Category: Corporate culture

Chipping away at the three treasures of Japanese HR

Several Japanese blue chip companies have announced some quite radical changes to their HR systems, just in time for the new Reiwa era. The so called three treasures of lifetime employment, seniority based pay and a company union have been looking a little tarnished for some years now. They seem a legacy not even of the Heisei era but of the post war Showa era of a booming economy and a need to retain a young workforce.

Hitachi had shown the way four years ago (as described in our blog post at the time), abolishing seniority based pay for its managers and replacing it with pay based on job roles. They have made further waves recently with the announcement of the first ever Hitachi subsidiary President to be in their forties.  The newly formed Hitachi Global Life Solutions will be led by Jun Taniguchi, born in 1972.

Hitachi claim that this new system is needed for the company to be truly global and able to appoint and transfer managers around the world, regardless of where they were recruited. Beer and soft drink manufacturer Asahi Group Holdings has also been shifting to global standards. Around half their employees are non-Japanese, as a result of their acquisitions of European brands such as Peroni, Grolsch and Fullers. They have said their Presidents and CEOs will be evaluated on return on equity from now on, and given the boot if it is not maintained above 13%.

Japanese megabank MUFG says it will reduce new hires in Japan by 45% to 530 next spring, and will cut the 6000 employees in its Tokyo headquarters by half. Not all Japanese HR traditions are being thrown out of the window, however, as the surplus 3000 will not be made redundant, but rather redeployed to sales functions or sent overseas to areas where MUFG is expanding like the USA and Asia (but not it seems, Europe).  MUFG  is automating the functions that these staff performed, as well as cutting many of its retail branches in Japan. It will instead be beefing up its overseas compliance and digital payment systems divisions.

Some Japanese politicians and commentators have said that the “rei” of Reiwa sounds rather cold, as it can sometimes mean “order” or “command”.  It also, when combined with the radical for water, becomes a character meaning chilly or freezing.  It certainly feels like some icy winds will be blasting through Japanese cosy HR traditions in the new era.

 

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Five elements of building trust between Japanese and European business cultures

If I were to capture what I try to do in my work in one phrase, it would be “build trust between Japanese and European business cultures.” This of course leads to questions of how trust is defined, and therefore how it is built.

The title of my new book, Shinrai, is the Japanese word for “trust”. It is composed of two characters, shin, meaning “believe”, and rai, which means “to request”. In other words, if you trust someone, you believe they will do what you request. The character for shin can be broken down further into components which mean “person” and “word” and the character for rai can be broken down into “bundle” and “leaves or pages”. It implies communication between people is a fundamental part of building trust, but also getting things done and pulling together.

Analysing the work I have done with clients over the past fifteen years, I would say there are five components of building trust in multinational companies. In sequential order they are communication, mutual interests, processes and regulations, reliability and accountability and vision and values – and then back to communication again in a virtuous circle.

1. Communication

Having a common language is critical – this is why any initiative to help immigrants integrate into a society usually starts with language lessons. The problem for Japan is that for native speakers of European languages, Japanese is one of the most difficult languages to learn and Japanese feel similarly about English. Japanese companies can do more to help Westerners learn Japanese – an intensive course in Japan is one of the most effective ways to do this. Japanese companies can also communicate better than they do in English – it’s not enough to make English the common language or force a minimum English level on employees, management needs to communicate vision, strategy and plans in English more effectively than it currently does.

 2. Mutual interests

The Economic Partnership Agreement between Japan and the EU is a classic example of common interests helping to build trust. People have differing degrees of interests, but finding mutual interests means that there is a stable basis for negotiation. Japan wants to sell more cars in Europe, European consumers are happy to have cheaper, good quality Japanese cars. Europe wants to sell more food and drink to Japan, Japanese consumers are happy to have cheaper, good quality European wine and cheese. On a micro level, this is why I always encourage Japanese expatriates in Europe to engage in small talk with their European colleagues – it’s a way of discovering mutual interests, which means mutual understanding, compromises and agreements are more easily gained.

 3. Processes and regulations

Once you have discovered your mutual interests, you can come to an agreement, but it needs mutually recognised standards to work well. What are the quality and safety standards expected of a car, or a cheese in your respective countries?

When there is a low level of trust, laws, regulations and processes are needed as a fall back. However, both Japanese companies and the European Union are sometimes guilty of becoming bogged down in bureaucracy and process. You have to show you are obeying regulations and following processes in order to be trusted, but ultimately, this is not sufficient. How you do something in terms of your intentions and behaviour towards others is as important as carrying out the process correctly and obeying the law.

 4. Reliability & accountability

When you trust someone, it is not only because you believe they will obey the law, but also that they will do what they say they will do. For Japanese companies, this can be hard to define, as the culture is often a family style one, where everyone’s roles are vague, with no job descriptions and rely on a seniority-based hierarchy. It’s assumed everyone will do whatever necessary, in the best interests of the family. Rules can be bent for family members but this vagueness does not work well in more diverse organisations.

The current fight between Carlos Ghosn and Nissan is focused on processes and regulations. Nissan will try to prove Ghosn flouted Japanese law, but will have to answer questions about its own internal rules. Ghosn will try to prove that he followed both internal and external regulations. But what really seems to be at stake is a loss of mutual trust between Saikawa and other Japanese executives and Ghosn. If you are an insider in a Japanese company, you are trusted as a family member to act in the best interests of the family, and rules can be bent accordingly. But once you are seen as an outsider and acting in your own interests, possibly harming the company, then the rules are applied rigidly – just as the UK is finding out as it negotiates to leave the EU.

 5. Vision & Values

This is why you need a clear vision of where the company is going and how you want it to be seen. The vision and values have to be discussed with and shared with employees so they feel they belong. The values will guide them as to how they should behave in order to achieve that vision. If the vision is simply to hit various targets, within the boundaries of rigid rules and processes, without employees engaged with the company values, then the kinds of corporate scandals we have seen in both Japanese and European companies will continue, with catastrophic consequences for trust across societies and cultures.

This article is in the introduction of “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” by Pernille Rudlin, available on Amazon as a paperback and ebook.

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Mitsubishi Corporation – a microcosm of the challenges facing Japanese business

The death of the Japanese trading company and the “keiretsu” (company grouping) model has been repeatedly announced over the nearly thirty years since I started working for leading trading company Mitsubishi Corporation and researching their history. But when the Nikkei newspaper runs a three part series on whether Mitsubishi Corporation’s business model is bust, (as they do regularly) it’s worth a look, as Mitsubishi Corporation’s doings are closely watched by the rest of Japanese business.

Digital speed

Part one of the Nikkei series deals with the digital revolution and how it might disintermediate middlemen like Mitsubishi Corp. It notes that Mitsubishi Corp is likely to announce a record profit for 2018/9, but calls Mitsubishi Corp’s legacy a “heavy burden” in trying to find a new digital way to do business.

It looks at how young Mitsubishi employees are scouring Shanghai and Guangzhou for new technologies in convenience stores that they can bring back to Japan.  Mitsubishi Corporation turned Lawson, a convenience store chain in Japan, into a fully owned subsidiary in 2017, partly in response to the losses made on its traditional commodities trading business. But convenience stores themselves are now being threatened by Amazon and China’s Alibaba.

In the mid term plan announced last autumn, Mitsubishi Corp set up a special cross-company structure to look at communications and data [pretty sure we had something like that when I worked there 25 years’ ago, but anyway] and appointed an executive from the energy division (one of the traditional powerful factions at Mitsubishi Corp) as Chief Digital Officer.  “Other trading companies are not our competitors any more” says a senior Mitsubishi Corp executive.  Instead they are looking at SoftBank, who have double the profit and double the share price of Mitsubishi Corporation – a reverse of 10 years’ ago.

The concern, as with so many older Japanese companies, is the speed of change. President Kakiuchi syas he wants to decide within 3 years how to participate in the digital economy – but is that fast enough, the Nikkei asks.

The Three Diamond brand

“Mitsubishi Heavy Industries can fix it by themselves” said a senior executive at Mitsubishi Corporation in September 2018. A subsidiary of Mitsubishi Heavy, Mitsubishi Aircraft Corporation was facing delays in developing its Mitsubishi Regional Jet and needed further investment. The main branches of the Mitsubishi Three Diamonds, the core of the Friday Meeting are Mitsubishi Corporation, Mitsubishi Heavy Industries and MUFG Bank.  It was usual in the past for Mitsubishi Corporation to come to Mitsubishi Heavy Industries’ rescue [often grudgingly I would say] but this time they did not step in.

President Kakiuchi says Mitsubishi Corporation’s relations with other Mitsubishi companies are “no different from with normal independent companies” and has been reducing cross shareholdings.

The Mitsubishi Motors factory which started production in Indonesia in February 2019 of the Nissan Livina also illustrates how ties are weakening.  The factory is a joint venture between Mitsubishi Motors and Mitsubishi Corporation. Mitsubishi Motors was originally an offshoot of Mitsubishi Heavy Industries, and Mitsubishi Corporation has been a frequent partner either in dealerships or production, but Mitsubishi Motors turned to Nissan for investment when it was hit by a fuel emissions scandal in 2016 and is now in a triple alliance with Nissan and Renault.  Up until then, the Mitsubishi group had always bailed it out, but repeated scandals meant they felt their fingers had been burned too often.  “To be frank, we have no role to play in this” said a Mitsubishi Corporation executive on the arrest of Ghosn, even though Mitsubishi Corporation had increased its investment in Mitsubishi Motors from 10% to 20% in 2018.  Mitsubishi Motors was selling around 1.2m vehicles a year, and the view was it had to enter an alliance, manufacturing 100 million a year to survive.

Chiyoda Corporation, a spin off from Mitsubishi Oil, asked Mitsubishi Corporation for financial support last year on a loss made on a US LNG plant construction joint venture. The President of Chiyoda Corporation, Masaji Santo, is a former Mitsubishi Corporation employee.  Mitsubishi Corporation was not only the lead shareholder in the LNG plant but was going to be a customer of the LNG plant, so insisted on a low construction cost, which was resulting in Chiyoda making a loss.  President Kakiuchi has said “we will do what we can to support” but is still considering the pros and cons.

Retaining young employees

“I didn’t want to feel regret” said a young employee in his twenties, who left Mitsubishi Corporation after a few years, to join an IT company, citing the difference in the speed of decision making between the two companies.  Mitsubishi Corporation has always been one of the favourites for the elite graduates of Japan, but recently it has dropped in the popularity rankings for Tokyo and Kyoto University graduates, losing out to foreign consultancies like McKinsey.

Graduates who want to make a difference quickly are avoiding trading companies, experts say. One reason is the continuing seniority based promotion system. It took around 20 years to become a general manager until recently, but now Mitsubishi Corporation has reformed its personnel system for the first time in 20 years, to allow capable employees to take on responsibility regardless of age.  Performance based systems and evaluations have been introduced at certain management grades, setting compensation on complexity of the job role and results. Young employees are polishing their management skills with overseas postings.

The Nikkei cites the example of a 33 year old employee posted to the Cote D’Ivoire, who started a solar panel energy project. A Tsukumo Fund has also been set up, to invest up to Y500m in any ideas that employees have which pass certain criteria, even if they don’t have their boss’s approval.

This last point is key to me – it was always possible to have a lot of autonomy, become a manager overseas at a young age and start new projects at Mitsubishi Corporation if you were capable enough, but you needed your manager and the rest of the hierachy’s support – and that took a lot of time.

As the Nikkei says, Mitsubishi Corporation is a microcosm of the Japanese business world. The lifetime employment, seniority based promotion system worked well in the post war era, but now with an ageing, shrinking workforce, companies have to become more flexible to attract young people and encourage innovation.

 

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What role did Carlos Ghosn’s status as a foreigner have in terms of his downfall?
And what does this mean for any other foreigner leading or looking to reach the top of a Japanese company?

Obviously the Nissan story is evolving hour by hour, so what follows is based on my current understanding as of 20th November.

The specific accusations are that Carlos Ghosn received share price-related compensation and the Dutch holding company of which he was a director along with Greg Kelly, as part of the Nissan-Renault alliance, used its funds to acquire and refurbish houses which were his residences. These were not declared, not as an income tax issue, but as a fiduciary/governance issue, in terms of declarations to the Japanese securities and exchange commission.

Is the way this possible misuse of funds was exposed specifically because Ghosn was not Japanese? Actually a lot of Japanese Presidents and Chairmen are allowed to use company funds for personal reasons, and because of the blurring of personal/private and employer in Japanese companies, it is quite common for companies to provide housing and other benefits far beyond the norm in the West, particularly to senior executives, who are not, on paper, paid that well. This is particularly true of companies where the President is also the founder or has a high degree of autonomy.

Terrie Lloyd, a long term resident and entrepreneur in Japan wrote an interesting piece on this recently – https://www.terrielloyd.com/terries-take/tt-970-imploding-one-man-shacho-listed-companies-e-biz-news-from-japan/

You also can’t help wondering what had been going on over the years in terms of internal checks and corporate governance at Nissan if they did not know and challenge what kind of “benefits” and compensation Ghosn was getting – as illustrated by this blog post from a Japanese corporate insider https://bdti.or.jp/en/blog/en/nissanltr/?77

So the next question is, as it often is with Japanese corporate scandals, why is this particular accusation being exposed and why now? The official story is that it was made by a whistleblower, which necessitated an internal investigation, and then this led to a plea bargain which would reduce the penalties to Nissan.* There is only one other instance of this happening – with Mitsubishi Hitachi Power Systems and a Thai bribery case – and it was a Japanese manager who was involved.

But I suspect, as do other analysts, that Nissan chose to pursue this and publicly expose it because they didn’t like the direction Ghosn was taking the company in and couldn’t work out another way to get rid of him. There was undoubtedly a long running worry about the degree of control/interference by Renault and the French government and Ghosn’s intention to make the alliance irreversible by the time he finally stepped down in 2022. I also just read a story in the Nikkei Business magazine that Ghosn was very keen for the alliance to partner with Google, Microsoft and Daimler and Chinese companies to create a CASE (Connected, Autonomous, Shared, Electric) strategy. That degree of “foreignness” and with the US, and China, and Daimler with whom Mitsubishi Motors already had a failed alliance might have elicited an allergic reaction from Japanese executives at Nissan and Mitsubishi Motors.

But also, which accounts for the strong words from current President Saikawa, indulgence of senior executives is tolerated so long as they still seem to be working for the good of the company, and Ghosn not turning up for the public apology after the inspection scandal, and the sense that it was his corporate culture of imposing aggressive targets on employees that might have caused that scandal – and yet he blamed Saikawa, might have tipped Nissan executives further into exposing the issue publicly rather than dealing with it in the usual way.

The usual way (see Fujitsu/President Nozoe resignation in 2009), when other executives decide that a President has to go sooner than the usual carousel of 6 years as President and another 6 years as Chairman because they think he’s gone beyond what is morally acceptable and/or they don’t like his strategy, is that they try to let the executive exit honourably, by getting him to resign due to illness or some similar blamefree excuse.

Maybe this option was offered to Ghosn – who had after all been leading Nissan as President and Chairman for nearly 20 years, so way beyond the norm for Japan. But I can imagine that he refused it – and this could be attributed to him being “foreign” – instead of understanding Japan’s “shame” culture, he would have gone down the Judaeo-Christian and legalistic route of saying he had a contract until 2022 and as far as he was concerned he had done nothing wrong, innocent until proven guilty, so bring it on.

There may also be a political aspect – again nothing specifically to do with Ghosn being foreign – but Nissan may have got the hint from Japanese government agencies that they would be supported in taking Ghosn down because they were not politically in favour of the direction he was taking the alliance in – see what happened to Horiemon/Livedoor.

So in summary, I doubt Ghosn was treated differently because he was foreign per se, but because he was foreign he probably reacted differently, just as Michael Woodford did when asked to resign after uncovering scandals at Olympus, believing his own innocence and not fearing public exposure.

But underlying this there could be a resistance in Nissan and beyond, to any further globalizing, whether it results in French or Chinese or American or German control or influence. If I was a foreign executive, particularly if I was Christophe Weber at Takeda, I would be watching further developments in this case like a hawk and making sure I built as many strong, trusting relationships with my Japanese executives as possible.

*The story has indeed evolved – it now turns out that Nissan itself was not part of the plea bargaining deal, it was the two officials, one non-Japanese SVP who managed the Dutch subsidiary and one Japanese who was Ghosn’s chief of staff, who agreed to cooperate with the investigation under a plea bargain.

I was also quoted in the New York Times on this subject.

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Nissan and Ghosn – the cycle of coups d’état reaches back to the 1960s

I always prefer coincidence or cock-up to conspiracy, and former journalist and PR consultant Masaki Kubota clearly feels the same way, judging by the first few paragraphs of his article on Carlos Ghosn and Nissan in Diamond magazine.

As he says, in his years as a journalist, it was the standard defence of any Japanese executive caught up in a scandal that it was a conspiracy of people out to get him.

With Ghosn, you could easily claim, as many have, that this was a conspiracy, born of some kind of alliance between insiders at Nissan who wanted to get rid of Ghosn, his ex-wife and the Japanese government, and this kind of accusation is handy both for Ghosn and the French government or Renault who might have wanted Ghosn to continue to be influential.

But then Kubota does a classic kishotenketsu twist, pointing out the history of Nissan, going back to Ghosn’s installation and even before, is one of a cycle of coup d’etats.

Starting with the most recent history, of the inspection scandals – the exposure of the problem was a way of resisting the inspection system that Ghosn’s management team had introduced, shortly after Saikawa (identified as one of Ghosn’s team) became the new President of Nissan. It was in effect an abortive coup d’état.

Going further back to 1999 the then President Yoshikazu Hanawa was in negotiations with Daimler Chrysler and Ford but instead installed three Renault executives, without even consulting the previous Presidents who were advisors to the company at the time. “It was a kind of a coup d’état” the Nikkei said at the time.

Purging the Don

Even further back, to the 1980s, when the Chairman and former President for 16 years from 1957 was Katsuji Kawamata, there was a coup which led to the purge of union power at Nissan in Japan. It was well known that Kawamata gained his power through cooperating with the Nissan group labour union leader Ichiro Shioji. But then in 1984, Shioji, who was seen as the main obstacle to Nissan opening its factory in Sunderland UK and before that in the US, was hit by a scandal – photos appeared in the weekly magazine Focus, of Shioji on a yacht with a beautiful young woman.  Criticism of Shioji, as “the Don”, mounted and he resigned on 22nd February 1986. The Nikkei reported on this as “the 2.22 coup d’état” a reference to the 26th February Incident, a failed coup attempt in Japan in 1936. It was said that the power behind the 2.22 coup was Takashi Ishihara who was in favour of global expansion, and was the President at the time.

Ishihara had been involved in an earlier coup, when he was still at managing director level in 1969. Documents were leaked to the media about an incident involving a Nissan microbus.  It became clear that this was done in order to purge the upper ranks of the company.

As Kubota says, when there is a fraud in a company, this is often results in a clear out of those in the upper levels of management who are to blame.  In fact, this kind of incident has been quite rare at Nissan, so when it happens, it is likely that it is part of a major change in strategic direction.  So, Kubota asserts, it is definitely a coup d’état.  In Kubota’s experience, it is hard to change a corporate culture that easily, so if Nissan is used to changing strategies by coup d’état, then it will continue to use this mechanism.

Corporate culture will not change just because foreign executives are put in place. Kubota reminds us that for Saikawa to criticize Ghosn so strongly, when Ghosn has not yet been put on trial, is certainly a change from the usual crisis management of Japanese companies.

Kubota sees this singling out of Ghosn by Saikawa, who worked so closely with Ghosn for many years, as a kind of personal insurance.

So where does Saikawa fit in? Kubota has dug out the fact that Saikawa was executive assistant to the President from 1992, Yoshifumi Tsuji. Tsuji had taken over from Yutaka Kume, who had succeeded Ishihara, the instigator of the coup against union Don Shioji.  Saikawa was therefore part of the team that survived the Renault coup.

So it goes round. As Kubota puts it, even in the midst of this coup d’état, there will be people wondering whether they will be the next to be stabbed.

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5 types of Japanese colleagues who are “workstyle reform” blockers

I was surprised to see this explanation of  five generations of “workstyle reform” blockers in the Nikkei Business magazine came with a big red caution notice to readers not to take offence. The categories are not to be taken as hurtful stereotypes but based in research, and do not apply to all people of a particular age group, they explain.

So with that in mind, here’s a precis of the 5 types identified. Even though I’m not Japanese, I’m afraid I do recognise aspects of myself in the “middle manager” category, and am trying not to take offence. Although some of the characteristics are obviously derived from each age group’s experiences of the Japanese domestic economy and society, I am also reminded that there is plenty of evidence each generation around the world has complained about the other generation for the past thousand years or more.

1. The Veteran

Born between 1947-1951, so 66-71 years’ old

  • Work comes first
  • Believes in the virtue of hardship
  • Over strong sense of competition
  • Clings to past experiences of success
  • No intention of changing how they work
  • Gets angry if their way of working is rejected
  • Will oppose competitors’ opinions regardless of content
  • Caught up with “how things were” in the past.

2. The Executive

Born between 1952-1960 so 57-66 years’ old

  • Don’t rock the boat – doesn’t want to challenge
  • Laissez-faire
  • Always talks about “ideally”
  • People are people, I am what I am
  • Rather than change workstyle, is interested in what happens after retirement
  • Uninterested in reform, regardless of content
  • Just wants results, doesn’t make concrete proposals
  • Won’t listen, as retiring soon anyway

3. The middle manager

Born between 1961 and 1970, so 47 to 57 years’ old

  • Superficial
  • Thinks too highly of self
  • Extremely hedonistic
  • Sees everything in cost/benefit, mercenary terms
  • Reform should be done cheerfully, enjoyably without trying too hard
  • Won’t do it if not fun
  • Will oppose anything which increases own workload
  • Tells everyone to do their best and doesn’t do anything themselves
  • Will change the content of any reforms on a whim

4. The shop floor leader

Born between 1971 and 1986, so 31-47 years’ old

  • Pessimistic
  • Not good at interacting with other people
  • Prioritize risk avoidance
  • Strong sense of resignation – “they won’t understand”
  • “If this reform fails, there is no future for me”
  • Won’t promote reform if don’t trust the company
  • Too busy watching others’ reactions to say own conclusions

5. The staff member

Born between 1987 and 1994, so 23 to 31 years’ old.

  • Little sense of crisis
  • Not good at making an extra effort
  • Prioritizes personal life
  • Everything in moderation
  • “Is reform really necessary?” Won’t do it unless feels it’s necessary
  • Let other people take up new challenges or jobs requiring some thought
  • No empathy with the reasons behind the reforms
  • Doesn’t take the company so seriously, ignores directions

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Itochu – a vulture fund business model?

Itochu was stuck at the number 4 position among Japan’s trading companies for many years, until the “genius” Masahiro Okafuji became President in 2010. Thanks to his management style, Itochu even managed to push Mitsubishi Corporation out of the top spot, and recorded its highest ever operating profit in 2017.

According to Diamond magazine, these achievements have their roots in the aggressive “vulture fund” techniques that Okafuji introduced. These are quite different from the usual trading company matching of demand and supply, middleman role. As Diamond magazine describes it, first of all, having taken control through acquisition of shares, the business model and organisation are thoroughly analysed, then the profitable areas are developed so that the share price improves, so that their shares can then be sold off at a profit. If there are any weaker businesses, even if there is a long history and the founder has nurtured them, they are cut away.  Itochu did this with various Japanese fashion and food acquisitions from 2010 onwards.

Of course trading companies can make profit in other ways from their acquisitions, by becoming involved in their supply chains and logistics.  Itochu also often sees brands as commodities, to be merged, sold off or cut back as necessary. This does of course mean that employees attached to those brands are also no longer needed.

Okafuji says with regard to human resource development “we are in commerce. So it is a question of knowing what makes money and what doesn’t”.  Diamond magazine contrasts this with other trading companies such as Mitsubishi Corporation “on the noble path” and Mitsui “focusing on commodities”.

Itochu is in our top 5 Japanese companies in the UK, by number of employees – largely because it acquired garage chain Kwik-Fit in 2011, which has just under 5000 employees. It has other associated businesses too –  as I walked past my local Kwik-Fit garage recently I saw an Isuzu truck (Itochu has a large stake in Isuzu) with Stapleton’s Tyres branding (also owned by Itochu) making a delivery.  It also owns First Response Finance – who provide instalment credit to sub prime customers wanting to buy used cars – and a car dealership chain in Germany.  There are no signs as yet of any selling off of these investments.

 

 

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Using big data to understand how Japan’s business ecosystems have changed

It’s tough for Japanese companies to distil what makes them distinctive. Thanks to lifetime employment, most employees have no experience of other companies to compare and contrast their own company with.

One thing that Japanese companies have been excellent at, and have tried to replicate when they expand overseas, is their collaborative networks of companies or “ecosystems”, working as supply chains or in consortia. A few Japanese companies have realised this is a strength, and are trying to incorporate collaboration with customers or co-creation with partners into their vision and values, to the extent that this is in danger of no longer being a differentiator.

Some new research from Nikkei Business usingTeikoku Databank’s database of Japanese business relationships has come to the rescue with some fascinating insights on how Japan’s business ecosystems have been evolving and how they differ from company to company.

The magazine feature starts with a 2 by 2 matrix to illustrate which big companies and which ecosystems are doing well and not so well over the past 5 years.  Matching this against our Top 30 Japanese companies in the UK and Europe, the category members are as follows:

++ Turnover growth was above average both for the company and its ecosystem:

  • Dentsu
  • Toyota

+- Above average growth for the company but below average growth for its ecosystem:

  • Denso
  • Honda
  • Sharp
  • NYK
  • Nidec
  • Murata
  • Ricoh
  • Fujifilm
  • Astellas

–+ Below average growth for the company but their ecosystems had above average growth

  • Nissan
  • Sony
  • Itochu
  • Mitsubishi Corp
  • Sumitomo Corp
  • SoftBank
  • Marubeni
  • Mitsui

– – The company and its ecosystem both had below average growth:

  • Canon
  • Eisai Pharma
  • Sumitomo Electric Industries
  • Mitsubishi Chemical
  • Mitsubishi Heavy
  • Kao
  • Panasonic
  • Fujitsu
  • Takeda
  • Hitachi
  • Kyocera
  • Toray
  • Mitsubishi Electric

Panasonic stays faithful to its big ecosystem

Unsurprisingly the trading companies have the most companies in their supply ecosystem, but Panasonic beats trading company Marubeni to the number 5 spot with 55,781 companies in its ecosystem.  Mitsubishi Electric is at #9, SoftBank at #11, Hitachi at #12, Fujitsu at #14, Sharp at #19 for having the most number of ecosystem members.

Suzuki Motors, Isuzu, Daihatsu, Daikin, Kubota, Mitsubishi Electric and Sumitomo Corp all stay faithful to their supply chain, whereas Canon, Rakuten and Shiseido have low loyalty to suppliers.

Sharp‘s rationalization post acquisition by Hon Hai is showing – having reduced the numbers of suppliers in its ecosystem by 25% over five years – and it is also the least “faithful” amongst the electronics and IT companies. Fujitsu has also reduced its supplier numbers by around 10%, and Ricoh and Mitsubishi Electric have cut back a little too. Panasonic has remained relatively faithful and with the same number of suppliers over the past five years. Hitachi‘s supplier numbers have also remained steady, but less fidelity than Panasonic.  Canon and Sony have both substantially increased the numbers of companies in their ecosystems – presumably as they have diversified into new areas such as medical systems and entertainment.

Panasonic‘s ecosystem remains balanced across several sectors – manufacturing, ICT, logistics/delivery, retail, educational/professional and construction, whereas there has been a clear shift by Sony towards building up its ecosystem in educational/professional, ICT, retail, and logistics/delivery.  Sharp has shrunk its ecosystem in all sectors over five years apart from logistics/delivery.

Automotive supply chains

The reduction in suppliers that Carlos Ghosn started in the 2000s at Nissan has continued – the number of companies in its ecosystem has shrunk 40% over 5 years and it is also the least faithful of the car brands to its suppliers. Only Suzuki and Daihatsu have expanded their ecosystem, and are also relatively faithful to suppliers, as is Honda. Honda, Toyota and Mitsubishi Motors have all shrunk their ecosystems by around 10%, Subaru by 20% and Mazda by 30%.

 

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Making sure the Toray brand cuts through in the global fibre industry

Still from Toray’s Blue Butterfly campaign

“Intel Inside” translated brilliantly into Japanese as “Interu Haitteru”.  Now Toray, Japan’s largest synthetic fiber manufacturer and another successful Japanese B2B company that nobody has heard of outside of Japan, would like to do the same thing by having “Toray Inside” tags for products containing Toray fibres.  According to Kei Shimabara, Director of the Toray Marketing Planning Office in the Nikkei Style, this collaborative marketing has worked with Boeing’s 787s and UNIQLO’s Heattech clothing, but has not permeated much beyond that.

As Shimabara acknowledges, Toray is not a well known brand outside of Japan and this needs to be worked on in order to expand Toray’s business overseas.  Shimabara sees Toray’s marketing as inseparable from sales – there is not a separate marketing department for each business unit at Toray.  Sales representatives are also supposed to be marketers.

The supply chains are long in Toray’s businesses, and start with Toray’s textile fibres and resins – with many B2Bs before reaching the C(onsumer).  They have several plants across Europe, some making luxury car interior fabrics, some making carbon fibre for the blades of wind turbines.  In the UK their factory weaves polyester and nylon fabrics for fashion, industrial and medical uses.  Europe is bundled together with “North America and other areas” in the annual report – representing around 16.6% of revenues – the same proportion as China and “other Asian” markets, with Japan making up the other half.

Presumably North America and Europe are combined as a result of the legacy of Toray acquiring American company Zoltek in 2014, and with it some production in Europe. This acquisition will make it even more critical that employees as well as customers understand what Toray stands for. Shimabara says he is bringing together company wide project teams, including HR and PR to work on this.  “Digital marketing is going to be a powerful tool” says Shimabara, “but, embarassingly, I have not touched it up until now, so have just started studying it.”

The Toray website has some nice TV ad videos, with the theme of a blue butterfly and “Materials can change our lives” but the current annual report has the rather generic “Toray Way” on its cover, and uses a corporate mission statement that I have seen in many, many other Japanese technology companies of “Contributing to society through the creation of new value with innovative ideas, technologies and products”. It looks like Mr Shimabara has his work cut out to cut through.

 

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What is a Japanese company?

I had anticipated the “do you have any questions for us?” at a recent final interview for a non-executive directorship for an investment trust focused on Japan.  I was advised by another experienced non-executive director to think of a thought provoking question, to show the board I was capable of bringing a different perspective, something they had not thought of before.

On reflection, I probably erred too far on the “thought provoking”.  It was a genuine question, however, and I was genuinely interested in their answer.  As the fund’s strategy was to invest only in Japanese companies, how do you define a Japanese company?

Listed in Japan or majority of business in Japan?

The fund defined it as being listed on a Japanese stock exchange.  This may seem a clear enough definition, but does this mean Sharp, now owned by a Taiwanese company, Hon Hai, is a still a Japanese company?  How about Hitachi Power Tools and Calsonic Kansei, now both owned by American buyout firm KKR?

Other Japan focused funds also invest in companies that are listed outside Japan, so long as a significant majority of their business is in Japan.  But if percentage of sales in Japan is the criterion, then there are plenty of Japanese companies who are listed in Japan, for whom a majority of their business is outside Japan – Takeuchi for example exports 95% of its diggers to overseas markets and 68% of Sony’s business is outside Japan.

Avoiding ‘country risk’

Why does it matter?  It matters to the boards of such funds, because if they define “Japanese” as Japan listed or majority of business in Japan, then clearly they need to consider the “country risk” of Japan and ensure the strategy is adjusted, or mitigation is put in place accordingly. 

They need an expert in Japanese economics or politics to read the entrails on whether Prime Minister Abe will be re-elected as leader of the LDP in September, and if so whether he will be in a strong enough position to carry on with his “Three Arrows” of reform.  They need to be able to judge whether the recent dip in Japan’s GDP growth is temporary, or likely to be revised upwards in June, as often happens. They might need some inside track on trade friction around the world and how this might affect the Yen.

But if the strategy is to invest in specific Japanese companies with long term growth potential, then this is not the same as investing in the Japanese economy or a Japanese index tracker.  The aim should be to look for companies that will succeed no matter what happens to the Yen or Abe.

Managed by Japanese executives?

Specifying that those companies should be Japanese indicates to me that there is thought to be something unique to Japanese companies that makes them worthy of special attention.  So should it be that the management of the company is Japanese?  In which case, how should Takeda be classified – likely to become even more dominated by non-Japanese executives after the acquisition of Shire?

What about other companies who, like Takeda, have substantial overseas business acquired through acquisition, but manage it mostly through an international HQ based outside Japan, such as Japan Tobacco (Swiss HQ) or Dentsu (Dentsu Aegis Network in the UK)?

Or how about SoftBank, founded and run by Masayoshi Son, ethnically Korean and educated in the USA?  The original telecoms business is clearly Japanese, but what about ARM in the UK and Sprint in the US – not to mention Softbank’s massive Vision Fund which notably is not investing much into Japanese companies at all?

Where Japanese companies have the edge…

I propose some further, admittedly fuzzier definitions of “Japanese”. Firstly, the business should reflect an aspect where Japan has an “edge” – a comparative advantage.  For example, any business that is focused on the elderly, as Japan has the most rapidly ageing population in the world, with over 25% over the age of 65.  Or a business which has evolved from Japan’s traditional manufacturing and craftsmanship strengths, what is known as monozukuri in Japanese – highly sophisticated machine tools, robotics and components.

But I think there is something more than that to being “Japanese”.  It’s about the corporate culture and governance – a different model to the Anglo-Saxon shareholder value maximization model.  Investing in a Japanese company should be for long term capital growth rather than a quick dividend, as well as some satisfaction that the investment is going into a company which does not engage in creative destruction type capitalism. 

…is also where the risks lie

And this is where the risks also lie.  Japan’s stakeholder capitalist model means job security, but also hidden underemployment and low productivity.  Jealous guarding of corporate reputation can mean cover ups when something goes wrong.  Strong loyalty to other members of the corporate family can mean deference to seniors without questioning or challenging orders given.  Extreme risk aversion can mean opportunities missed.

Understanding and mitigating these risks is not something that can be resolved by an informal chat with a contact in a ministry, nor by looking at exchange rate forecasts and putting some hedges in place.

This was the conversation I wanted to have, and where I thought I could add value, but that’s the trouble with the “any questions for us” coming at the end of the interview.  As the board chair said – fascinating question, but you’d need a whole afternoon or a seminar to thrash it out.  And no, I did not get the job.

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