Category: M&A

Brexit and Japanese jobs in the UK – growing by acquisition or “new” jobs?

Those looking for “despite Brexit” good news may be reassured that employment in the UK by the biggest Japanese companies has grown by 22% since 2014/5, right in line with the growth in Japanese jobs across Europe, Middle East and Africa (EMEA).  About a quarter of the 750,000 people we estimate work for Japanese companies in the region are working in the UK, and so far there is no obvious divergence between the UK and the rest of EMEA in terms of overall job growth.

Big ticket acquisitions are the main driver of Japanese growth in the UK

But as we pointed out in previous posts looking at the trends across Europe, a distinction needs to be made between “new jobs” created in EMEA by Japanese greenfield investment, and investments which are acquisitions of existing jobs.  Eastern Europe is the beneficiary of the former, particularly for the automotive sector, whereas the UK has been the target of the latter with big ticket acquisitions like SoftBank acquiring ARM, Mitsui Sumitomo acquiring Amlin, Sumitomo Rubber acquiring Micheldever, and NEC acquiring Northgate Public Services as well as Outsourcing acquiring various staffing and outsourcing companies.

Where are the “new jobs”?

These acquisitions account for the new entrants to the Top 30 ranking we have compiled below. They push out Fujifilm, Sumitomo Corporation, Japan Tobacco (who shut their factory in Northern Ireland last year) and Toshiba. The original Top 30 in 2014/5 have grown a more modest 10% if the acquisitive newcomers are not included.  One of the highest climbers from the original 2014/5 ranking is the main Japanese creator of new jobs in the UK- Hitachi – in particular via their rail manufacturing and assembly plant at Newton Aycliffe.

There has not been a decline in automotive sector jobs in the UK – yet – however.  In fact quite the reverse – there has been some growth in jobs in all three of the big Japanese car companies. But the trend is clear, as pointed out in previous posts, that even without Brexit, the drift of investment and jobs in the automotive sector is eastwards and to Africa.  It’s easy to see how British people in those areas where Japanese automotive supply chains are active could blame the EU for job losses. Even though there actually weren’t that many EU grants enabling Japanese companies to transfer production from the UK to Eastern Europe – despite the rumours – merely by being members of the Single Market, and having lower labour costs, Eastern European countries are an obvious destination for new manufacturing investment.

Will Japan’s investment in the UK services sector be Brexit proof?

The investment in the UK by Japanese companies over the past three years has largely been through acquisitions in the services sector. This is not surprising, as services are 80% of the UK’s GDP and the UK’s comparative advantage in the region. It is also relatively Brexit proof in the sense that services sector investment will not be directly affected by any supply chain disruptions. Clearly if the UK economy takes a hit from Brexit, however, this will dampen demand for services. There has also been a shift of regional headquarters away from the UK by Panasonic and Sony and others, and of financial services companies, but as yet this has not hit UK jobs.

Eastern Europe has also been attractive to Japanese companies for business process outsourcing. Although Fujitsu is still – just – the top employer in the UK, employee numbers have dropped 29% – and there are now 13,000 people working for its service centres in Poland.  NTT and its subsidiary NTT Data has also shot up the Top 30 both for the UK and the EMEA region – again through acquisitions – and has decided to base its new global ex-Japan headquarters in the UK.

Infrastructure, energy, transport should be the future for Japanese jobs in the UK

The UK’s strength as a global services provider will not disappear overnight, however hard the Brexit. But it’s hard to imagine how the kinds of secure, high quality automotive manufacturing jobs that those who voted for Brexit might have wanted to see return to the UK will come back, however soft the Brexit.  The potential sunlit upland is in infrastructure – energy and transport.  These sectors were needing investment regardless of whether the UK is in or out of the EU and are not so reliant on just in time supply chains across the region. Transport, environment and energy are areas where cooperation and financing on an EU-wide  basis makes business and environmental sense though. But unfortunately Brexit has provided a distraction that has resulted in Hitachi freezing its Horizon nuclear power projects in Wales and Gloucestershire from lack of government financial support, and the recently called review of HS2 must also be giving Hitachi’s rail business and other Japanese executives cause for concern. Risk averse Japanese companies are not going to want to make multi million investments in infrastructure projects in a country which is politically unstable and unreliable.

 

Top 30 Japanese employers in the UK – 2015-8
Rank 2017/8 Rank 2014/5 Company UK employees 2017-8 UK employees 2014/5 % change UK 2014-8
1 1 Fujitsu 8,351              11,694 -29%
2 2 Nissan 8,190                7,440 10%
3 9 Hitachi 7,210                2,747 162%
4 4 Honda 7,062                5,268 34%
5 3 Itochu* 6,737                6,779 -1%
6 14 Dentsu* 4,394                2,127 107%
7 7 Ricoh 3,506                3,331 5%
8 6 Toyota 3,467                3,352 3%
9 5 Sony 3,410                3,777 -10%
10 10 Canon 2,828                2,643 7%
11 8 Mitsubishi Corp* 2,815                3,085 -9%
12 18 NTT 2,569                1,779 44%
13 13 Marubeni 2,549                2,137 19%
14 – Mitsui Sumitomo & Aioi Nissay Dowa 2,384                   305 682%
15 15 Mitsubishi UFJ Financial Goup 2,310                2,100 10%
16 11 Nomura 2,208                2,628 -16%
17 19 Calsonic Kansei 2,189                1,571 39%
18 12 NSG 2,140                2,348 -9%
19 16 Denso 1,986                1,930 3%
20 17 NYK Group 1,911                1,780 7%
21 – Sumitomo Rubber 1,762                     92 1815%
22 – NEC 1,725                   297 481%
23 25 Konica Minolta 1,657                1,278 30%
24 23 Mitsubishi Electric 1,610                1,344 20%
25 – Outsourcing 1,595                     10 15850%
26 22 Olympus 1,589                1,368 16%
27 21 SMFG 1,569                1,372 14%
28 29 Mizuho 1,434                1,060 35%
29 26 Brother Industries 1,411                1,254 13%
30 27 Unipres 1,396                1,095 27%
92,568 76,896 20%
*Estimates for EMEA/Europe as official figures not available
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Top 30 Japanese companies in Europe – who’s in, who’s out and which countries are benefitting

In my previous post I looked at the growth drivers or otherwise at the top 5 largest Japanese companies in Europe, Middle East and Africa (EMEA) – Yazaki, Sumitomo Electric Industries, NTT Data, Fujitsu and Canon.  Overall employee growth for the largest Japanese companies in the region has been a healthy 22% over three years (see table below). But of the top 5, only NTT Data has beaten this average.

Yazaki and Sumitomo Electric Industries are automotive manufacturers who have consolidated their position as the biggest employers by further greenfield investments in new plants in Moldova, Serbia and Bulgaria over the past three years.

Of the other three, IT services company NTT Data has more than doubled in size over the past three years in the region through acquisitions. Fujitsu, however, has shrunk as it shifts from hardware manufacture and sales to IT services. Canon has grown by 15%, partly through taking on Toshiba Medical Systems.

Toyota group strength in Europe

The rest of the Top 30 shows a similar pattern – the automotive sector growing through greenfield investment in new or expanding plants, with the electronics/ICT sector growing through acquisition, or shrinking through consolidation and moving towards B2B in automotive and medical fields.   Panasonic more than doubled in size in the region, through acquiring Spanish automotive company Ficosa and Belgian technology company Zetes.

Honda’s employee total in EMEA hardly changed over three years, Nissan’s only grew 2% whereas Toyota grew 16% – which shows something about the relative fortunes of those car brands in the region recently.  Toyota will presumably expand further once it fully takes over the joint venture factory with PSA in the Czech Republic.  Other Toyota group companies have also expanded – such as Denso, Toyota Industries and Toyota Tsusho via its French/African trading company CFAO acquired in 2012.

Bridgestone employee numbers have grown 43% partly through acquisitions in France but also expansion and greenfield investment in Eastern Europe and Russia. Japanese automotive glass manufacturers (who also make architectural glass) Asahi Glass grew 33% but Nippon Sheet Glass only expanded its employees by 4% – still recovering from the bad timing and heavy debts of its acquisition of Pilkington Glass in 2006.

Fastest growing, fastest shrinking companies

The fastest growing Japanese employer in the region was electric motor manufacturer Nidec – more than tripling in size over the past three years, having been on a spending spree around the world – with around 25 acquisitions, many of them in Europe, since 2015. Nidec is the only new entrant into the top 30 over the three years, pushing out Fast Retailing (owner of Uniqlo, Comptoir des Cotonniers, Princesse TamTam etc). Fast Retailing grew too, opening new Uniqlo stores in Spain, Belgium, Sweden and the Netherlands in the past couple of years, with further stores to come in Italy and Denmark.

Sony and Ricoh have both shrunk by over 10%, however, with neither making any major acquisitions. Konica Minolta, which grew 25%, acquired various IT services providers in Germany, France, UK and the Czech Republic.  Bubbling under the Top 30, at #31, NEC also grew rapidly, by 47%, after the acquisition of IT services companies like KMD in Denmark and Northgate Public Services in the UK.

European hot spots

Climate change has sparked investments from Mitsubishi Electric and Daikin in European air conditioning manufacturing and alternative energy production.  Mitsubishi Electric has an air conditioning factory in Scotland employing 1000 people and expressed quite clearly its concerns regarding Brexit to a parliamentary committee in 2018 (by the way, I think there must be a typo in the submission, as it says 20% of its UK employees are EEA, which is considerably more than the figure of 13 they state).  In December 2017 it announced it had started production of airconditioners at its new factory in Turkey.

So yes, it’s true that the UK has taken a ‘lion’s share’ of Japanese investment in recent years and therefore Japanese company employment in the EU. I estimate around 160,000 jobs out of 750,000 or so in the region (21%) are in the UK. But this share of investment is largely due to big ticket acquisitions by Japanese companies in the UK (SoftBank/ARM, MS Amlin etc) and also that investment in real estate is counted as “greenfield” investment.

Around a quarter of Japanese jobs in the region are in the automotive sector, and they’re moving eastwards

If we look at greenfield investment, largely in manufacturing, generating thousands of new jobs, with the exception of Hitachi’s rail factory in the UK, this has been going to Eastern Europe, CIS, Turkey and North Africa.  The automotive sector is particularly key. I estimate around 250,000 of the 750,000 or so people employed by Japanese companies in the region are in the automotive sector.  Brexit is giving extra impetus to automotive and other supply chain manufacturing jobs to accelerate their move eastwards.

Top 30 Japanese employers in EMEA 2018
Rank 2018 Rank 2015 Company Total global employees 2017/8 no in EMEA 2017/8 % in EMEA 2017/8 Employee growth 2015-2018
1 1 Sumitomo Electric Industries 255,133 60,537 23.7% 7%
2 2 Yazaki 306,118 57,661 18.8% 19%
3 9 NTT Data 118,000 36,000 30.5% 140%
4 3 Fujitsu 140,365 27,000 19.2% -8%
5 4 Canon 197,776 25,623 13.0% 15%
6 5 Toyota 369,124 22,147 6% 16%
7 18 Panasonic 274,143 21,931 8% 116%
8 13 Bridgestone 142,669 17,510 12.3% 43%
9 10 Asahi Glass 53,224 17,400 33% 19%
10 8 Toyota Tsusho* 56,827 17,000 29.9% 10%
11 7 Nissan 138,910 16,807 12% 2%
12 11 Denso 171,992 16,688 10% 15%
13 6 Ricoh 97,878 16,680 17.0% -10%
14 16 Hitachi 307,275 16,000 5.2% 36%
15 14 JT Group 57,963 15,410 26.6% 27%
16 30 Nidec 107,554 12,917 12% 223%
17 15 NSG 26,957 12,500 46% 4%
18 17 Dentsu* 62,608 12,176 19.4% 11%
19 21 Toyota Industries 61,152 11,837 19.4% 48%
20 12 Sony 117,300 11,730 10.0% -11%
21 19 Konica Minolta 43,299 10,825 25.0% 20%
22 24 Kyocera Group 75,940 10,024 13.2% 40%
23 25 Daikin 70,263 9,227 13.1% 36%
24 20 Honda 215,638 8,591 4.0% 0%
25 23 JTEKT 49589 8,128 16.4% 12%
26 26 TDK 102,883 8,045 7.8% 20%
27 22 Itochu* 102,086 7,382 7.2% -5%
28 27 Olympus 35,124 7,353 20.9% 15%
29 31 Mitsubishi Electric 142,340 7,300 5.1% 46%
30 28 Mitsubishi Corporation 77,476 7,189 9.3% 19%
TOTAL 3,977,606 529,619 13.3% 22%
*based on estimates as official figures not disclosed
pernilledotrudlinatrudlinconsultingdotcom"}">© Rudlin Consulting Ltd 2019

If you would like more detailed analyses, by sector or individual companies, please contact pernilledotrudlinatrudlinconsultingdotcom

Pernille Rudlin’s latest book, Shinrai:Japanese Corporate Integrity in a Disintegrating Europe is available on Amazon.

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The top 5 Japanese companies in Europe, Middle East & Africa all have headquarters in the UK

Over half a million people worked for the 30 largest Japanese employers in Europe, Middle East and Africa (EMEA) in 2018, 22% more than in 2015. Going by the research we have done on the main host countries of the region (Germany, UK, France, Netherlands), this would indicate there are around 750,000 employees of Japanese companies in EMEA.

The top 2 by a large margin are Sumitomo Electric Industries and Yazaki, both making automotive components such as wire harnesses.  They both have multiple manufacturing sites employing thousands of people, mainly in eastern Europe, north Africa and South Africa.

Yazaki‘s EMEA headquarters are in the UK and Germany.  The UK side supervises branches and subsidiaries across Europe, with R&D and customer service centres across the UK and the EMEA region. Yazaki Wiring Technologies European HQ is in Cologne, with subsidiaries in Eastern Europe and Turkey. Yazaki’s EMEA workforce has grown by nearly 20% since 2014/5 with recent greenfield investments  such as a new factory in Serbia and a third plant in Bulgaria.

Sumitomo Electric Industries also has European headquarters in the UK and in Germany (the Bordnetze side of the business). The Sumitomo Electric Wiring Systems operation in the UK originates in the acquisition of Lucas Industries in 1999. There is no longer any manufacturing in the UK but it supervises factories in Germany and Italy, with Sumitomo Wiring Systems Japan directly owning factories in Eastern Europe and Africa. Similarly the German HQ arises from the acquisition of Bordnetze from VW and Siemens in 2006. Sumitomo Electric Industries’ workforce in EMEA has grown 7% in three years, including acquisitions in Germany and a new plant in Moldova.

Sumitomo Electric Industries and Yazaki were the top 1 and 2 in 2014/5, but the third largest Japanese employer in EMEA, NTT Data, was only the 9th largest three years ago.  NTT Data has grown through acquisitions such as Dell’s services business, Everis, MagenTys and Keane. NTT Data EMEA is based in the UK, owning subsidiaries across Europe. Again, there is a split regional HQ, with NTT Data Europe GmbH owning Itelligence – but not for much longer.  The parent company, NTT is undertaking a major restructure of its business, uniting NTT Data EMEA, Everis and itelligence as part of EMEA & Latin America region, moving to a matrix rather than vertical organization. By 2020 NTT intends to have 2 companies under its new NTT Inc holding company for its non-Japanese business – NTT Data and a merged NTT Communications/NTT Security/Dimension Data organisation.  The global headquarters for NTT Inc will not be in Japan but in London.

Dropping down a place from 3 to 4 over the past 3 years is Fujitsu, another Japanese IT major, in the awkward position of being both a supplier and competitor to NTT.  Fujitsu’s presence in Europe originates from its acquisition of the UK’s ICL in 1990 and a joint venture with Siemens, which it later bought out.  Fujitsu’s workforce in EMEA (or EMEIA as it names it, adding in India) has dropped by 8% since 2014/5 and looks to shrink further in 2019 and 2020 with the closure of the last PC manufacturing plant anywhere in Europe, in Augsburg, Germany.  As it shifts to IT services business, its workforce in its global delivery centres and service desks is growing in lower cost but skilled, multilingual countries in the region such as Portugal, South Africa, Poland, Morocco and Russia.

Canon was also pushed down a place to 5 from 4 three years’ ago by NTT Data’s rise, but its workforce in EMEA has grown around 15% over the period. Canon acquired Dutch company Oce in 2009 and Canon Europa is the Netherlands based holding company which owns Canon Europe in the UK, acting as the functional and marketing headquarters for the region.  Canon has grown partly through taking on Toshiba’s medical systems business and also through the acquisition of Sweden based Axis Communications in 2015.

From a UK perspective, whilst it’s reassuring that all of the top five Japanese companies in the region have some kind of regional headquarters in the UK, this does not mean that largest proportion of the jobs they have generated is in the UK.  In manufacturing the drift is eastwards and southwards, and even for IT services, business process outsourcing and support jobs are shifting to Eastern Europe, Portugal, Africa and India. As they all have an EU based alternative headquarters, it is unlikely there will be any change in the HQ structure post Brexit, rather that virtual management teams dispersed across a very broadly defined region will become even more common.

Part 2 of this analysis continues here.

Pernille Rudlin’s latest book, Shinrai:Japanese Corporate Integrity in a Disintegrating Europe is available on Amazon.

 

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Is Sharp still a Japanese treasure?

Sharp Corporation Chairman and President Tai Jeng-wu was the second in command at Taiwan’s Hon Hai when it acquired Sharp in 2016.  His cost cutting organisational reforms have turned the company’s results around in a “V” shaped recovery.  He is now hurrying ahead with restructuring the business portfolio.  In an interview with Nikkei Business he says Sharp is “Japan’s treasure” and is at pains to point out how influenced he has been by Japanese teachers in the past.  Japan and Taiwan continue to have good relations (reinforced by a common threat of China, hinted at in this interview with the dig at unfair competition from state owned companies), and many Taiwanese speak excellent Japanese.

He says that unlike Carlos Ghosn, he did not arrive at Sharp with a posse of executives.  He feels that the reforms are still only half way but he wants to work alongside Sharp employees – rather than a top down imposed change.

Asked what was the problem at Sharp, he said “it is not for me to say, but I suppose the crisis occurred when there were problems with management in the 2010s – when people who have only had experience in one particular technical area or business become president.  You need to have a general overview to be a top executive, so when there was a crisis they were unable to respond. How I fixed the $2.5bn loss was to cut costs by around $1.7bn and then cut back investments and with some transient profits, we were back in the black.”

Don’t be a big fish

“You have to develop people step by step.  When I started at Sharp, I said when announcing my strategy that “Sharp should not be a big fish, but should aim to be a fast swimming fish”. So I kept asking every day for things to speed up.  I set some rules for developing successors.  I lowered the limit requiring presidential approval to Y3m ($27,000).  That was to ensure I would be aware of all the company’s problems. I then increased the limit to Y20m ($184,000) in 2018 when I put the CEO structure in place and this year I increased the limit to Y100m.”

“I will stay on as chairman of Sharp until March 2022.  My wife and family want me back in Taiwan though. All the time from 2016 I have been looking for a successor.  I even asked a Japanese consultant to help, but I cannot find one.   I want the successor to be Japanese – it doesn’t matter if it’s an internal or external appointment. Maybe it could be someone from Hon Hai even.  They should be able to manage in the current harsh environment, covering a wide range of businesses and find synergy with Hon Hai.  It is the second criterion that makes finding the right person difficult.”

Japanese managers became bureaucrats

“It used to be that Japanese management of factories and businesses were strong, and my teachers were all Japanese. But then Japan went into a recession and the founder managers all disappeared, and managers became bureaucrats. That is why management strength declined.  Japan is now only strong in parts and materials. ”

Sharp’s employee levels are back to the same as before the management crisis.  “There were two early retirement drives during the crisis, and a lot of good people left.  Those who remained when I joined the company in 2016 were one of three types – highly capable and loyal, those who couldn’t find another place to go and those where were waiting to be pushed. I actually never cut employees. In fact we need to increase our employees – we had some influxes from when we took over Toshiba’s PC business and other M&A.”

“I am not a god, I just improved everything step by step”

“I renegotiated the contracts for solar battery procurement and saved around $100m. I have also brought the Sharp brand back in house for the US TV production business.  A brand is like a person’s name. Selling it is wrong. During the crisis Sharp sold off its precious buildings for $188m and then spent $30m on out of date computing.   I am not a god, I just improved everything step by step. I was taught to do Horenso (keeping bosses in the loop) and check everything thoroughly, not just sign off easily by Japanese teachers.”

I am now promoting management based on data, and a shift to B2B (business to business). B2C (consumer) business is currently 65% of our turnover, I want to make it 50/50. The structure of trade in B2C is unfair – companies like ours in a free trade country have to compete with state owned companies who don’t have to invest or write off so much. That is why Japan’s IT/electronic companies’ share is falling – it’s a structural problem.   In B2B it is a fairer fight. W have built a good ecosysytem over many years, so we have a good chance.

A Rising Sun Alliance of Japanese electronics companies

“I think there should be a Rising Sun Alliance of Japanese companies. There are a lot of Japanese electronics manufacturers but I don’t see that they will merge -t here is too much pride. I do have to be careful as Hon Hai is not a Japanese company. I am reflecting every day on how to manage employees. If I am criticised, it is not just my, but Taiwan’s pride at stake.”

“Sharp will last over 100 years.  It is a treasure of Japan. I would like the brand to last another 100 years. I come to the office every day before 7:00am and give a bow to the statues of the founders in the front entrance. Sharp is a treasure to me too.”

Nikkei Business comments that there is no doubting his sincerity and dedication – apparently he lives in a single man’s dormitory and walks round the factory at 5am in the morning thinking about Sharp.  He is at pains to seem almost more Japanese than the Japanese in this. But, the Nikkei wonders, will this be enough to succeed in the new territory for him and Sharp of B2B platform business.

 

 

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The successes and failures of Japan’s era of big overseas acquisitions

The era of Japan’s big overseas acquisitions began with domestic mega M&As in the 1990s according to Nikkei Business magazine.  Following the bursting of Japan’s economic bubble in 1990, a wave of M&As happened in the financial sector, giving birth to Mizuho from Fuji Bank, Daiichi Kangyo and the Industrial Bank of Japan and Sumitomo Bank and Sakura Bank producing SMBC. In the steel sector with NKK merging with Kawasaki Steel and becoming JFE and in the pharmaceuticals sector with Yamanouchi and Fujisawa merged to become Astellas.

The key concept for these M&As in the 1990s was “restructuring” – to rationalise the back office and integrate R&D. Then in the second half of the 2000s came a wave of overseas acquisitions, to counter the business impact of the shrinking, ageing population of Japan by growing overseas but also to benefit from further restructuring and rationalisation.

Mega overseas acquisitions of the 2000s

In 2007 Japan Tobacco acquired the UK’s Gallaher from RJR, becoming the third biggest tobacco company in the world. In 2006 SoftBank acquired Vodafone Japan and then the US company Sprint Nextel, then British ARM Holdings in 2016. Takeda acquired US Millennium Pharmaceuticals in 2008, then Swiss Nycomed in 2011, with the biggest M&A ever by a Japanese company, acquiring Ireland’s Shire in 2019.

“Growing overseas means the development of our human resources has become an urgent necessity” said the President of Takeda in 2006, Yasuchika Hasegawa. Hasegawa  was seen as “an alien from outerspace” for his dry, rational management style, arising from many years working in the USA.  Although Takeda had been the biggest pharmaceutical company in Japan for some years, it only ranked around 17 in the world before its acquisition spree and urgently needed to find new drug development sources. It felt it was lagging competitors.

The need for global management skills

Hasegawa decided to globalise the company internally by recruiting a foreign successor to himself in 2014 – Christophe Weber from GlaxoSmithKline.  Three out of the seven current Takeda directors are not Japanese.

Japan Tobacco‘s managers sent overseas after the Gallaher acquisition found themselves caught between overseas executives determined to defend their patch with rational, logical arguments about productivity, logistics and profitability. After years of painful discussion, it was agreed to close the factory in Northern Ireland.  Even now, says Masamichi Terabatake, the current President of Japan Tobacco, a Japan based executive needs to be prepared to travel around the world regularly to discuss strategy with local executives. “You need to keep global staff motivated. Investment and marketing cannot be left vague, they have to be quantitative so they can be transparently discussed. That’s probably why executives in the West are a bit younger!” he says.

NSG acquired UK’s Pilkington in 2006, becoming heavily indebted to do so. From being very domestic, it became a company whose sales were 80% overseas. Unfortunately this proved to be terrible timing as the automotive and architectural glass market crashed after the Lehman Shock.

Many of the acquirers also struggled because they did not have managers with experience of managing overseas businesses.  As Nikkei Business magazine says, mega M&A means mega complexity for which plenty of preparation and a high level of management know-how, with the ability to spread this know-how horizontally and vertically is needed for success.  It’s still not clear how far Japanese companies have progressed in this.

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The enduring Japanese family firm

I attended a Japan Society talk last month on shinise  (Japanese family firms) – given by academics Innan Sasaki and Davide Ravasi.  Sasaki and Ravasi argued that shinise have survived over 100 years, by keeping small and focused on traditional crafts like sweet making, sake brewing, and textiles.  They are very much embedded in the society and community in which they operate – the highest concentration is in Japan’s old capital, Kyoto.  In return for their commitment to the local community, they gain a social status and support from the community.  They are meant to have a higher moral purpose than pure profit and therefore do not seek to take risks and grow much beyond their current geography and sector – which means they are more resilient to external economic shocks.  When downturns happen locally, they survive through the strength of local support. This contrasts with what Sasaki and Ravasi call “instrumental” firms, who exist for a purely economic purpose.

Even large Japanese multinationals behave like Kyoto shinise

Listening to their descriptions of shinise‘s motivations and behaviours, I realised they were very similar to the way I describe bigger, multinational Japanese firms in my seminars.   Even though Japanese multinationals have taken the risk to expand overseas, and are often no longer owned by the founding family, the ethos of having a higher moral purpose than shareholder value, of corporate contribution to society and strong risk aversion to ensure longevity still endures.

And like the shinise, the darker side is the sacrifices needed to be regarded as a proper member of the family firm and the difficulty of becoming a senior manager if you were not born into it – or at least recruited straight from university like Japanese headquarter permanent staff.

Nikkei Business magazine had a feature last month on family firms in Japan showcasing research that family owned firms in Japan perform better than non-family owned firms in terms of Return on Assets. “They don’t hold on to unnecessary assets” says Professor Yasuhiro Ochiai of Shizuoka University.

Japanese family owned multinationals that have performed well

DMG Mori is still owned by the Mori family and has been particularly active recently in M&A overseas since the current Mori took over as President in 1999, most notably in their merger with German machine tool manufacturer DMG.  Apparently quite a few of DMG Mori’s employees come from the wider “family” of customers and suppliers.

Of course the most famous Japanese company still managed by a founding family member is Toyota.  However the current President Akio Toyoda is adamant that the company name is Toyota, the family name is Toyoda, and Toyota is not a Toyoda family company, “it’s everyone’s company.”

Those that are listed on the Tokyo Stock Exchange and also active in Europe were:

  • Suntory (Torii family – founded by Shinjiro Torii in 1899) – chairman is from the founding family.
  • Aisin (automotive parts maker in the Toyota group founded in 1949 – chairman is part of the Toyoda founding family)
  • Shimano (Founded 1921, president is a Shimano)
  • DIC (Dainippon Ink) founded in 1908 by Kijiro Kawamura, a Kawamura is on the board of directors

And how to avoid toxic family rows

It’s not all joy in a family of course. Nikkei Business also looks at the family rows that have affected the performance of companies like Idemitsu (petroleum company) founding family shareholders fighting a merger with Showa Shell and the rebellion against founding family member Yoichiro Ushioda and chairman by executives of LIXIL (owners of German bathroom fittings company Grohe).

Nikkei Business’s prescription for avoiding trouble is:

  1. Frequent communication between family members
  2. Treat family members who are employees the same way as other employees in terms of company regulations
  3. Don’t withhold information for family only, be transparent in management
  4. Don’t appoint a successor from the family if there is noone suitable
  5. Keep family assets and company assets separate
  6. When there is a generation changeover, keep criticisms to yourself
  7. Avoid too many family members as employees
  8. Ensure a structure is in place to stop family members going rogue

For more on what being a “family” means for Japanese firms and the non-Japanese employees that work for them, this was one of my most popular articles in recent years.

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Fujitsu and NEC: same woes in Japan, diverging in Europe and Africa

Increased sanctions on Huawei should benefit Japanese ICT (Information & Communication Technology) companies NEC and Fujitsu, yet both seem to be struggling after years of restructuring, says the Nikkei. They were at the core of what used to be known as the Den Den Family – suppliers to Japan’s former Ministry of Post and Telecommunications, now NTT.  However their telecoms business seems to be undermining rather than helping their restructuring efforts.

“Fujitsu is no longer a manufacturer, because of its shift to IT services, and NEC has lost its strengths in technology, they are no longer globally competitive”, says an NTT executive.  NTT was not using Huawei for its DoCoMo mobile network business anyway, so this will not be a source of new business.

Years of restructuring with little result

NEC started an early retirement program in Japan for employees over 45 in 2018, with 2,170 employees leaving at the end of the year. Fujitsu also transferred some of its Japan based employees who are not in customer facing divisions to customer facing divisions, resulting in 2,850 people leaving the company by March 2019.

Both companies have sold off businesses in areas such as semiconductors, smartphones, PCs and internet service provision.  Compared to 2000, when both achieved operating income of Y260bn, NEC’s revenues have dropped 42% and Fujitsu  has fallen by 25% and operating income has fallen by half or more. Employee numbers have dropped by 29% at NEC and 30% at Fujitsu.

Neither company have achieved operating profit margins of over 5% since 2000, despite repeated restructuring.   Market capitalization is down 80% for NEC and 73% for Fujitsu.

The new president of Fujitsu, Takahito Takada, recognises that there are still issues that need to be resolved, domestically and overseas.  His predecessor Tatsuya Tanaka had also tried to increase operating income but delays in restructuring in Europe meant this was not achieved.  NEC has also repeatedly missed profit targets.

Reluctance to merge, difficulty in partnering for 5G

Both NEC and Fujitsu have been focusing more on developing IT systems for private and public sector clients, and telecoms is becoming more peripheral to the business.  There are moves afoot to integrate the optical transmission equipment business of both companies into one unit that is globally competitive, involving the Japanese Ministry of Economy, Trade and Industry, the Ministry of Internal Affairs and Communications and NTT.  However, given that NEC and Fujitsu have always been competitors, and have never integrated any of their businesses before, there is a strong reluctance on their part to proceed.  Furthermore, NTT itself says if the result of such a merger is continuing high prices, then this will not be viable.

Even though NTT was the first in the world  to introduce 3G, Fujitsu and NEC did not capitalise on this or for 4G, and were outstripped by Huawei. The question now is whether they can catch up with 5G.  Both are seeking partners overseas – NEC with Samsung and Fujitsu with Ericsson.  Previous partnerships like this for 3G and 4G, with Alcatel-Lucent, Siemens and Nokia did not bear fruit. NEC is hoping to get business from Rakuten’s entry into mobile phone services, setting up a communication network with US startup Altiostar Networks.

Unable to compete with Google or Microsoft in IT services

Even in the core business of IT systems, with Industry 4.0, AI and IoT, Fujitsu and NEC do not seem to be showing any signs of new growth sources.  Amazon is eating into their cloud offerings and it is difficult to compete with the massive R&D budgets of companies like Google.

NEC is trying to get away from reactive, passive IT system building based on customer requests. They are investing in anticipation of customer needs, in areas such as food waste reduction, building a demand and supply platform to ensure more accurate forecasts.

Fujitsu is aiming to become more competitive by shifting new business creation out of Japan.  It has set up an AI HQ in Vancouver. This is an attempt to escape from the model it has relied on in the past, of developing hardware in Japan and then selling it overseas.

Both companies are also having to compete with Google and Microsoft or startups for talented IT people. NEC introduced a system this  year to recruit outstanding researchers with a starting salary of $93,000.

Europe, Middle East, Africa

NEC and Fujitsu diverge in their strategies for the Europe, Middle East and Africa region. Fujitsu has been cutting employees in EMEA (or as they call it EMEIA – including India). This is happening particularly in Germany and the UK where it could be argued it is overweight, thanks to the legacy of the acquisition of ICL in the UK and the joint venture with Siemens. It announced in the past year it will close the factory in Augsburg, Germany – the last remaining computer factory owned by anyone, in Europe.

NEC, on the other hand, has grown in the region. They acquired Northgate Public Services in the UK and KMD in Denmark in 2018. They are also proactive in Africa, looking at getting involved in Japanese development aid projects.

The market in developing countries could be where NEC is a strong alternative to Huawei, whereas the investment in AI in Canada suggests to me that Fujitsu is still pursuing its dream of being a leader in AI and supercomputing, taking on North America.

 

 

 

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Murata – reinjecting enjoyment into corporate philosophy

Murata is one of Japan’s most quietly successful companies, with a 40% share of global sales of the tiny ceramic capacitors that are essential to the electronics industry.

Tsuneo Murata, 3rd president from the founding family, says in an interview in Nikkei Business that the bursting of the dotcom bubble in 2001 was a turning point for the corporate culture. They had become too arrogant during the IT bubble of the 1990s and had stopped listening to customers. They did not recover as quickly in the early 2000s as rivals did. Tsuneo Murata, who was then EVP, asked board members and employees for their views on the company culture and what was preventing recovery. He was told the company had become conservative, cautious, inflexible, bureaucratic and slow.

So he set up an organisational cultural reform committee It was tasked with ensuring that the culture became one which adapted rapidly to a changing environment, where the genba (shopfloor) had autonomy and people could freely discuss, create and challenge.

The need for persistence in cultural reforms

Murata became President in 2007. Even with the Lehman Shock walloping profits shortly after, he insisted on continuing with cultural reforms. He went back to the founding philosophy of Akira Murata, to rediscover the sense of freedom that Murata used to have. Actually the philosophy does not mention freedom. In translation it says pretty much what many Japanese corporate philosophies say – contributing to society through innovative technology, building trust, working in partnership, etc.  The one part that isn’t translated into English is the word “yorokobi“, meaning to enjoy.  To me that’s the most important bit – a lot of Japanese companies have lost their sense of fun since the 2000s.

It sounds like the success of Murata is as much to do with Tsuneo Murata’s personality.  Since becoming President he continues to eat in the same canteen as workers in the headquarters in Kyoto and does not use the executive elevator (unless in an emergency). “I don’t think there’s a single employee that does not like him” says one employee.

He is asked by Nikkei Business how he ensures a common understanding of corporate culture when Murata acquires other companies – for example, IPDiA in France in 2016.  “It takes time, especially when it’s a foreign acquisition, because generally overseas employees are not as loyal to their companies as in Japan anyway. But if we introduce our corporate philosophy to them, they have empathy with it. I think it’s important to communicate it thoroughly.”

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“Let’s be lovers first” is a high risk approach to acquiring overseas for Japanese companies

Most Japanese companies assume overseas acquisitions are high risk – and yet continue to acquire in pursuit of growth. But according to research from Daiki Tanaka (formerly of McKinsey and now running his own consultancy) Japanese overseas acquisitions of companies in the same industry from 1996 to 2018 had a lower failure rate (2.8%) than domestic Japanese acquisitions where the acquiring company is “jumping” into new sectors (3.4%).

The money at stake is are far bigger however for overseas takeovers.  The average price tag of an overseas acquisition is Y24.5bn (over $200m), whereas the average domestic acquisition in Japan is around Y1bn (over $9m). This would be partly skewed by recent mega acquisitions such as Takeda acquiring Shire for  $62bn and SoftBank acquiring ARM for $32bn.

Tanaka also concludes from his research that a “let’s be lovers first” approach is actually a higher risk strategy for overseas acquisitions. Taking a minority stake and then gradually raising it to full ownership/marriage can mean that due diligence is insufficient and the minority shareholder has not been able to participate fully in corporate governance.

Tanaka expects Japanese companies to continue to acquire overseas companies from the same industrial sector, because lower risk domestic acquisitions will not necessarily help to access higher growth overseas markets. If they want to escape the low growth, ageing Japanese market, acquiring overseas is the obvious quick route out.  It would seem that a virgin marriage is recommended however.

 

 

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The good and bad of no longer being “Japan owned”

I’ve been wondering for a while whether Japanese employees of companies such as Sharp or Takata have been feeling any change in corporate culture since being acquired by Taiwanese or Chinese companies and whether those companies could still be considered to be “Japanese”.

Nikkei Business has inteviewed employees from Sharp, Toshiba memory division and also from the laptop division of NEC (now owned by Lenovo) and come up with  13 aspects that have caused difficulties for Japanese employees who have been “bought” (as the Nikkei puts it) and 7 positive effects.

Difficulties:

1. Having to work much harder than before – due to increasing focus on short term profitability – even longer hours than is the norm in Japan.

2. Loss of right to evaluate staff – a sense that Taiwan HQ is now in charge of career development

3. Increase in employees who have a “Taiwan First” mindset

“If you don’t like doing things the Hon Hai way, then start your own business, or go and work for Nidec or Panasonic. If you can’t do that, then suck it up, seems to be their attitude” says one employee.

4. Rigid management by numbers

5. English skills are now compulsory

6. Nemawashi (stakeholder management/consensus) no longer works

7. Large cuts in salary

8. Reduction in autonomy

9. Sudden changes in supplier relationships

10. Reduction in  management positions

11. Being posted to unwelcome locations

12. Collapse of succession planning

13. Low capability managers being seconded to your company

Some of the above could happen to any acquired company in any country, but I guess 1, 4, 5, and 6 are particularly acutely felt for Japanese companies acquired by foreign companies.

Some employees saw an upside however:

1. Structural problems are removed

2. Disappearance of bullying bosses

3. Job becomes more fulfilling

4. “Rags to riches” when previously your career history or educational record counted against you

5. Increased salary

6. Improved credit rating

7. More opportunities for promotion

Again many of these are the result of issues arising from having worked for a failing company, and now being owned by a more successful one – but I can see that for many Japanese who were stuck – with their careers blocked by bullying bosses, or considered lower status because of not being a lifetime employee since graduation or not coming from a top university –  it is refreshing to be evaluated and promoted purely on ability.

 

 

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