnings for a rainy day.
The special feature concludes with an interview with Hideto Fujino of Rheos Capital Works, in which he says investors want to hold shares in Japanese companies who raise salaries, if this is to attract more motivated, talented employees. “We don’t see payroll as a cost, but an investment”.
March has always been a stressful, uncertain month in Japan. Most companies, schools and universities start their new year around April 1st and this is also when corporate promotions and restructurings are announced.
Prime Minister Abe has been adding to the stress by trying to push through various labour market reforms, aimed at expanding “discretionary labour” by the end of the parliamentary session in June, but has had to row back on some of them due to the data on which they were based turning out to be severely flawed.
Status conversion rule
One piece of legislation which will be enacted from April this year is the new status conversion rule. This will allow fixed term employees renewing contracts for more than five years – usually temporary workers dispatched from staffing companies, or part time workers or contract workers – the right to switch to indefinite employment with no fixed period. In other words, the kind of lifetime employment, regular contract that Japan’s seishain (proper staff – see other posts on this here) have.
The gap in status, job security and benefits between seishain and” irregular workers” has been an enduring sore in Japanese society since the immediate postwar period of labour shortages in Japan when the lifetime employment system became established. The proportion of irregular workers in the Japanese workforce has grown since the 1990s, to around 37.3% of the workforce – 10% up on 10 years’ ago.
Irregular workers will disappear – maybe
Toyo Keizai magazine has an article headlined “Irregular workers are disappearing” saying the new status conversion rule will be a big shock to companies that rely on non-permanent employees. However surveys show very few employees and even HR managers are aware or understand the new rule, and companies are not making much effort to stimulate interest in it, unsurprisingly.
Japanese recruitment agencies go global – again
Presumably it will also be a shock to staffing agencies in Japan too, who have done rather well out of the rise in this sector of the workforce. There is a further rule imposing a three year deadline for temporary employment from a temping agency, after which the company will have to hire the employee directly – which will come into force from September.
No wonder recruitment agencies have started a second bout of acquisitions overseas – recent acquisitions in Europe include Outsourcing acquiring JBW, Liberata and Ntrinsic in the UK and Orizon in Germany and Recruit acquiring USG People in the Netherlands.
I partly set up this blog to address the lack of good quality information on Japanese companies in English, as well as to analyse how European and Japanese business cultures interact. An article in the Nikkei Business magazine regarding the impact of the European Union’s new financial regulations, Mifid II, on Japanese share prices unexpectedly fed into both those motivations.
Mifid II (The Markets in Financial Instruments Directive II, well explained by the Financial Times) has been causing much irritation amongst friends of mine who are investment advisors or equity analysts now unable to find jobs, thanks to the most well known aspect of it, which is that asset managers will now have to pay for research and phone calls to analysts. Before January 2018 the cost of this was built into the trading fees.
As the Nikkei Business article points out, it is not efficient for large securities brokers, who provide services to customers globally, just to charge research service fees to European investors. In any case, as pointed out by the Financial Times article, the requirements in Mifid II have an impact on US brokers’ status and also cover any asset that has an underlying product listed in the European Union.
So many brokers are cancelling the big ticket investor relations events that they used to host for free. CITIC CSLA used to hold a Japan equities IR event every February, but this has been cancelled for 2018. The rumour is that there was a concern that there would not be enough participants, now costs have to be justified to investors.
“People are no longer spending money on research” says Richard Kaye, Analyst for Japan at Comgest, questioning whether Mifid II is really “helpful”. Daiwa Institute of Research’s Shungo Koreeda says that foreign investors are likely to become much more discriminating in their choice of research from Japanese securities companies.
As foreign investors account for around 70% of trading in Japanese equities, if there is insufficient information available on Japanese equities to help investment decisions, it may have a negative impact on the Japanese stock market, concludes Nikkei Business.
The wheels have been coming off Japan’s post-war HR system for some years now – whereby seishain or “proper” employees in Japan have been hired straight out of university, onto generalist, lifetime employment tracks, heavily weighted towards seniority-based promotion. It stabilised the workforce in the immediate post war period when there were labour shortages, and worked well throughout the boom years, when there were places for everyone to go in an ever-expanding organisation.
Since the economic bubble burst, Japanese companies cut back on graduate hires and used contract staff to fill the gaps, but these contract workers had lower status, without job security and benefits, and there have been accusations that overreliance on less motivated contract workers to do quality checks, under pressure, has caused some of the recent scandals. Japan’s labour market is still relatively less mobile than Sweden, the USA or Switzerland, according to Hays.
So maybe it’s time for “outsiders” to have a higher status. This idea was floated by Nagisa Inoue in the Nikkei Asian Review, and now its sister magazine, Nikkei Business has a special feature “Your sell by date as an employee – the increasing pile up of employees who only have ‘age’”.
It looks at Panasonic, who have hired around 500 a year into management positions – over 40% of whom are over 35 years old. Panasonic’s founder, Matsushita Konosuke, said employees were family – and up until recently, managers were meant to select their successors from their juniors and develop them. Now they have been allowed the option of saying they do not see any suitable successors, and can ask to look for outside hires. The salary system is also being adjusted so that higher salaries than the norm for a position can be offered to those outsiders with specialist skills.
“I did think the next promotion was going to be me – I even tried to improve my TOEIC score so I could work globally, and made efforts to widen my job”, said a 40 something Panasonic employee – but his new boss was hired from outside.
Denso, the Toyota group automotive manufacturer set up a new division to develop components for the “connected car” and around 2/3 of its employees were hired from outside the company. The division is also deliberately placed in Yokohama, away from the headquarters in Aichi prefecture and from the Tokyo branch office. “We wanted to cut ourselves off from Denso culture” says one manager.
Pernille Rudlin will be facilitating a seminar in Frankfurt on October 25th 2018 – “Working Effectively in the Japanese financial services industry – Lessons from London”
Pernille has worked with most of the major Japanese financial services companies who are present in the City of London over the past 15 years and been involved in a number of post merger integrations across Europe.
1. An overview of Japanese financial services in the UK and recent trends in M&A
2. Impact of cultural factors on Japanese financial services – attitudes to risk and impact on risk management, attitudes to responsibility and accountability and how this impacts corporate governance
3. Practical tips on what to do if you supply services to or work for a Japanese financial services company when you want to make proposals, instigate change or sell to a Japanese company and how to build relations with Japan HQ.
Further details including online registration and payment are available on on Eventbrite
Hitachi’s rail business is only 5% of the whole group’s turnover, but is growing rapidly and moving from being “double domestic” to a truly global business. Overseas sales are now 83% of turnover, having been 28% of the business in 2012.
Nikkei Business interviewed Alistair Dormer (subscription only, in Japanese), the CEO of Hitachi Rail who is also a Senior Vice President and Executive Officer of the Hitachi Group about his four years as CEO – at a time when the railway business is undergoing major change, with Siemens and Alstom joining forces in Europe for their rail business.
Dormer talks about the importance of being able to scale multilaterally through M&A, with the acquisition of Ansaldo Breda and other companies, which resulted in acquiring customers across 27 countries – 26% of business is now in the UK, 17% in Japan, 10% in Asia Pacific. Hitachi Rail is also moving, like every technology business, into “solutions” adding a services side, including communication technology, software development, signalling systems and operations.
Speed up every aspect
Dormer says the most important thing for Hitachi Rail as a Japanese company was to speed up every aspect. “It is a strength of Hitachi as with other Japanese companies that business advances on a consensus basis, carefully harmonizing in-house planning and business negotiations with partners. This leads to stable quality standards and organizational cohesion, but it is also a weakness in that it takes too much time when you face global competition. The leader needs to be able to make quick decisions and communicate rapidly.”
Of course this is even more difficult when communication and decisions have to be made across long distances such as between the UK and Japan. So Dormer decided the best way was to move people around, to raise the frequency and density of communication. So there has been substantial exchange of people between the factory in Japan and manufacturing bases in UK and Italy.
If there is a substantial geographical and time distance, then people prefer not to have meetings about trivial things, but these details can later become obstacles. So having more regular interaction is necessary. Hitachi Rail hterefore also has regular video confererence and Dormer himself visits sites, holding meeitngs with 50-80 people to exchange opinions.
Only use simple English
With English as the common language, Dormer (as a native Brit) instituted a rule that only simple English should be used. “When native English speakers are talking, they speed up. It should be easy to say, “I don’t understand, I can’t follow what you’re saying”, but it’s difficult to do this in a teleconference or an important meeting. So then the meeting ends inconclusively and you find out later that people did not understand. So not only should you use simple English, but also I put in a process to confirm understanding after the meeting. The productivity of our meetings has greatly improved as a result”
Hitachi Rail has also introduced common standards across all countries for HR reviews, cost, engineering performance etc. “Each country, the UK and Italy and Japan, have different cultures and ways of doing things, so we did not force conformity, but respected each others’ cultures while working to Hitachi’s values as the common standard.”
Brexit – nobody knows what the future will hold
With regard to Brexit, Dormer says he is repeatedly asked about it, but at the moment there has been no change. “Hitachi has good relations with the UK government. All we can do is continue to ask that companies like us who have their regional base in the UK can continue to access the EU market as seamlessly as possible. There is no choice but to believe this. A transition period is being discussed, so it’s possible the environment will not change for the foreseeable future. However it is still a shock to me on a personal level that the UK made such a decision – even when we knew there was nothing to gain from leaving the EU. There are many people in our offices who were born in the European Union outside the UK, and they are worried. My priority is to reassure them, but the only thing I can say is that nobody knows what the future will hold.”
The number of Japanese nationals resident in the UK fell by 4.5% in 2016, from 67,997 in 2015 to 64,968 – the first time since 2008-9, when the Lehman Shock hit and numbers dropped from 63,526 to 59,431.
It’s difficult to avoid concluding that the Brexit referendum vote had an immediate psychological impact along with the beginning of a renewed crackdown on non-EU migration. I expect the downward trend to be intensified in 2017-8 as it has become much more expensive and difficult to bring in Japanese expatriate staff from 2017. The non-EU immigration cap has been hit for the third month running in February 2018. It is estimated that the cost of bringing in a Japanese expat has increased from £2151 to £7174 in 2017 (and might double again in later years) after the introduction of the immigrant skills charge of £1000 per year in April 2017. The charge to use the NHS is proposed to rise from £200 to £600 over the next couple of years.
Given that some Japanese companies have hundreds of Japanese expatriates in the UK, this is a significant cost, even though it does not seem to have deterred more non-EU migrants from coming to the UK in 2018 compared to 2017.
Delving further into the Japan’s Ministry of Internal Affairs and Communication’s Statistics Bureau’s statistics, it is clear that other European countries are still seeing significant rises in Japanese nationals as residents – Sweden has seen an increase of 8% from 2015 to 2016, the Netherlands a 7% rise and the two largest Japanese populations after the UK, Germany and France have also seen 3-4% rises, to 44,027 and 41,641 respectively. Belgium and Russia are the only two other countries to record a decrease in Japanese nationals, of 9% to 5,707 and 4% to 2,650 respectively.
Vorkers, the Japanese equivalent to Glassdoor, an online site where employees rate their employers, has just announced its annual rankings of companies in Japan where employees are most engaged. Diamond magazine has analysed the rankings from the point of view of the regional cultures in Japan. As noted in a previous post, regional cultures are strong in Japan, and have an impact on corporate cultures.
Diamond magazine notes that Osaka companies are prominent in the top 5 – namely Suntory at #2 and Itochu at #4. Both have over a hundred year history as Kansai region “merchant” companies and Diamond says this “yatte minahare” (Osaka dialect for “go for it” or translated by Suntory as “follow your nature”) spirit is still evident in the employee comments. If you like a challenge in your work, these are the kind of companies to join. “You might get told off by your boss for not doing something, but you don’t get told off if you tried to do something and couldn’t” says one female employee in planning.
Brother, at #15, has its headquarters in Nagoya, the capital of the Midlands of Japan, where many automotive companies are also based. Founded in 1908, initially as a machine repair workshop, Brother is now most famous for its printers. 80% of its sales are overseas.
Brother employees say that “there has been a big change over the past 5 years. Overseas travel and secondment is positively encouraged. It’s the best place for someone who wants to work globally.” (Male, product development). “Fundamentally the bosses and my seniors are mostly good people. There is a culture of using surname-san (rather than more formal job titles – see our post on this) and therefore there is not such a formal atmosphere” (female, sales)
As for the newer companies, one to look out for is Uzabase at #33. It was founded 10 years ago and provides platforms for business intelligence such as NewsPicks. Employees rate it highly for allowing individual freedom and responsibility.
These are not characteristics traditionally thought to be sought by Japanese employees or prevalent in Japanese companies. Diamond says the comments on Vorkers show employees praise their companies for developing them as individuals, to allow them to take up all kinds of challenges and forgive mistakes. This is a sign of how the Japanese workplace will need to be when most jobs can be done on a computer, now that overtime is being cracked down on and productivity is being emphasised, to enable both the company and its employees to grow.