M&A

“Innovative jam” or Singapore? Foreign Direct Investment post Brexit

A Brexit supporter recently told me that he wanted Brexit to mean the removal of as many tariff and non-tariff barriers as possible, so we would have cheap imports and the UK would become once again “the most prosperous nation on earth, as it had been in the 19th century”. Free trade in the 19th century prodded the British economy of the industrial revolution to the services based economy we are now. But it has taken a century to work through, and we still worry about the impact of globalization on an industrial and agricultural workforce who cannot easily or willingly switch to service sector jobs.

In the 19th century, the flood of cheap imports was paid for by the profits from the UK’s investment in foreign railways and other industries overseas and our management of trade routes – particularly in relation to the British Empire. Up until 2011 the UK continued to pay for its trade deficit by making more money from its overseas investments than foreign investors were making from investments in the UK. Since 2011 the UK is no longer making enough money from its overseas investments to make up the deficit. The current account deficit is financed by the continued growth of foreign investment into the UK on the capital account.

So Brexit supporters have proposed three non-mutually exclusive ways to reinvent 19th century free trade prosperity for the UK, absent an Empire we can exploit. One is to compensate for any loss from no longer being members of the Single Market by making the UK as low cost and deregulated a place to do business as possible to attract more foreign investment (the Singapore option). Another option is for British businesses to expand into further flung overseas territories that they have for some reason been neglecting up until now. Or there is the “innovative jam” option, where we identify manufacturing or services that the UK has comparative advantage in and can export more of.

Japanese investment has been a key component of foreign investment into the UK, with greenfield manufacturing investments in the 1970s and 1980s like Nissan, Toyota and Honda but in the past 20 years has been more to do with acquisition or building up service sector presence such as banking and insurance. Some of the acquisitions built up a supply chain within the Single Market (particularly the automotive parts suppliers such as Denso/Marston/Excelsior, Calsonic Kansei/Llanelli Radiators) and others have been pure service sector market share acquisitions (such as Itochu buying KwikFit) or to buy up creative and technological expertise (Dentsu/Aegis, Softbank/ARM). So apart from the automotive sector, lack of access to the Single Market might not be such a blow to these acquisitions. Nonetheless, I know from my own experience that is not low cost or lack of regulations that are the most attractive for Japanese companies who invested in the UK – they were looking for stability and a skilled workforce, for long term sustainability, not short term profit. Brexit and the loss of regulatory predictability makes the UK less stable, and it also seems we might cut off access to the non-UK EU wide skilled workforce, who make up around 30-40% of the employees of some of my clients.

Alex Brummer, City Editor of the Daily Mail and author of “Britain For Sale – British Companies in Foreign Hands – The Hidden Threat to Our Economy” wrote in the Daily Mail regarding the multibillion dollar writedown arising from the Toshiba profit inflation scandal that “Toshiba shows the foolishness of relying on foreign owners, who put their domestic agenda first, ploughing money into Britain” and “corporate Japan operates to very different accounting and governance standards to Britain” (citing Olympus) and that this should worry the UK because Toshiba has investments in the UK nuclear power industry.

He then goes on to point at Dentsu‘s overtime related suicide scandal (although he doesn’t mention Dentsu’s earlier overcharging scandal) and how Dentsu has bought up Aegis, a UK advertising agency. He asserts that the CEO, who has now resigned, may have taken his eye off the ball due to his global expansion ambitions. He also laments the acquisition by Softbank of Cambridge based chip designer ARM.

“When command and control of our infrastructure, technology and creative industries is passed to decision makers far away, we all suffer.” he concludes. No evidence of this suffering is given. Presumably the worry is that Toshiba will have to pull out of the 50 per cent stake in NuGen it acquired from Spain’s Iberdrola, which is looking at building a 3.6 gigawatt nuclear power plant near Sellafield in Cumbria. No mention is made of Hitachi, who acquired the stakes in Horizon Nuclear Power after German utilities E.ON and RWE pulled out a few years’ ago – and have transferred their global rail HQ to the UK. I’m also not clear how Dentsu’s domestic woes are supposed to impact Dentsu Aegis Network. Nor what the issue might be with Softbank acquiring ARM, as Softbank’s CEO Masayoshi Son has promised to dramatically increase employment in the UK rather than asset strip. The trend I have seen with these acquisitions over the past decade or so is that Japanese companies have given up trying to manage everything from Japan and as with Dentsu Aegis Network, or Hitachi Rail, or Japan Tobacco, the international headquarters has moved to Europe.

I would argue that it is globalization and foreign acquisitions which have forced Japanese companies to become more transparent in many cases (Olympus acquiring Keymed, and thereby whistleblowing CEO Michael Woodford coming on board, or Toshiba making a mess of acquiring Westinghouse and CB&I Stone & Webster), and as a result, Japanese corporate governance is improving, albeit slowly. The majority of corporate governance scandals both in Japan and the UK are in the domestic services sector – certain British retailers for example, or banks – indeed Alex Brummer’s other book is “Bad Banks – Greed, Incompetence and the Next Global Crisis”. It was RBS’s acquisition of ABN Amro, and HSBC’s compliance issues in the USA, Switzerland and Mexico that exposed their lack of proper governance and management capability, and Rolls Royce had to pay fines to US and Brazilian regulators for their corrupt activities there.

Given that the Daily Mail and Alex Brummer are pro Brexit, is the implication that Brexit should not lead as other Brexiteers suggest to the UK becoming the new Singapore, but an opportunity to put an end to any further foreign direct investment in key industries, and maybe even try to kick out the current foreign investors in our infrastructure, technology and creative industries? At least that way our corruption and incompetence will be purely domestic and less prone to being exposed globally, because I would imagine other investor countries will retaliate by blocking British investment and erecting non-tariff barriers too, which might make doing any deals with China or Japan tricky. And if we don’t concede on immigration, a trade partnership seems unlikely with India, so that leaves other former colonies in the Commonwealth and the Anglosphere, for whom I doubt 19th century relationships with the UK feature much in their visions for the 21st century, with the possible exception of Trump.

Or there’s the “innovative” jam option. We will have to find alternative export sectors to build up, because the export sector we really had an advantage in after decades of free trade and EU membership – providing the professional services to support multinational industries (law, design, IT, engineering, research & development, finance, insurance, consulting, advertising, accounting, education) will fade away. If this kind of Brexit nativism really takes hold, multinationals will take their business elsewhere, swiftly followed by most of the EU professionals themselves. Still, at least we get back control.

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The story of Japanese companies in the UK continues to be the story of the UK economy overall in 2016

The number of people employed in the UK by the biggest Japanese companies in the UK rose by around 1% to 76,103 in 2016 – representing over half of the 140,000 or so the Japanese Embassy to the UK estimates are employed overall in the UK by Japanese companies.

Just as 80% of the UK economy is services, so too with Japanese companies in the UK. Although Nissan, Toyota and Honda attract most of the headlines thanks to Brexit – understandably as they represent around 15,000 of the 76,000 jobs – the vast majority of the rest are in the services sector.

Even Sony has only one small factory left in the UK, making high end audio visual equipment and employing less than 100 people. The rest of 3000 or so jobs are in Sony Interactive Entertainment, music and film & TV or in marketing.

Fujitsu is still the biggest Japanese employer in the UK but the gap with Nissan at #2 is narrowing, as Fujitsu have reduced their headcount by over 15% in the past year or so. Although Fujitsu is still seen as an IT & telecomms manufacturer in Japan, in the UK it is largely an IT services company.

Trading company Itochu may be a surprise at #3, but this is largely due to its ownership of tyre fitting chain KwikFit.

The Hitachi group of companies (#7) has grown by 17% over the year – thanks in part to expansion at Hitachi Rail and Horizon Nuclear Power – but the bulk of its employees continue to be at consumer loans company Hitachi Capital.

Dentsu Aegis Network, part of the Dentsu advertising agency, has continued to acquire across the UK and Europe, resulting in a 21% increase in headcount. Other notable increases thanks to acquisitions include Mitsui Sumitomo & Aioi Nissay Dowa acquiring Lloyds underwriters Amlin and of course Softbank, a new entrant to the top 30, with its acquisition of ARM.

The story of Japanese companies in the UK continues to be the story of the UK economy overall – a trend which will no doubt continue in 2017, with Japanese banks already strengthening and relocating to their other European Union based operations, or threatening to do so.

Customised reports, profiles and other research on the Top 30 largest Japanese companies in Europe, Middle East and Africa are available – please contact pernillerudlinrudlinconsultingcom for further details.

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European pride + global standardization = long debates

The European senior management team of a business which had been newly acquired by a Japanese company complained to me about being treated as if Europe was one homogenous country, when in fact they only had offices in 5 very different countries in Europe, with a headquarters in Germany. “It’s true, we know how to work with each other in Europe – after all Europeans have been living and working together for hundreds of years, but it seems strange that on paper we’re supposed to be a tri-regional structure of Europe, North America and Asia, and yet North America has only two employees and Asia has no regional headquarters, with Taiwan, China, Korea and Japan being managed separately”

This was just a small company, but actually I have seen similar situations in many other much larger Japanese multinationals. It’s partly that Europeans are very sensitive to their status –and want to be treated on a par with other regional heads – and this means the European definition of regions, with Asia as one region.

But it’s also due to a justifiable concern that if the company is meant to be offering global products and services, it needs to have a well-balanced global structure operating off common platforms, systems and processes. If the company grows by acquisition, you often end up with very different portfolios of services and products from country to country, incompatible processes and systems and no clear idea of how revenue and costs should be shared across the regions which are contributing to the global offering.

This can cause huge, long running arguments, partly because standardizing trade, production processes and technology are interrelated issues. Once you decide what products and services are global and what are local, you have the basis for splitting revenue accordingly. But you have to be careful this does not lead to regional organisations focusing on their local products and services, refusing to participate in global contracts because they make more profit out of local contracts.

Once you know what you are offering globally, you can standardise the technology – such as having all the company’s websites running off the same content management system, or production running off the same platforms or sales and purchasing using the same global accounting system.

Sometimes Japan headquarters has to swallow their pride for the sake of speed and efficiency. I was impressed that Nomura, when it acquired Lehman Brothers, decided to move their dealing onto the Lehman platform, because they judged it to be technically superior and faster than trying to integrate platforms or shift everyone onto the Japanese system.

Nobody wants to deal with these problems because they are so complex and lead to fights and easy resistance by those claiming that the global standard is not going to work in their markets. But unfortunately, if you do not deal with these issues soon after an acquisition, they fester and become even more difficult to resolve.

This article was originally published in Japanese for the Teikoku Databank News and appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

Large, stable employers are important for the health of the community, whatever the country of origin

You may remember, though it feels like a lifetime ago given what has happened since, that the front pages of the British business press in early 2014 were full of debate about whether to welcome or be worried by the US pharmaceutical company Pfizer’s bid to take over AstraZeneca, a UK-Swedish company. The £63bn bid would have made it the biggest foreign takeover of a British company in history.

Initially the British government wanted to portray the bid as a vote of confidence in what they had done to make Britain an attractive destination for foreign investment. However, the former CEO of AstraZeneca, Sir David Barnes, said that he was concerned that Pfizer would “act like a praying mantis and suck the lifeblood out of their prey. “ Pfizer wants to move its tax domicile to Britain when it acquires AstraZeneca, to take advantage of the UK’s low corporate tax rate and what is called a “patent box”, which gives tax breaks for research.

If Pfizer want these tax incentives, it should invest in the UK itself, and not attempt to do it via a takeover, Sir David argued. Pfizer last hit the headlines in the UK when it closed down its 60 year old research facilities in the east of England, with the loss of nearly 2000 jobs, in 2011. A few years before that it closed R&D sites in Nagoya, Japan and the US. The reasoning at the time was that research was better outsourced to smaller companies.

I have not heard anyone say that this trend has reversed, yet AstraZeneca committed to investing £500 million in a new research facility and headquarters in Cambridge, which is the main science cluster in the UK. Pfizer say it would honour this investment, and the jobs that depend on it, for five years at least.

The consensus in the UK seemed to be that given Pfizer’s “accounting led” approach, such commitments may not be worth much. The US company Kraft also promised it would not cut jobs when it took over one of the UK’s most famous companies, the chocolate manufacturer Cadburys, in 2010, and then shortly after closed down one of its factories.

This does not mean that the UK is hostile to all foreign takeovers, however. Japanese companies are much more welcome, as they are seen as having long term commitment to their investments. Takeda’s acquisition of Swiss company Nycomed did lead to job losses but this is seen as inevitable after a merger.* It is the wholesale closure of a factory or R&D site with major impact on the community around it which troubles people in Europe.

Many of the British researchers laid off by Pfizer in 2011 have found jobs in small start ups, but not everyone can be an entrepreneur or has the personal resilience to go through the trauma of redundancy. When I ask participants in my training what they like about working in a Japanese company, they almost always mention the stability, the long term view and the loyalty of the company to its staff. Large, stable employers are important for the health of the community, whatever the country of origin.

* Takeda announced it would close its Cambridge Science Park R&D facility in August 2016. R&D activity will be concentrated in the US and Japan, and the UK will move from global coordination activities to European only. I wonder how long that will last if the European Medicines Agency moves out of the UK however.

This article originally appeared in Japanese in the Teikoku Databank News on 11th June January 2014 and also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

Brexit business opportunities for Japanese companies

A couple of Japanese expatriate business people with whom I was having lunch with recently both remarked how surprised they were that their British colleagues were quick to recover from the Brexit shock and think positively about the business opportunities it might bring. I too have been trying to be positive and have been doing some further research into how Japanese companies are evolving in the UK. The opportunities I have identified for Japanese companies in the UK are:

1. Africa and the Middle East

The UK has historic ties to Africa and the Middle East, which means that is still a good base for coordinating activities across those regions as there are many expatriates from and experts in those regions, who live in the UK, and are sources of information and management capability.

The UK government is going to be looking to boost trade to non-EU countries, as a counterbalance to any negative impact from Brexit on trade with the EU, so there is likely to be plenty of support for developing business with these regions.

It might even be easier than before to hire people from those regions in the UK. Although a vote for Brexit was partly to stop immigration to the UK, this was very much about preventing lower skilled people from Eastern Europe living in the UK. Most Japanese companies were not hiring such people in the first place, so I doubt any restrictions on this kind of immigration will have much impact.

Japanese financial services companies are already changing the status of non-UK branches to a European Union branch or incorporated subsidiary, and are strengthening their African operations, but it looks like those operations will still be reporting into the London office, which will act as an EMEA coordination function.

Japanese manufacturers have already shifted lower skilled, labour intensive production eastwards in Europe or to Africa and I assume Brexit will accelerate this trend, with the UK being a regional hub for engineering design and development expertise

2. Infrastructure

Despite the fact that manufacturing has moved eastwards or south to Africa, the British government is well aware that British people desperately want well paid, secure manual worker jobs to return to the UK. The most obvious way to do this is through public sector investment in transportation and energy. Hitachi and other such infrastructure companies should still find plenty of business, although it is not clear what will happen to EU funding for energy and transport infrastructure projects.

3. Acquisitions in the UK

As Softbank’s acquisition of ARM proved, there are still companies in the UK which are attractive acquisition targets, not as a gateway to the Single Market but because they are unique in terms of their brand, technology or expertise. For example, food and drink brands unique to the UK, Lloyds underwriters and UK advertising agencies have all recently been acquired by Japanese companies. It seems likely the weak pound and strong yen will continue for a while, so there may be some bargains for the brave.

This article originally appeared in Japanese in the Teikoku Databank News on 14th September 2016 and is also published in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

Putting the Softbank/ARM deal in context – an exception in so many ways, is also not

To understand the sheer scale of the proposed £24bn Softbank acquisition of UK based chip designer ARM – we estimate it would increase investment by Japanese companies in the UK by over a half of the current cumulative total. Britain benefits more from Japanese investment than any other country in the world apart from the US and this deal would certainly maintain that claim, despite Brexit. By the end of 2014, the total value of Japanese investment in the UK was £38bn – to which should be added Mitsui Sumitomo Insurance’s acquisition of Amlin for £3.5bn in 2015.

There have been plenty of other acquisitions these past 15 years of UK iconic companies by Japanese companies, such as Nippon Sheet Glass acquiring Pilkington for £2.2bn in 2006 (interesting to note that ARM’s chairman is Stuart Chambers, who was CEO of Pilkington when NSG acquired it). The number of acquisitions probably accounts for the discrepancy between the Japanese Ministry of Foreign Affairs estimate of the number of Japanese companies in the UK of 879 – rather lower than that of the Teikoku Databank figure of 1380 noted previously. Of these, 470 are classified as incorporated (as opposed to branch offices) and many, as we pointed out previously, cover the whole European region. As well as concerns about losing “financial passporting” and the impact of tariffs on supply chains, a further 158 are R&D or design centres, which may well benefit from EU funds – which may mean relocating should those funds no longer be available post-Brexit.

JETRO, the Japan External Trade Relations Organisation surveyed 54 Japanese companies in the UK just before the EU referendum vote. 64.8% saw Brexit as having a negative impact on their business, with “Don’t know” 25.9% and “no impact” 9.3%. Several responded that they were looking at relocating to Germany, the Netherlands or Ireland. As JETRO points out, all three countries have strong economic links to the UK, so relocation there will not avoid being influenced by what happens to the UK and how Brexit impacts the EU.

The Japanese Chamber of Commerce & Industry in the UK has compiled the UK-Japan trade statistics for the past 15 years and it is noticeable that there is no clear trend in imports of goods from Japan – fluctuating between a high of £9bn in 2001 and a low of £6.7bn in 2009, and currently at £6.9bn for 2015. There has been an upward trend in UK export of goods to Japan, from around £3.5bn 15 years’ ago to over £4.5bn in recent years. A £3bn or so trade surplus in Japan’s favour nonetheless persists. But it is only literally half the story, The UK’s exports to Japan are actually around £9.9bn as of 2012 according to the UKTI. The other half are exports of services, primarily financial, but also legal, advertising, media, consulting etc.

The Japan-EU Free Trade Agreement is supposed to be finalised by the end of the year, and apparently may be worth £5bn a year to the UK. It will mean the elimination of the vast majority of trade tariffs, boosting imports and exports in agriculture, car manufacturing and clothing. There are still issues to be resolved on auto and agricultural tariffs as well as government procurement. And of course, how it will apply to the UK once it leaves the EU is a big unknown.

Looking at the development of Japanese companies in the UK over the past 40 years, apart from the big automotive manufacturers, it is clear that, as I wrote in my history of Mitsubishi Corporation, the UK has become a coordination and financing/marketing hub for Japanese companies in the region. Most of the famous Japanese names, such as Sony, no longer have mass production in the UK. Sony has a manufacturing centre in Wales, but it develops and produces low volume professional audio visual equipment. Even in the automotive sector, if you look closely at parts manufacturers such as Sumitomo Electric Wiring, which acquired Lucas SEI in 1999, or Yazaki, their operations in the UK are mostly development, design and engineering, or regional coordination. Their UK factories were shut down and production moved east or to North Africa years ago.

So Softbank’s acquisition of ARM, an exception in so many ways, is also not. It is buying into the UK’s design and technology expertise, as well as multinational marketing and management skills. Forty plus years of trade in the EU and the development of the Single Market has done exactly what the textbooks would predict, which is to make it clear where the UK’s strengths are – design, engineering, finance, marketing, legal and other services and some high end manufacturing. The revival of mass car production in the UK is because of our membership of the Single Market. The UK on its own is not enough to sustain a car industry (see the paragraph in my blog post here regarding the 100 million market theory).

The Japan-EU FTA is meant to cover services as well as products but the EU single market in services has not progressed for a while and it looks like the Transatlantic Trade and Investment Partnership, which would cover EU-USA services, is faltering. It does seem like the UK is going to end up spending enormous amounts of its resources and energy on unpicking 40 years of trade arrangements which have already had a profound impact on its economy, at a time when those resources would have been better devoted to developing agreements which would help the UK play to its strengths.

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Mitsubishi Motors & Nissan – Is Ghosn prepared to try to nail jelly to the wall?

When it comes to the Mitsubishi group of companies (keiretsu), I did almost literally write the book (A History of Mitsubishi Corporation in London: 1915 to Present Day), although my focus was more on the way the pre-war Mitsubishi Goshi evolved into Mitsubishi Corporation, the trading company, and more specifically, its London office.

It’s generally perceived in Japan that the Mitsubishi keiretsu has been the most cohesive and robust of all the keiretsu (Mitsui, Sumitomo, Fuyo being the other main ones) but as you might imagine, the current Mitsubishi Motors fuel economy data manipulation scandal has put this to the test.

According to Nikkei Business magazine (April 22^nd edition, not available online), the cracks are appearing. Whereas in the previous Mitsubishi Motors crises (recalls for various defects in the 2000s) Mitsubishi Heavy, Mitsubishi Corporation and Bank of Tokyo Mitsubishi UFJ all stepped in and financial support came from Tokio Marine, Mitsubishi Electric and Mitsubishi Materials as well, this time seems different.

Even now, having been hit by the commodity price slump, the automotive sector remains an important profit generator for Mitsubishi Corporation as it is involved in the sale and financing of vehicles in Asia and Europe as well as engine manufacture. Mitsubishi Corporation also seconds quite a few employees to Mitsubishi Motors, including the current Chairman and CEO Osamu Masuko.

Other Mitsubishi companies do not have such ties. Even though Mitsubishi Chemical Holdings supplies products to the automotive sector, its main customers are Toyota and Nissan. Mitsubishi Paper also said “we are busy with our own affairs”.

It’s not just about whether the companies have business together, points out the Nikkei. It’s also an issue of corporate governance. The Mitsubishi UFJ Financial Group has been reducing cross shareholdings, where appropriate. Mitsubishi Corporation is also checking shareholdings regularly for rationale and yield and disposing of them as necessary. Presumably it is hard to justify “Protecting the Three Diamonds” as the sole reason for support, to external directors and shareholders.

The Nikkei sees this as a chance for the Mitsubishi group to embark on a delayed restructure [the article was written before Nissan stepped in to acquire a 34% share]. In previous restructurings, there was a discussion about selling off the largely domestic ‘mini-car’ business, so this might be finally realised.

A more recent article in the Nikkei Asian Review points out that a key question is whether Nissan’s CEO Carlos Ghosn’s aggressive brand of reform will suit the corporate culture at Mitsubishi Motors “where change is not exactly a buzzword”. The question I have is what the corporate culture of Mitsubishi Motors actually is, other than a reluctance to change. The lack of a clear definition of values and vision may indeed be one of the causes of the repeated scandals. There are the Mitsubishi Three Principles, but not all Mitsubishi companies showcase them, and they lack the strong philosophy and toolkit of something like the Toyota Way.

Along with my official book on Mitsubishi in London I wrote a further unpublishable chapter, called “The Vague Company”. It talked about the benefits and difficulties of having a vague, unspoken corporate culture. Employees can enjoy the sense of being treated like adults, to work out for themselves what the right “way” is, but it makes global expansion – particularly post-merger integration – highly frustrating, when new, hybrid cultures need to develop. As one frustrated American employee at another Mitsubishi group company said to me the other day “I can’t get a handle on what the Mitsubishi Way is”. It is, as we say in British English, like trying to nail jelly to a wall. I suspect Ghosn may quickly tire of this and use his hammer in more brutally effective ways.

For more on Mitsubishi Motors’ future, I recommend this blog post by my old friend and former head of corporate communications at Mitsubishi Motors in the Daimler Chrysler days, Jochen Legewie: http://www.cnc-communications.com/blog/the-future-of-mitsubishi-motors/

For more on Mitsubishi corporate culture, I have gathered some resources on Pinterest here

“Japanese companies are too scared to touch their overseas acquisitions” – Nidec’s Nagamori

Shigenobu Nagamori, the billionaire founder of the world’s biggest manufacturer of micro-motors for hard disks and optical drives, Nidec, has acquired more than 40 companies in Japan and overseas. He comments in a Nikkei Business article that “you cannot just leave foreign acquisitions alone to get on with things by themselves. You need thorough mutual understanding and to even replace management if necessary.”

“Although you no longer hear about Japanese companies sending lots of managers over to their overseas subsidiaries who end up issuing all sorts of misguided directions, you now hear of companies who say ‘we think the same way as the counterpart management’ and so decide to buy the company and then just leave the management as is.”

“This is an illusion. Actually they are being left alone because the Japanese company doesn’t really understand what they are doing. It ends up with compromising on the necessary management reforms and profit targets.”

“I have regrets myself. We acquired 10 or so companies in Europe and North America from about 2010. We were warned by various companies who had M&A experience and financial institutions that we couldn’t restructure foreign companies the way we would Japanese acquisitions and that it was best to ‘leave it up to the foreigners’ otherwise they will quit”

“I thought that was true at the time. I also took on board the advice that Japanese managers needed to be people with Harvard degrees and a network amongst foreign executives.”

“However one company did not make any improvement no matter how often I set profit targets. I thought there must be something wrong with the company management as such a company should as a matter of course achieve profit margins over 15% but I was told that it was the limit for their industry.”

“In Japan you would try to persuade the management to adopt our “kaizen” knowhow (knowledge of how to improve) but we hit a wall with this in the West. So in 2012 we changed the management of the acquired company. But you can’t do it like pulling a trigger. I make a point of visiting each company at least once a year and have dinner not just with the executives but also the managers and discuss things with them. I also encourage them to send emails directly to me and I respond to them. I am trying to understand all the ideas people have for improving profitability.”

“It’s important that people in the company understand my thinking and I understand whether they are capable of understanding. If they are then it doesn’t matter if the CEO is changed. ”

“It’s the same in Japan. Communication is important. If you just cut back costs and improve profit, the company will not survive in the long term. Where is there waste, how can we make the most profitable products – the basics are the same in Japan or elsewhere. If this is understood, then overseas companies can be reformed too.”

“I think Japanese companies are too scared to touch their overseas subsidiaries. They overthink the differences. I used to be like that, but there is no need. The basics of management are the same everywhere.”

Japanese boards in Europe should reflect their customers, employees and community

I have just completed the first phase of research into how diverse the European subsidiary boards of the biggest Japanese companies in Europe are, both in terms of the nationality mix of Japanese and European directors, and also the number of women on the board.

More boards in Japan had women on them than in Europe, which is surprising if you were expecting boards to reflect the employee mix – particularly the pipeline of managers coming through the ranks of an organisation – as there are without doubt more women employees and proportionally more women managers in Japanese companies in Europe than there are in Japan.

The proportion of directors with European nationalities on the board of Japanese subsidiaries varied wildly from none in the case of Toshiba, Sharp and Fast Retailing (the Uniqlo subsidiary in the UK), through to 100% in the case of Asahi Glass, Bridgestone, Canon and Nidec. So national diversity does not seem to be influenced by which industry the company is in. This also means that what to me is the most compelling case for a diverse board, that it should reflect the customers it is serving, is not the key factor I thought it would be.

20 years’ ago, becoming less reliant on Japanese customers abroad as well as in Japan, was the driving force for many Japanese companies embarking on “kokusaika” (“internationalization”). Canon was a pioneer then in appointing Europeans to senior positions in overseas subsidiaries and does as a consequence appear to have fared better than other companies in the consumer electronics sector, both in Japan and in Europe.

The current favoured path to globalization for Japanese companies is through M&A rather than growing international businesses and executives internally, and the major acquisitions of the past decades account for the diverse boards of Asahi Glass (who acquired Glaverbel) and other companies that still have a high proportion of European directors such as Fujitsu (International Computers Ltd), Nomura (Lehman Brothers) and NSG (Pilkington).

There is some sectoral influence. For example, the financial services industry is under intense scrutiny by European regulators who have the power to approve board appointments. They expect directors to have deep understanding and experience of local markets – something which not many Japanese executives can claim.

Both Fujitsu and Hitachi have substantial public sector oriented businesses in the UK (government services, nuclear power and rail) which means that they not only need to meet the diversity requirements of government purchasing but also gain acceptance of the communities in which they operate. For example, the board of a Japan-owned UK utility recently advertised for a director, with a requirement that applicants be a customer of that utility.

For smaller Japanese companies, or those which are just starting in Europe, it is tempting to stick with a small board with just a couple of non-resident Japanese directors, but as boards come under pressure to have greater transparency and better governance in Europe, appointing local directors from the start should lead to better relations with regulators, customers and employees.

(This article first appeared in Japanese in the Teikoku Databank News in December 2015 and also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.)

Governance – interview with Yoshimitsu Kobayashi, external director at Toshiba and Tokyo Electric Power

Yoshimitsu Kobayashi, chairman of Mitsubishi Chemical Holdings, seems to be attracted to intractable problems. Not only has he become an external director of Tokyo Electric Power Company, post Fukushima but is now also a director of Toshiba, as it goes through a massive restructuring of its business, following its falsified accounting scandal (see our previous post – Toshiba – where did it all go wrong?). On top of all that he is also the chairman of the Japan Association of Corporate Executives.

Asked by the Nikkei Business magazine why he has taken on both TEPCO and Toshiba, he explains that he regards both as extremely important to the Japanese economy. “Nuclear power is a Japanese national policy, and Toshiba is a national policy company. If it is damaged, then it is damage to the whole Japanese economy” (as we explained in another post Shazai and the art of being a corporate shame magnet). “That doesn’t mean we have to preserve it at whatever cost. We need to be open about all the bad parts of Toshiba, and take responsibility for explaining what happened. Then we can rebuild. Governance needs to have concrete substance, not just on the surface.”

Nikkei Business calls 2015 “Year Zero of Corporate Governance” for Japan. Kobayashi says it will take 10 years to change corporate culture at the roots. Toshiba and TEPCO resemble each other, he thinks, in that TEPCO is learning to be a privately owned company, that looks after public infrastructure, which is similar to Toshiba.

“Aspects of Japan that had been good such as life time employment and seniority based promotion have now become a minus, and Japan has lost its competitiveness. Companies should not rely on politicians. It is not just about deregulating but changing the spirit behind the regulations.”

Kobayashi points out that while Japanese companies have been investing large amounts in overseas M&A, domestic M&A is still a fraction of that. There are 3 nuclear power companies, 8 car companies and yet 20,000 chemical companies. As a consequence, research and development is behind the West and China.

“What’s key is for Japan to keep hold of its traditional technical strength, but work out how to team this up with services.” “Mitsubishi Chemical Holdings is doing this – working on new materials, for the environment and healthcare… and also for light weight cars”.

Kobayashi also believes that top executives in Japanese companies should walk away once they have finished their stint as chairman. However he think that it takes 10 years at the top to really understand a company. The Toshiba system, whereby Presidents only stayed in post for 4 years, but then carried on for many years after as advisors was not healthy. “Maybe it’s because their remuneration is not as high as in the West that they stick around. Dow Chemical’s CEO is earning 50 times what I earn. Although Mitsubishi group companies don’t have so much cross shareholding in common now, we keep an eye on each other’s governance, so oldies are not allowed to hang around”

“Toshiba has a surprising number of businesses. In companies like that where there are many capable people, there are a lot of big fish swimming in small ponds. They think they are the company, and forget the public interest.”

Category: M&A