Why the EU’s Mifid II might hurt Japanese share prices

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.

 

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Japanese companies no longer growing their own

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 in Sweden, Switzerland or the USA, 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.

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Lessons from London – seminar in Frankfurt

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.

Topics:
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

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Hitachi Rail’s CEO Alistair Dormer on Brexit, speeding up and the need to speak simple English

Alistair Dormer – credit Paul Bigland

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.”

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First decrease in Japanese nationals living in UK since Lehman Shock

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.

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“Go for it!” companies in Japan – new and old

You have to have (octopus) balls in Osaka

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.

 

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Global Japanese companies have a diversity problem in their Japan HQ (and it’s not just gender)

Blue chip Japanese companies have traditionally recruited most of their employees through hiring them as graduates straight out of university as “lifetime employees”.  Labour shortages, job hopping in the younger generations and cutbacks on lifetime employment has meant that some companies have had to recruit more mid-career employees recently.  This entry track was in the past confined to specialist, non-line management positions and at a lower status to the lifetime employees, but recently I have seen more expatriate Japanese who have worked in other companies appearing in my seminars in Europe as expatriates with equivalent status to those who have been in the company since graduation.

Mid career hiring seems to me a good indicator of the degree of acceptance of diversity in its broadest sense, and Toyo Keizai obviously agrees, as they have published a ranking showing the percentage of employees in Japan who are “graduate hires” in the total year’s intake as part of their Corporate Social Responsibility data publications.

Companies in our EMEA and UK Top 30 largest Japanese employers who are also in the Toyo Keizai rankings of companies with the highest proportion of Japanese graduate hires are therefore in a rather paradoxical position of having a high number of non-Japanese employees in their overseas subsidiaries, being managed by a very traditional Japanese group of employees in their Japan headquarters.

Most of the companies in these categories are trading companies, banks and major manufacturers – the latter two having substantial domestic branch networks or domestic manufacturing and markets to cater for I suppose.  They include:

  • NYK 65 graduate hires in April 2017, 2 mid career hires in 2016
  • NTT Data 385/13
  • Canon 475/15
  • Toyota 1935/98
  • Sumitomo Corporation 157/8
  • Itochu 149/12
  • Marubeni 135/11
  • Sumitomo Mitsui Financial Group 1347/115
  • Mizuho Financial Group 1394/175
  • Toyota Industries 284/27
  • MUFG 1206/111
  • Dentsu 145/19
  • Fujitsu 740/110
  • Mitsui 180/30
  • MS&AD Insurance 1183/254

No sign of Mitsubishi Corporation in the rankings – which may be due more to non disclosure of data rather than not being in the top 150.  When I was working at Mitsubishi Corporation, we used to refer to the hiring of similar Mitsubishi graduate types every year as having led to  a “Kintaro ame” situation in terms of diversity – Kintaro ame (Kintaro sweets) are rather like British sticks of rock, the same wherever you cut through them.

 

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Japan has not faced up to the need for re-training in an ageing society

Japan’s population has already peaked at 127 million, and on current projections will be under 100 million by 2053, with around 1 in 4 people aged over 75 and under 60 million by 2100, by which stage 1 person in 2.5 will be elderly.  The Nikkei Business magazine has a special feature on what this means for Japan and how to make sure this future is a happy one.  Japan is of course the canary in the coal mine for other developed societies facing similar demographic changes, such as Western Europe, but, so far, does not seem to be taking the route that Western Europe has, of allowing immigration to rebalance the demographic trends.

Happy vs Bad scenarios

The “happy scenario” is where the elderly find jobs as “cloud workers” doing subcontracted administrative work for their local authority, live in affordable social housing and their pensions can allow them a comfortable lifestyle.  They might accumulate points from their work which go towards healthcare and social care.

The “bad scenario” is where salaries are only just enough to make ends meet and if you are living on your own, aged 80, you find it hard to do physical work.  Social infrastructure has not been renewed, and living conditions are worsening.  People are fleeing the suburbs in search of a cheaper cost of living. Intergenerational wage gaps have not been adjusted, and this is having an impact on pensions.  Low wages have led to a chronic labour shortage.

The new multistage life and career

The Nikkei then goes on to interview Linda Gratton, of the London Business School, regarding her concept that our lives will no longer be three distinct stages of education, work and retirement, rather multistage, with a time of retraining, which may result in no longer working for an organisation as an employee.

A rather depressing graph accompanies this, showing that Japan has the lowest number of people over 25 in further education (2.5%) compared to the OECD average of 16.6% – only the Netherlands has a similarly low rate, and Germany, the UK and Spain are also below average.

Japanese corporate training budgets are a tenth of Germany’s

Japan’s generally high level of education might explain this, but another chart also causes concern, comparing Germany to Japan in terms of corporate training.  Siemens spends over $1100 per employee per year, compared to $130 average spending on training by Japanese companies on their employees.  Training in Germany is for the whole industry (presumably they mean Germany’s national apprenticeship schemes) whereas for Japanese companies, training is only offered to employees.  The content of the training in Germany is transferable skills, and in Japan it is only useful for that company or industry.  German training includes e-learning via smartphones and PCs, whereas in Japan it is “on the job training” and classroom based training.

Actually I have noticed more e-learning in Japan too, although it is mostly for internal compliance purposes.  Despite the fact that I have recently created some e-learning, I am not sure it is a sufficient alternative to class room based training, particularly for soft skills.  But certainly if we are thinking of retraining people in skills needed for becoming “cloud workers” then it will have an important role to play.  Indeed the e-learning I have developed in Japanese is specifically aimed at Japanese people working in virtual global teams.

Japanese firms’ re-training, re-employment provision

The final part of the feature details a survey of various listed Japanese companies’ employees about their systems for allowing second jobs, early retirement, individual education and re-employment.  62% of Japanese companies allow employees to have second jobs, usually with some restrictions.  68% have an early retirement scheme, for 44% of those, it kicks in at age 50, 29% from age 45 and 12% from age 40 and also age 55.  52% do not have any support system in place for re-training or overseas study, although some do allow time off for study at an employee’s own cost.  80% of firms have a re-employment scheme for people who have left the company, but with various conditions, such as they should have left the company in order to bring up a family, or to look after elderly relatives, or to accompany a spouse when they had to move for work.

Nikkei’s Business’s message to Japanese companies is clear – for a happy future society, they need to step up their support for older employees to develop their second careers.

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Uniqlo aims to be world #1 in 3 years (at the earliest)

Uniqlo fan distributed on opening day in Barcelona

The overseas sales of Fast Retailing, with Uniqlo at its heart, have recently outstripped its domestic Japanese sales.  Although a branch of Uniqlo has opened in Barcelona, to add to stores in the UK, Germany and France, with further openings in Stockholm and Amsterdam to come, according to a recent inverview in the Nikkei Business, what really excites Fast Retailing’s founder, Tadashi Yanai, is the birth of huge middle class markets in China, India and South East Asia.

“The people in those markets are hungry for new clothes, and information about those new clothes” he says.  “The most searched for words in search engines are clothing related” [not lack of clothing related?] “When we make clothes, information is important.  It’s the same in any industry.”

“At my most optimistic, I think we can be world number 1 in 3 to 5 years.  We are in the best position in the growth markets of Asia.  Although various governments are trying to be protectionist, it is difficult to stop the trend of companies doing business around the world.”

“Manufacturing has to be done in the countries with the lowest labour costs.  Chinese manufacturers are setting up factories in Vietnam, Cambodia, Indonesia, Bangladesh.  And then on to India, the African coast, Eastern Europe.”

When asked about the new concept from Japanese company Start Today – the Zozosuit, which will supply bespoke clothing, with measurements generated by wearing a “Zozosuit”, Yanai said this technology will not be a sufficient differentiator in its own right.  “In the future, IT infrastructure will be common to everyone, and free.  They will have to think hard about how to build up their business model to make best use of that data”.

Fast Retailing has another brand, in Japan only, GU, where RFID tags are in every item, and there are self service check outs, so shop assistants will become more like “concierges”.

“I think only companies that have a positioning that makes sense globally will survive.  Up until now it has been enough to have a positioning in Japan,  and as a consequence, there was pointless competition within each industry.  Now markets are global, being number 1 in Japan is pretty meaningless.”

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Toyota, Sony have most Japanese employees overseas

I was surprised to discover a few months ago that Sony, despite being one of the most overtly “global” Japanese companies, has so many Japanese expatriate managers in its European operations.  This is confirmed by the rankings recently published by the Toyo Keizai, which estimate that Sony is only beaten by Toyota in terms of the number of Japanese posted overseas.  Toyota group company Denso is at #3 and the other big electronics conglomerates Canon and Mitsubishi Electric at #8 and #9 – showing Sony is not alone.

Other car manufacturers such as Mazda, Isuzu, Suzuki and Mitsubishi Motors are in the Top 50 but Honda and Nissan appear not to have disclosed data as they are not in the rankings.

I’m less surprised that the main trading companies (Mitsubishi Corp, Mitsui Bussan, Sumitomo Corp, Marubeni) are in the top 10, and that their expatriates represent a high proportion of the headquarters regular staff.   However, this does show that it is very difficult for them to localise their business model in terms of bringing more non-Japanese into the mainstream management of the company – tending instead to keep local executives confined to the acquired subsidiary.

Sumitomo Mitsui Banking Corp appears to be an outlier amongst banks but in fact the other megabanks did not disclose data so have not been ranked.  Toyo Keizai assumes that they are at about the same level as SMBC.

The top 20 are as follows:

  1. Toyota 2,450 Japanese expatriates (out of 75,218 headquarter regular staff)
  2. Sony 1,400/16,659
  3. Denso 1,336/23,801
  4. Mitsubishi Corporation 1,286/6,233
  5. Mitsui Bussan 1,209/5,971
  6. Sumitomo Corporation 1,101/5,162
  7. Sumitomo Mitsui Banking Corporation 1,083/29,283
  8. Canon ~1000/26,246
  9. Mitsubishi Electric 962/31,694
  10. Marubeni 907/4,458
  11. Hitachi 800/35,631
  12. Toyota Tsusho 792/3,614
  13. JETRO 700/1,764
  14. Minebea Mitsumi 653/5,953
  15. Itochu 640/4,285
  16. Yazaki 597/289,300 (worldwide)
  17. Yamaha Motors 569/6,512
  18. Murata 560/7,899
  19. YKK 560/3,804
  20. Toray 553/4,486

 

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