M&A

How will Hitachi weather the storms of Brexit and industry turmoil, not just in nuclear energy but also rail?

The Japanese business media is asking the question I’ve been wondering about too – what might the impact be on Hitachi Rail’s global HQ in the UK, now that Hitachi have shown they can take the tough decision to suspend their Wylfa nuclear power project, amid the continuing uncertainty of how Brexit will play out?

Toyo Keizai’s Naoki Osaka details the history of how Hitachi’s first step into the UK rail market was as a preferred bidder for the UK HS1 in 2004, supplying 174 carriages, which were built in Japan. Hitachi then won the IEP bid in 2012, for 866 carriages and a contract for First Great Western. They then invested £82m in the Newton Aycliffe factory i 2015, which is now making around 40 carriages a month for IEP and Abellio Scotrail. Not all parts are made in the UK. The 700 employees mostly do not have any rail manufacturing experience but are learning fast, according to Osaka. The 25 expatriate Japanese have been reduced to 6. Including the maintenance operations, there are now 7 sites in the UK, expecting to expand to 13 by 2020, employing around 2000 people.

Osaka was told when he visited the factory last December that there were plenty of future projects to bid for, so no worries for the future. However Diamond magazine says their Hitachi contact told them that since Hitachi lost the London deep tube bid last year and also lost their attempt to overturn the decision, they only have an order book through to the end of 2019, and no orders beyond that, as yet. Diamond describes the formerly warm relationship between Hitachi and the UK government as “frosty” as a result of both this and the failure of the government and Hitachi to agree on how to move forward on the finances for the Wylfa nuclear power project.

If there is a no deal Brexit, customs inspections will be significant for carriage manufacturing, says Osaka. 70% of the parts are made within 40 miles of the factory. So although there are fewer logistical concerns, there will be plenty of issues around rules of origin that are likely to cause supply chain problems for suppliers to Hitachi.

Furthermore, the Italian factory which Hitachi acquired in 2015 is improving productivity beyond expectations and will no doubt play an important role in developing Hitachi’s rail business in Continental Europe.

Hitachi is also keeping an eye on the Siemens/Alstom rail business merger. It may well be blocked by the EU, and as Alistair Dormer, CEO of Hitachi Rail predicted, Alstom is offering to sell of some of its businesses to avoid this, for which Hitachi could be a buyer. Hitachi was hoping to become one of the Big Three of the global rail business, with a target of Y1trn turnover – Siemens and Alstom’s merger will produce a Y2trn business. Now it has turned its back on nuclear business, can Hitachi become a global player in the rail business, in the face of storms caused by Brexit and industry restructuring?

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Is “chutzpah” in Israel the same as “not reading the air” in Japan?

Japanese investment in Israel has shot up the past five years. According to JETRO there are 66 Japanese companies based in Israel as of 2017, 16% up on the previous year. Nikkei Business estimates the total of investment asY130bn (around $1.1bn) – the main contributor being Mitsubishi Tanabe Pharma’s acquisiton of Neuroderm for $1.1bn in 2017.

PM Abe’s visit to Israel in 2015 brought about many further visits from Japanese business people. The attraction is, unsurprisingly, Israel’s expertise in IoT, AI, cyber security and other technologies. But the big obstacle, certainly according to many people I have spoken to about this, is the big cultural communication gap.

According to Shintaro Hirado, who has set up a business support company in Israel, it can be seen as a positive, that Israelis are very straight with you, and once you get over the shock of that, then you can build good trusting relationships.

Japanese expatriates in Israel compare “Chutzpah” (cheek, nerve, audacity) to the KY (Kuuki Yomenai) phenomenon in Japan of a few years ago, when younger Japanese were accused of not being able to “read the air” (usually of disapproval).

Israeli owners of companies acquired by Japanese companies such as Rakuten have asked for earn outs before the final agreement was signed, or left due diligence meetings days before they were over, not out of anger, but just “I’ve said all I need to say.”

Japan Intercultural Consulting – whom Rudlin Consulting represents in Europe, Middle East & Africa – has just started a partnership with Charis Intercultural Consulting, who have a presence in Israel, so this communication gap could be a business opportunity for us too.

Some Japanese companies in the UK see Brexit as a business opportunity

In an article for the Teikoku Databank News in October 2016, I wrote about how Japanese business people in the UK were surprised that many British people’s reaction to Brexit was to try to be positive and seek out new business opportunities – I particularly pointed to Africa and the Middle East, infrastructure projects in the UK and M&A in the UK.

Now Nikkei Business magazine also has an article on Japanese companies in the UK that have indeed seen there are business opportunities in Brexit.

First up is NTT Data, who expect that clients will be looking to introduce new IT systems as a result of Brexit. For example, to cope with any new tariff and customs checks, goods might need IC tags. Also, there will be more need to check the work permits of EU citizens in the UK.

NTT Data has added over 200 IT consultants and digital design specialists in the past year, to its existing 700 staff and expects to add another 100 this year. It also acquired UK software development MagenTys company in May 2018 and opened up a design studio in London aimed at collaboration with start-up companies.

Brexit may also mean that the UK’s distribution system needs to adapt – there will be more need for warehousing and holding zones. The Japanese logistics company Nippon Express is therefore looking at strengthening its warehousing business. “We get a lot of enquiries for warehousing, so we want to be ready for any needs arising from Brexit”, says UK MD Toshinori Sakai.

Japanese security company SECOM is also expecting there to be greater needs for security systems arising from Brexit. Up until now security companies had been able to rely on hiring low wage immigrant security guards but if immigration is cut back then there will be greater need for SECOM’s security cameras and other automation, to replace those guards. SECOM’s UK MD, Minoru Takezawa predicts that the cost of providing security will rise as a consequence of cutting off the supply of cheap labour, so technology-based solutions will become more competitive.

SECOM started a new service in 2017 alerting retail chains when people with criminal records are entering their outlets. They have increased the staffing of their monitoring centre from 40 to 100 and acquired a Northern Ireland headquartered Scan Alarms & Security Systems in March 2017.

Nikkei Business acknowledges that many of Japan’s manufacturers – particularly in the automotive sector – are preparing for the worst, in terms of Brexit related disruption. But many multinationals in the IT sector, such as Google and Apple, have invested further in London, Cambridge and Oxford, in pursuit of a high skilled workforce and overall Japanese investment into the UK continues to increase in 2016 and 2017, and not just because of SoftBank acquiring ARM in 2016.

Law firm Ashurst’s Hiroyuki Iwamura points out that the UK is a pivot to global markets, particularly to the US. Theresa May is showing particular consideration for Japanese businesses – If they worry too much about the negative impact of Brexit, they may miss some good business chances, Nikkei Business London bureau chief Takahiro Onishi concludes.

If you would like to purchase a detailed list (address, company size etc) of acquisitions made by Japanese companies in the UK in 2016 (24 companies), 2017 (21 companies), 2018 (8 so far), please contact Pernille Rudlin (pernillerudlinrudlinconsultingcom)

Brexit watch – Top 30 Japanese companies in the UK

We’ve been tracking the 30 biggest Japanese employers in the UK for over 3 years now, so it seems a good moment as Brexit draws nearer to see what changes they have made over the past three years, explicitly or implicitly, to prepare for Brexit and beyond. Overall, the top 30 Japanese companies in the UK have had a good 3 years’ in the UK, with total number employed increasing by nearly 15% to just under 90,000, out of the 140,000 employed by 1000 Japanese companies that is usually cited. I even wonder whether that 140,000 ought to be revised substantially upwards, as I believe the estimate dates from 2015.

However the average increase conceals some hefty drops (Fujitsu, Nomura and Yazaki) and substantial increases – the latter largely due to acquisitions.

Nearly every annual report from the companies that make up the 30 biggest Japanese employers mentions Brexit, but few state explicitly what actions they have taken to deal with the risk, unless they are financial services companies facing regulatory issues. Most note that the outcome is uncertain, and that they are monitoring and planning.

No tax haven please we’re Japanese

As well as Brexit, another factor that some Japanese companies in the UK have to take into account is the tightening of the Japanese tax haven law. Passive income such as dividends and royalties, if received in a country with a corporate tax below 20%, will be subject to charges from the Japanese tax authorities. The UK corporation tax rate is 19%, due to go down in stages to 17% and Theresa May has recently promised “whatever your business, investing in a post-Brexit Britain will give you the lowest rate of corporation tax in the G20.”

As I stated in my speech to the UK Tax Forum, because of their long term, stakeholder oriented, risk averse ethos, Japanese companies are not really interested in the UK as a tax haven. Panasonic, seen as a bellwether in terms of corporate governance in Japan, cited the tax law as the reason to move its headquarter function from the UK to the Netherlands, where the headline rate of corporate tax is 25% (although sweetheart deals can be done). I also think that the decision of the European headquarters in the UK of trading companies Sumitomo Corporation and Mitsubishi Corporation to sell their shares in investments such as Princes and Triland Metals in the UK to their Japan headquarters is part of this drive – to avoid being seen as using the UK as a tax haven for their dividend earnings.

Whose standards are they anyway?

Japanese companies would be more interested in the second part of May’s statement – “you will access service industries and a financial center in London that are the envy of the world, the best universities, strong institutions, a sound approach to public finance and a consistent and dependable approach to high standards but intelligent regulation”.

But of course the question they will be asking is “whose high standards?”

There are around 200 Japanese companies with manufacturing in the UK, and we estimate around 50% of their production on average goes to the EU (excluding the UK). 30% is to the UK and the remainder to the rest of the world. In Toyota’s case, over 80% of their production in the UK is exported to the EU. So it’s no surprise that, as repeatedly stated, including in the Japanese Ministry of Finance’s “Message to the UK and the EU” of a couple of years’ ago, Japanese business want harmonised regulations and standards across the UK and the EU.

All the Japanese financial services companies affected by EU regulation have taken action – Hitachi Capital and MUFG have strengthened or set up bases in Amsterdam, MS&AD in Brussels, Sompo International in Luxembourg, SMFG, Mizuho and Nomura in Frankfurt.

The rise of the pure UK plays

Looking at who’s in and who’s out of the Top 30, the rise of “pure services” is noticeable, largely through acquisitions such as MS&AD acquiring Lloyds underwriters Amlin and InsureTheBox, Dentsu acquiring multiple advertising and marketing agencies in the UK, Outsourcing acquiring recruitment agencies and government debt collectors. Bubbling under are Park24, now the owner of National Car Parks. Many of these investments are very domestic UK market oriented, so Brexit proof in the sense that they are not reliant on the European single market in terms of supply chains, regulation or freedom of movement.

Conversely manufacturing companies have dropped out – such as JTI, with the closure of its Gallaher factory in Northern Ireland last year and Fujifilm, who have three different production sites in the UK.

Freedom of movement and solutions

As well as emphasising the need to harmonise regulations and standards, and ensure tariff free trade, the Japanese government “Message to the UK and the EU” of two years ago also pointed out that Japanese companies in all sectors employ large numbers of non-British EU nationals in the UK. Because many of them have UK -based regional headquarters, or have design and engineering or customer support centres in the UK, they rely on the freedom of movement of these non-British EU nationals as well as the freedom of movement of British employees themselves, to visit or be seconded to client sites to provide pre sales, installation and aftercare support. This also applies to Japanese engineers visiting the UK from Japan who at the moment are finding themselves being turned away because they gave the wrong answer at the border, saying they have come to the UK “to work”.

This last issue is likely to be raised quite insistently in any post Brexit trade deal between Japan and the UK, and if not solved, I would expect to see the numbers employed by the Top 30 in the UK to fall in the years to come.

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With Weber’s push to acquire Shire, will Takeda be a Japanese company any more?

Takeda’s French CEO Christophe Weber is on another charm offensive ahead of the get-the-popcorn-out annual shareholders’ meeting on June 28th, with an interview in the Nikkei Business.

I found the interview very easy to follow, compared to other interviews with Japanese Presidents. I suppose this is for the same reason that Prime Minister Abe’s speechwriter writes his speeches in English first, and then translates them back into Japanese. The resulting Japanese is much clearer and more logical. On the other hand, the interview is stuffed with Anglo Saxon finance concepts like EBITDA, EPS and scenario planning, which must be difficult for more traditional Japanese stakeholders to swallow.

I also get the impression the Japanese interviewer felt able to be more blunt in their questions.

Why did you buy Shire?

“We have already been focusing on R&D during our major reforms at Takeda, and this is going well. So we didn’t need to make this acquisition, it was more a case of doing this in order to accelerate the reforms at Takeda, to make us even more competitive.”

The board did not all agree at first?

More than half of Takeda’s board are external directors. “There were many questions. We had several meetings before we reached a final decision… Shire had R&D strengths in the same areas Takeda is focusing on, which is why we decided to buy them. We did a lot of scenario planning and clarified the risks, thinking about what would help Takeda succeed in the long run.”

So there are no big risks?

“It’s not zero, but f we have an appropriate buffer, we can avoid risks. For example, selling off businesses which are not within the scope of our strategy”. Presumably it’s this kind of approach that is worrying Takeda’s founding family shareholders.

How do you see the fall in Takeda’s share price on the news of the acquisition?

“Of course we weren’t happy. We weren’t able to explain the decision in full, so I think if we can explain in more detail from now on, people will be persuaded. We will maintain the dividend. We will increase earnings per share.

Shire turned down your approach a few times. What were your thoughts then?

“It would have been good to have progressed more quickly, but it is important to start negotiations from a point relative to the upper limit of a rational offer price. I also wanted it to be a friendly not hostile approach.”

So was it the most appropriate price in the end?

“Yes. If not, we would not have gone ahead”

Shire is known as a company that is good at making money. Why is this?

“It’s because they focus the business. 65% of turnover is in the US and profitability is also high.The organisation is lean and they focus their research.”

Something Takeda can learn from?

“Yes, very much so. I think there will be some great outcomes from the merger. We can accelerate the improvement of Takeda.” (You can feel Takeda’s founding family wince at this point)

With this acquisition, Takeda will enter the world’s top 10 pharmaceutical companies. Are you happy that Takeda will now have the scale to continue as an R&D led company, or do you want to expand further?

“I think we will be competitive enough. We will have regional balance, sufficient funds for R&D, an appropriate strategy, excellent candidate drugs. I don’t see any weaknesses… We are not going to let the pursuit of M&A go to our heads. We are very cautious in evaluating businesses. We also use partnerships with universities and other companies in order to develop drugs and have over 180 such joint development projects.”

Takeda has just set up a Health Innovation Park in Shonan, Japan to encourage such partnerships. Weber does not think this model is appropriate outside Japan, however. In the US, venture capital is more readily available. It’s true that Japanese companies in the same supply chain, or who might even be competitors in other areas, are much more willing to cooperate in an ecosystem, for mutual benefit. It’s a strength of Japanese companies which I hope they hold on to, despite pressures from Western shareholder shareholder oriented capitalism.

More than half of top management are not Japanese. Dublin, where Shire’s headquarters are, is a low tax base – will you shift Takeda’s headquarters outside of Japan?

“No No No No. Takeda is a Japanese company. The headquarters inarguably are in Japan. The name will remain as Takeda. We are in the middle of building a new global headquarters in Tokyo, in Nihombashi.

So is there a meaning to being a Japanese company?

Being a leading Japanese company has meaning on the world stage. When in 2017 we acquired ARIAD, they themselves were looking for a Japanese partner, because of Japan’s strengths in their area of research.

What were your feelings when you were approached to be CEO of Takeda?

I was really surprised. I had never met Yasuchika Hasegawa, the then president of Takeda.

That’s amazing! What made you take the job?

I was attracted by Takeda’s wish to be a global leader and their vision and values. It is an industry where you need to have a strong sense of responsibility, and Takeda has that in their DNA. Actually most people told me not to take the job. There is the rumour that foreign CEOs don’t do well in Japan as there have been more cases of failure than success.

And how was it since you took the job?

For the first few months I was in listening mode. More than 70% of employees are outside Japan and they need to be heard too.

Were there things that were difficult, because it was a Japanese company?

One thing I realised was that you cannot say “the Japanese company way” as every Japanese company is not the same. There are elements in common of course, but there are big differences.”

With the acquisition of Shire, the company will expand further – what are the priorities for management?

It is quite simple – to make sure employees feel motivated and happy, and that the company succeeds. My responsibility is to ensure the environment is where diverse employees can give their best. It’s important to take time to communicate. I am conducting town hall meetings in each operation. After a short explanation of trends, we have a Q&A.

Weber says he has been a manager for 25 years and made many mistakes, but his main philosophy is to never stop learning.

In 2016 Weber set up a Vision 2025, to encourage the development of highly innovative drugs to bring to the world and be a company that is trusted by all stakeholders. “At Takeda, the patient is number one”. He defines “Takedaism” as fair, sincere, honest and tenacious.

With this deal, you have become one of the most famous business people in the world. Aren’t you getting invitations to join other companies?

My timeframe is the 2025 deadline for realising the vision. I have said repeatedly I will stay at Takeda until then. I have not become president in order to become famous. I believe this acquisition is the right thing for Takeda to do. That is why we are doing it.

If you do leave Takeda before 2025, you owe me a dinner.

Of course, but I get to choose the restaurant.

Nikkei Asian Review has an interesting article on Weber’s impact on Takeda here (in English).

Mitsubishi Corp alumnus toasts the Suntory spirit

When I left Mitsubishi Corporation after 9 years, I felt guilty that I had not found a way to repay (in business development rather than money) the MBA they sponsored me through and worried that the wonderful sempai (mentors) who had supported my career would now be angry with me. I was delighted and relieved therefore, when one of the sempai, very senior in the company, invited me for a drink when I was in Japan on a business trip, and explained to me and the other team members at the table that Mitsubishi Corporation should regard people who leave as alumni, just as McKinsey do. “We may end up doing business together one day,” he predicted.

Indeed Mitsubishi Corporation is now a valued customer of mine, and I have seen many other MC alumni rise to some of the top positions in the Japanese business world. Probably the most well known one is Takeshi Niinami. A graduate of Keio University, as so many MC people are, he was sponsored by MC through a Harvard MBA. He eventually became President of Lawson, the convenience store chain that MC had invested in, leading its turn around.

He is now the President of Suntory Holdings and was interviewed in Nikkei Business magazine about recent developments there, including the acquisition of Beam Inc (but not its acquisitions in Europe of Lucozade, Ribena and Orangina) and the “Suntory Way”.

What Beam got from Suntory

“The Suntory Way means that we develop products that our competitors do not have”, says Niinami. “When I explained this to the Jim Beam factory in Kentucky they were very supportive. Beam Inc headquarters people all had MBAs. American marketers get a sense of consumer trends from consultant’s reports and decided their strategy based on that, they never went to the gemba (shopfloor) the way we do in Japan. They just told the Kentucky factory what to do, top down, from afar. If you told them to go to the gemba they’d probably quit. There wasn’t one single person in the executive team who came from manufacturing and they weren’t investing in the factory. But the Kentucky people loved making things. So when we told them we saw manufacturing as the most important thing and appointed someone from manufacturing to the board, their motivation shot up.”

“When they came to see our factories in Japan, they became aware of the need to improve their Kentucky factory. Beam is even older than Suntory – more than 200 years of history. We were able to revive their DNA.”

What Suntory learnt from Beam

“Beam are really good at managing profitability. Suntory got heavily into debt to buy Beam and we are all focused on reducing this debt. Suntory was not as good at managing cash flow as Beam but we have learnt.”

What’s next for Suntory and Niinami

Niinami was brought in by the previous President and now CEO and Chairman, Nobutada Saji (also from the founding family) in 2014. Niinami thinks his successor is likely to be another member of the founding family – current COO NobuhiroTorii – and seems in favour of this, as a way of maintaining Suntory’s spirit. He also expects Suntory to remain a privately held company, despite discussions to the contrary when he first became President. The advantage, he says, is that Suntory is able to contribute to society, through the Suntory Hall (a famous concert venue in Tokyo) and also a water sustainability initiative, without having to justify this to shareholders.

As an outsider, Niinami feels he was able to see objectively how good the Suntory spirit was, and how to roll it out globally. He has set up a Suntory University to help with this. Although Niinami is only 59, he says he is willing to finish his career at Suntory. “I am already “of age” and I don’t think anyone will be asking this “odd fish” to join them.”

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

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 thererefore also has regular video confererence and Dormer himself visits sites, holding meetings 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.”

Nidec’s Nagamori on the root causes of Japanese corporate scandals.

The founder and President of Nidec Corp, Shigenobu Nagamori has been high profile in the Japanese media (again). As well as a long interview in Diamond magazine about why all 57 of his acquisitions (many in Europe) have been a success, he gives some punchy analysis in his final column for the Nikkei Business magazine on what the root causes of the succession of scandals coming out of corporate Japan.

“It is the top management’s fault if bad news does not reach them. If there is something wrong with the production process or sloppiness in quality control, this is a matter of life or death for a manufacturer. That such important information is not being communicated is because the management is not going to the genba (where the action is) and seeing what is going on for themselves.

4 root causes of scandals at the genba

Nare (becoming used to something) Thinking that a certain level of irregularity won’t be a problem, getting accustomed to it.
Amae (being indulged) – believing that you won’t get found out anyway
Tiredness – when the cost price seems to have reached rock bottom or kaizen has been continuing for a while
Takotsubo (octopus pot – for more uses of this analogy, see our post on octopus appointments) – silos where a problem in one unit is hidden and not communicated to other units

This happens because managers are not ensuring a sense of urgency in the genba. This doesn’t mean they have to keep pressurising employees. They should be making frequent efforts to strengthen and pull up the genba. That’s why they should enter the genba themselves and see for themselves what is going on in R&D and manufacturing, sales. This will naturally lead to a sense of urgency.

Of course managers set targets, but if they don’t know the genba, then these are just words, and feel very distant to the genba.

The need for “hands on”, “micromanagement” and “making responsible without giving away responsibility”

Hands on means the genba solves problems with the management alongside. Not just throwing problems at them.

Micromanagement is that managers make decisions about all the issues in the genba. When I acquire a company that is in trouble, in order to reconstruct it, I check purchasing for even 1 yen. Some people say this will undermine the ability to think for themselves but it’s quite the opposite. It is to make the employees think, come up with suggestions and work alongside managers to review it. Not just get told, in a one way fashion.

“Making responsible without giving away responsibility” means that I delegate authority, but I don’t just leave people up to it. Otherwise the genba logic just becomes stronger and they fail to see what is appropriate overall. So delegate, but regularly check, very thoroughly.

The importance of developing generalists

It’s also important to develop executives. Although there is a tendency in Japan at the moment to reject generalists, it’s no good if someone only knows one business area and has no idea about other parts of the business. While people are young, they should experience management in different divisions in order to become proper executives.

That’s why I am always visiting our subsidiaries around the world. We have 300 companies and over 100,000 employees so I can’t do this by myself. So I get other people like our CSO (Chief Sales Officer) to travel around too. I am visiting somewhere pretty much every week. If managers had this attitude, the morale of the genba will also improve. You cannot take it easy.

Japanese overseas subsidiaries in Europe: M&A boom equals more employees, less capital investment?

Recent statistics on Japanese companies’ activities in Europe show an overall positive picture – growth in employee numbers but declines in capital investment. Could this be a reflection of the ongoing Japanese overseas acquisition boom?

Sales of Japanese overseas subsidiaries in the 1st quarter of 2017 were up 7.9% overall on the previous year and at similar levels in Europe, but growth in North America was 4.3% up on the previous year. Asia represents nearly 50% of Japanese subsidiaries abroad, and sales grew 8.8% on the previous year, according to figures from Japan’s Ministry of Economy Trade, and Industry.

However capital investment declined again, by 13.6% (12 consecutive quarters of decreases) particularly in Europe (40.9% decline – the first decrease in 5 quarters) and ASEAN countries. Capital investment in North America was only down 0.8% but even this was the first decrease for three quarters.

Nonetheless, the number of employees increased 1.9% globally, and by 4.9% in Europe, the 15th consecutive quarterly increase. Growth was less in Asia (1.3%) and North America 2.9%).

This may reflect a long term shift of Japanese companies in Europe towards more service oriented, and therefore people intensive businesses, away from capital intensive manufacturing.

However, figures from the Japan Automobile Manufacturers’ Association show that automakers in Europe are still expanding production (by 7%), although below the peak levels of 2007 and 2008. 17% more cars were imported from Japan than the previous year, but Japanese car manufacturers also purchased record numbers of EU made components.

Exports of Japanese cars manufactured in Europe fell 17%, representing around 20% of Japanese production in Europe. These exports went (in order of size) to North America (24%), Latin America (10%), Middle East (10%), Africa (8%), Oceania (8%) and Asia (6%) – presumably including Japan, and the Honda Civic that Boris Johnson drove when he recently visited Japan, citing it as an example of “fantastic” British exports to Japan.

Japanese car manufacturers now operate 14 plants in seven EU countries – 4 in the UK, 3 in Spain, 2 in Portugal, 2 in Poland, 1 in Hungary, 1 in France and 1 in the Czech Republic. The major capital investments in 2016 were made by Nissan in the UK and Spain and Toyota in Poland.

What Dentsu’s woes tell us about Japan’s advertising industry and beyond

A British former advertising executive once told me that he and his counterparts in other ad agencies in Tokyo regularly held FUD drinking sessions where the D stood for Dentsu and the F and the U, well… But it does seem as if Dentsu’s iron grip on Japan’s marketing and advertising industry is coming to an end.

Dentsu is Japan’s largest advertising agency and has also recently entered our Top 30 Japanese companies in the UK thanks to the acquisition spree it has been on, consolidating multiple purchases of agencies in the UK and elsewhere into Dentsu Aegis Network, headquartered in London.

So dominant is Dentsu in advertising spend (although its rival Hakuhodo is traditionally stronger in magazine advertising) that you rarely get much critical coverage about it in the Japanese media. Critical analyses are starting to appear now though, following the suicide of Matsuri Takahashi in 2015 from overwork and then revelations in the Financial Times (clearly undeterred by being owned by the Nikkei group) of Dentsu overcharging clients for digital advertising, both leading to the resignation of the President Tadashi Ishii in December 2016.

“Corporate culture at Dentsu is like the military”

Shinichiro Kaneda in the Nikkei Business takes a look at whether the culture of Dentsu has changed since, in the May 8^th edition of the magazine. “The corporate culture is like the military” according to Takahashi’s mother. Kaneda says yelling can still be heard coming from the “sermon room” as one meeting room was known, for small mistakes or a lapse by junior staff. New graduate hires have been threatened with the tonsure if they do not reach the peak of Mount Fuji in the top group during the new staff orientation programme.

This military culture is necessary to Dentsu says Kaneda, because it is based on Dentsu’s unique position with regard to its clients. “What the head of the advertising section of a client says is an order which must be obeyed” says a former executive. “Even if they give two contradictory orders, you have to comply with both.”

Crush new graduates’ pride

But the new graduate hires have all come from elite universities like Tokyo. “People who think logically want to answer back. So Dentsu have to, at the outset, crush graduate hires’ pride and personality. That way, they will just fall in line with what other people tell them to do”.

Takahashi was a graduate of Tokyo and suffered when she found herself being sucked into this culture. Dentsu bears responsibility for not changing this culture, but behind it is a wider problem across the whole of the business sector of Japan, says Kaneda.

A wider problem across Japan’s business sector

Dentsu’s clients are major companies with advertising budgets in the millions of dollars. The head of the advertising section reports straight into the top executives of the company. Requests from clients bypass Dentsu’s own sales force and go straight to the business units and in some cases to Dentsu’s top executives. Everybody gets copied in and it becomes a “stamp rally” and if even one person opposes it, then the plan is overturned,” says a Dentsu insider.

This affects the shop-floor at Dentsu who are forever urgently redrafting proposals while at the same time having to keep an eye on costs.

The media is also very demanding. TV stations try to sell advertising as a package of both late night spots and peak time spots which Dentsu has to persuade its clients with large budgets to swallow.

When economic times were better, money flowed around and budgets and manpower were generous. Results were measured with a few qualitative surveys.

But now the Japanese economy is stagnant and with digitalization, large budgets covering everything are being subject to the scalpel and foreign companies in particular are asking for a much greater level of detail.

Traditional mass media is less influential and internet advertising is not only cheaper but results can be measured quantitatively.

Militaristic approaches do not work in this kind of situation. “It has exposed the contradictions of the Japanese workplace” says a Dentsu executive.

In order to keep up profits and save the face of the advertising departments of clients, Dentsu keeps offering advertising services that they claim will sell, but then the results are measured quantitatively, and if targets are not made, harsh treatment is handed out. This is particularly true of digital advertising.

“Dentsu is a warning to Japanese companies who do not look at what is happening at the ground level, and just pursue profit” says Kaneda.

How Dentsu compares to Hakuhodo

Former Hakuhodo (the second largest ad agency in Japan after Dentsu) employee and now author of many books, Nakagawa Junichiro, was interviewed in the Toyo Keizai magazine regarding the “super elite” of Dentsu and Hakuhodo. “they are neither a normal company nor are they media. They do anything that is related to communication. They have both made a lot of money and the employees are paid well. Yet they because they do not make their internal workings transparent, it is not clear what kind of companies they really are.”

“They will say yes to whatever the client asks for. The employees are simply a mass of corporate slaves. There are lots of internal organisations going by foreign sounding names or numbers. For example, one local government was told their account was being looked after by the #13 section but then this section split off and changed its name. This happens almost on a daily basis to meet client needs.”

“The human networks are complicated. For example if a magazine says it wants to write about Company A, the PR department of Company A will ask Hakuhodo if the magazine is respectable or just trying to blackmail them into taking advertising. Hakuhodo will ask one of its sub contractors who know this area well. But it’s not always so clear what the sub contractor’s own interests might be.”

Political campaigning

Both Hakuhodo and Dentsu run campaigns for political parties – usually Dentsu for the LDP, the centre right party that has been in power during most of the post war period and Hakuhodo for the DPJ (now the Democratic Party). Since the election has moved onto the internet, the amount of money following around has become greater. All kinds of media are now being used from videos to animated graphics and Dentsu and Hakuhodo try to offer the full range.

Learning to bow

Shazai press conferences (where executives have to bow in apology for some misdemeanour) are also good business. A rehearsal generally is charged at Y1m to Y2m ($9000-$18000) – the agency role play being journalists, they create various scenarios and make a recording of it and guide executives on what to say. “I am pretty sure you can see Dentsu’s influence on Sarah Casanova, the President of McDonalds Japan’s apology, if you look at the way she behaved the first time compared to the second time” says Nakagawa.

The amount the agencies earn from one client can be significant. In 1996 when Hakuhodo won both the Nissan and the Mazda accounts, their turnover rose by Y130bn. “So it’s tough on your career if you lose accounts like that. Retaining clients by being totally devoted to them becomes key and the sales executives are seen as the elite. Although at Hakuhodo the creatives are the elite, and the salaries are about 70% of Dentsu’s, but still pretty good. What’s true of both agencies is that sense that you cannot do anything in your own organisation or by yourself, you are nothing without the agency.” So meetings tend to be full of people, and so as not to anger the client, instead of creating the trend, you tend to go with the flow.

Nakagawa left Hakuhodo because “when I started working on the Amazon account, I realised I had become a typical agency salaryman who simply supports the career of some middle aged guy at the client’s, who I don’t even like.”

Overtime is a problem not just in the advertising agencies

“Overtime is a problem for all Japanese companies” not just advertising agencies. “People take the “customer is god” idea too much too heart. Both Dentsu and Hakuhodo try to achieve over 90% for their clients. If they stop doing that then maybe overtime will disappear.”

“Dentsu is not that strong in the digital space. There’s still things they need to learn. They are good with TV for the World Cup and the Olympics, but they are being beaten on digital. The specialist shops are stronger. Unfortunately, with digital you can always keep adjusting and improving so the work never ends”

“Advertising executives are remote from real life. They only hang out with the top few percent of income earners. They are all graduates of top universities. But they are not that corrupt.”

Category: M&A