Going hybrid A special report on business in Japan December 1st 2007
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Going hybrid Also in this section
Message in a bottle of sauce Japan’s corporate governance is changing, but it’s risky to rush things. Page 3
Still work to be done Japan’s labour market is becoming more ex- ible, but also more unequal. Page 6
Not invented here Entrepreneurs have had a hard time, but things are slowly improving. Page 8
No country is an island Japan is reluctantly embracing globalisation. Page 10
JapAnglo-Saxon capitalism Have Japanese business practices changed After 15 years of gloom, Japan’s companies have emerged with a new, enough? Page 13 hybrid model a bit closer to America’s, says Tom Standage
NCE it was the Walkman. Then it was omy as a whole (see chart 1, next page). Jap- Othe PlayStation. Today it is the Toyota anese rms have restructured, paid down Prius that epitomises Japan’s technologi- their debts and are now posting record pro- cal and industrial prowess. Built by Japan’s ts. The banking system has been cleaned largest company, which is now on the up. Yet despite this progress, Japan still verge of becoming the world’s largest car- faces huge problems. maker, the Prius is a hybrid car propelled Government debt, at around 180% of by the combination of a petrol engine (for GDP in the current scal year, is the highest range) and an electric motor (for energy- for any developed economy (see chart 2, e ciency). The Prius was the rst commer- next page). The government will soon cial hybrid car and has become by far the have to raise consumption taxes just to most successful, with sales of over 1m stop the debt from growing. Japan also since its launch in 1997. Although that is a faces a painful demographic squeeze as its modest gure compared with Toyota’s an- population ages and the workforce starts nual output of around 8m vehicles, it has to shrink. This will put a premium on in- transformed the company’s image. Toyota creasing labour-productivity growth, is now known for greenery and innova- which at 1.2% is only half the OECD aver- tion as well as manufacturing e ciency. age, largely thanks to the hugely ine cient But the Prius also symbolises another service sector, which accounts for 70% of transformation: that of Japan itself. Just as GDP and two-thirds of employment. Ja- a hybrid car combines the distinct advan- pan’s average labour productivity in ser- tages of petrol and electric propulsion sys- vices fell from 88% of the American level in tems, Japan has been developing a new 1993 to 84% in 2003. This highlights an- hybrid model of capitalism that brings to- other of Japan’s problems: its two-tier Acknowledgments gether aspects of the old Japanese model, economy, made up of an e cient, global- In addition to the people named in this report, the author would like to thank Bill Emmott, Chikatomo Hodo, Graham which ran into trouble in the early 1990s, ised manufacturing sector and an inef- Davis, Harold Meij and Endymion Wilkinson. with carefully chosen elements of the cient, inward-looking services sector. more dynamic American or Anglo-Saxon Japan also risks losing its edge in inno- A list of sources is at variety of capitalism. The resulting hybrid vation. Although it spends far above the www.economist.com/specialreports model has been adopted by many rms OECD average on research and develop- and has already helped to transform Ja- ment (R&D) as a share of GDP, this money An audio interview with the author is at pan’s fortunes. After wrenching political is not always put to good use. The Science www.economist.com/audio and corporate reforms, the country in 2002 Council of Japan estimates that Japan’s emerged from over a decade of economic R&D is only about half as e cient as Eu- A country brie ng on Japan is at stagnation. Since then the recovery, origi- rope’s and America’s. Entrepreneurial www.economist.com/japan nally export-led, has spread to the econ- start-ups account for only around 4% of1 2 A special report on business in Japan The Economist December 1st 2007
2 rms in Japan, compared with 10% in Eu- ders consolidation among Japanese rms, rope and over 14% in America, and Japan which is necessary if they are to become Weighed down 2 comes bottom in several rankings of entre- more globally competitive. It prevents the Government debt as % of GDP, 2007 estimate preneurship. Despite the might of its big e cient redeployment of labour and a exporters, Japan is also a laggard in global- proper use of women and elderly workers, 0 50 100 150 200 isation, with the lowest levels of foreign di- which will be vital if Japan is to cope with Japan rect investment, imports and foreign work- its ageing population and shrinking work- Italy OECD ers in the . With a domestic market force. The old model hampers entrepre- France that o ers little scope for growth, Japan is neurship and innovation in small compa- missing out on opportunities overseas. nies, an important component of a Germany dynamic and responsive economy. All of Canada Time for a new model this acts as a brake on growth. At the same United States Its old industrial model, which formed the time, Japan needs to become more closely Britain basis of the Japanese miracle in the sec- integrated into the global economy, both Spain ond half of the 20th century, was devised to gain access to fast-growing foreign mar- Source: OECD under very di erent circumstances: high kets and to enable competition from for- growth and a pyramidal population struc- eign rms to spur improvements in the ture, with far more young people than old, stodgy services sector. That is why a new, of doing things, at least in some areas and notes Atsushi Seike, a labour economist at more exible model is needed. in some companies. You pick and choose Keio University in Tokyo. This old model In the late 1990s, when Japan had en- which bits you adopt, says Hirotaka Ta- was founded on three main elements: rst, dured almost a decade of stagnation, the keuchi, dean of the school of corporate lifetime employment, in which workers American model seemed to have all the strategy at Hitotsubashi University. Japan spend their entire career at the same rm, answers a reversal from the 1980s, when has tilted more towards the Anglo-Saxon slowly working their way up the ranks; American rms were trying to emulate the model, but wants to go its own way. The second, seniority-based pay, which links seemingly unstoppable Japanese model. debate is about how far to tilt. wages to length of tenure rather than abil- America’s economy was booming, fuelled Sir Howard Stringer, the rst non-Japa- ity; and third, company-speci c unions, by a ourishing technology industry. Its nese boss of Sony, the Japanese electronics which promoted close co-operation be- approach seemed more successful at pro- giant, embodies the attempt to combine tween unions and management. moting innovation and growth in the in- Japanese and Anglo-Saxon approaches. Another typically Japanese practice ternet era, and its vibrant start-up scene In our company, as in others, there was a was a close relationship with a main was a far cry from Japan’s staid big-com- lurch towards the Western model, he bank and other companies organised into pany capitalism. says. My job is to manage that without corporate groups known as keiretsu, So policymakers rewrote corporate law alienating Japanese sensibilities. Some of bound together by a web of reciprocal to allow Japanese companies to adopt an the virtues of the Japanese model have to cross-shareholdings. The old model was American-style model of corporate gover- be retained. It is a balancing act, some- well suited to the times: it delivered social nance, and some companies began to times stimulating, sometimes frustrating, stability and cohesion as Japanese work- adopt Anglo-Saxon practices such as per- but there is merit on both sides. It helps ers pulled together to catch up with West- formance-based pay, share options, out- that he is a foreigner but not an American, ern nations, and helped Japan to become side directors, promotion based on ability, admits Welsh-born Sir Howard. the world’s second-biggest economy. pursuit of shareholder value and hiring But the population structure has new employees in mid-career. The bank- Finding the right balance changed beyond recognition and Japan is ing system was recapitalised, cross-share- But now that the economy is growing no longer a developing country, so the old holdings were unwound and companies again, there is much debate about whether model no longer ts and many of its embarked on a programme of restructur- Japan has found the right balance or strengths have become weaknesses. It hin- ing. But a funny thing happened on Ja- whether more reform is needed or even pan’s way to the American model it never whether it is time to reinstate some of the got there, observes Steven Vogel, a politi- old ways. After the departure of Junichiro A modest recovery 1 cal scientist at the University of California, Koizumi, the charismatic and reformist Japan’s GDP, % change on previous year Berkeley. Many of the reforms met with prime minister who held o ce between opposition and were scaled back. Then the 2001 and 2006, there is a sense that the po- 6 dotcom crash and the Enron scandal litical momentum for change has been caused the American model to lose its lus- lost. Instead, there is growing concern that tre, to the delight of Japan’s old guard. the spoils of the recovery have not been 3 Instead, forward-looking Japanese equitably distributed, and that inequality + rms have devised a hybrid model that is rising a worrying phenomenon for a combines elements of both the old Japa- society in which 75% of people once identi- 0 nese and the Anglo-Saxon model. We ed themselves as middle-class. – have been going through a process of trial There has been a backlash recently, and error, of what to change and what not particularly since we recovered from the 3 to change, says Fujio Cho, the chairman recession, says Mr Seike. This contributed 1990 95 2000 05 07* of Toyota. The e ect has been to move Ja- to the fall of Mr Koizumi’s successor, Sources: National statistics; The Economist *Estimate pan somewhat closer to the American way Shinzo Abe, who resigned in September.1 The Economist December 1st 2007 A special report on business in Japan 3
2 Japan’s new prime minister, Yasuo Fu- for the hybrid model, which pays more at- Marra, a Japan specialist at A.T. Kearney, a kuda, said in his rst policy speech in Octo- tention to shareholders at the expense of consultancy. Japan is at a potential tip- ber that in promoting structural reform, other stakeholders in a company in par- ping point for the next few years. we have seen disparity and other pro- ticular, its employees. There is obvious Yet despite the current political paraly- blems surface. He was committed to fur- ambivalence about the adoption of Amer- sis, reform has taken on its own momen- ther changes, he said, but would also ad- ican practices at Nippon Keidanren, Ja- tum. The slow drip of legal and regulatory dress the inequalities arising from pan’s conservative big-business assoca- changes, many of them passed by previ- previous reforms. tion, which has campaigned to slow the ous administrations or introduced by Ja- Japan is now at a crucial stage. Owing pace of reform. When there are two mod- pan’s powerful bureaucracy, continues. to the recent resurgence of the Japanese els, says Masakazu Kubota, Keidanren’s Individually, some of them do not amount economy, support for reform is beginning managing director, globalisation means to very much, but collectively they add up to fade and the future of Japan can be said the more competitive model will prevail. to a change in the Japanese business envi- to be hanging in balance, notes a report Unfortunately, the most competitive sys- ronment. Retrospectively, the changes from Keizai Doyukai, a business lobby. tem is in the United States, he says. during the past decade were signi cant, Much of the political wrangling in Japan, In part, Keidanren is trying to shield its and we are a di erent country now in and the various takeover battles and more dinosaur-like members from reform. many respects, says Mr Hasegawa. showdowns between activist investors But its scepticism re ects a wider concern. This special report will look at four of and corporate executives, can be seen as Japanese companies are social institu- the most important areas of change: cor- part of the debate about how much more tions, providing social cohesion and tak- porate governance, the labour market, the Japan needs to change, and how large a ing on many roles that in other countries climate for entrepreneurs and innovation, component of American or Anglo-Saxon are performed by the state. By contrast, the and Japan’s response to globalisation. It capitalism ought to be incorporated into Anglo-Saxons view companies as money- will examine what has changed and what the new hybrid industrial model. Japan making machines that can be freely has not; how and where Japan has struck has to Anglo-Saxonise, but in a Japanese bought, sold, merged and dissolved in or- compromises between the Japanese and way, says Yasuchika Hasegawa, the vice- der to maximise returns to shareholders. Anglo-Saxon models; how widely the chairman of Keizai Doyukai. Japan has to What makes Japan interesting is that it’s a new hybrid model has been adopted; and nd its own capitalism style. society having a debate about shareholder whether it will be able to solve Japan’s Not everyone shares his enthusiasm versus stakeholder capitalism, says David many problems. 7 Message in a bottle of sauce
Japan’s corporate governance is changing, but it’s risky to rush things
T WAS not a storm in a teacup but a battle tenstein, Steel’s boss, insisted that Steel forecast pro t of ¥500m. Iover a bottle of sauce. The ght during had a long-term commitment to Bull-Dog. The Bull-Dog saga was a litmus test for 2007 for Bull-Dog Sauce, a Japanese condi- But on a visit to Tokyo to meet Bull-Dog’s attitudes to shareholder capitalism. Those ment-maker with 27% of the sauce market, management, he made matters worse by who believe that companies should be run cast into sharp relief the con ict between saying he planned to educate and en- to maximise the returns to shareholders no-holds-barred Anglo-Saxon capitalism lighten Japanese managers about Ameri- thought that shareholders should have ac- and the traditional Japanese approach to can-style capitalism. cepted Steel’s generous o er; but those corporate governance. At its shareholder meeting in June, Bull- who hold the traditional Japanese view The supposed villain of the piece was Dog proposed to enact a poison pill de- that companies are social communities, Steel Partners, an American investment fence that involved issuing three new not baubles to be bought and sold, disap- fund that since 2000 has invested more shares for every existing share to all share- proved of Steel’s treatment of a venerated than $3 billion in some 30 Japanese com- holders except Steel, which would in- 105-year-old company. panies. Having built up a 10% stake in Bull- stead receive cash, diluting its original Both sides have a point. Japanese com- Dog, Steel launched a takeover bid in May, stake. Mr Lichtenstein gave warning that panies have neglected their shareholders o ering to buy all outstanding shares in the poison pill could set a dangerous prece- for too long. But, says Gerald Curtis, a Ja- the company for around $260m, a 20% pre- dent and deter investment in other Japa- pan-watcher at New York’s Columbia Uni- mium over the share price at the time. Bull- nese companies. But that, of course, was versity, Steel’s heavy-handed, at-footed Dog’s management opposed the bid. the whole idea. The poison-pill motion approach has made it more di cult for Why us? lamented the rm’s managing was passed, and although Steel mounted a others to argue that companies should pay director, Masaomi Tamiya. Steel was ac- legal challenge, Bull-Dog’s right to use the more attention to their shareholders. A cused of being a greenmailer a preda- device was upheld by the courts. So the for- lot of Japanese in the business and nan- tor that buys a large share in a company, eign investors were thwarted, but at great cial community are mainly mad at Steel threatens to take it over and then agrees to cost to Bull-Dog, which said it expected to because they make it more di cult for Ja- drop its bid and sell its stake back to the make a loss of ¥980m ($8.3m) for the year pan to do what it has to do, says Mr Curtis. company at a hefty premium. Warren Lich- to March 2008, rather than the previously For one thing, Japanese rms tend to sit1 4 A special report on business in Japan The Economist December 1st 2007
2 on piles of money: the cash and securities they hold amount to 16% of gross domestic product, compared with a long-term aver- age in America of around 5%. And Japa- nese companies’ average return on equity is only around 9%, compared with 14-17% in America and Europe. Under a previous by the two companies’ boards. Ichigo, tivists halfway. Japan is gradually coming set of rules, dividend payments were which held a 13% stake in Tokyo Kohtetsu, to appreciate the bene ts that activist in- taxed whereas capital gains were not, so approved of the logic of the deal but felt vestors can provide, says Shoichi Niwa of Japanese investors were more interested in that the proposed share-swap short- RECOF, a specialist mergers-and-acqui- share-price gains than in dividends; but changed Tokyo Kohtetsu’s shareholders. sitions consultancy. those rules no longer apply. And the pro- Some foreign activist investors are also portion of Japanese shares held by foreign taking a more subtle approach. The Chil- Learning to love M&A investors has increased hugely, from 5% in dren’s Investment fund (TCI), for instance, Japanese rms are also changing their atti- 1990 to 28% now. Both these changes have which has a 10% stake in J-Power, an elec- tudes towards M&A. The pace is picking up increased the pressure on companies to trical utility, earlier this year pressed the (see chart 3) and the nature of the deals is use any excess cash to increase dividends, company to triple its year-end dividend. changing. For most of the past decade, says or to buy back shares to boost prices. TCI’s boss, Christopher Hohn, began his Mr Niwa, M&A deals involved mainly do- Foreign investors have been demand- letter to shareholders by apologising for mestic rms as they restructured and spun ing this for years, but domestic investors writing to them out of the blue, then care- o non-core subsidiaries. But then the are now following suit. A pioneer in this fully explained why he thought that J- merger activity spread to the core busi- eld was Japan’s most famous activist in- Power needed to do better. The company nesses themselves, with consolidation in a vestor, Yoshiaki Murakami, a colourful responded with a letter of its own, and in number of industries including oil, steel, and controversial gure who in July was June TCI’s resolution was defeated. TCI banking, insurance, pharmaceuticals and found guilty of insider trading and sen- trod carefully and decided to lose round retailing. In the past two years Japanese tenced to two years in prison. Although Mr one gracefully, says Mr Marra approv- rms have also made more acquisitions Murakami plainly went too far, he helped ingly. Investors who recognise that Japan abroad. These are not the trophy assets of make the case for a greater emphasis on is still getting used to a more activist ap- the late 1980s, but strategic purchases by shareholder returns. Japan’s Pension Fund proach (rather than treating Japanese rms Japanese rms to make themselves more Association, a quasi-governmental body in the same way they would treat Ameri- globally competitive: Nippon Sheet Glass that oversees investments worth more can ones) will reap bene ts in the long bought Pilkington, Japan Tobacco bought than $100 billion, said this year that it term, he says. Gallaher and Toshiba bought Westing- would press rms to pay higher dividends Japanese managers may not nd it easy house, for example. and would vote against directors of com- to switch their attention to shareholder Changes in Japan’s corporate law acted panies making inadequate returns. value, but the trend towards greater share- as catalysts. In 1999 it became possible to Another example of an investor exert- holder activism is clear. This year around buy other rms using shares; in 2000 it be- ing pressure involves Sparx Group, a Japa- 30 companies have faced shareholder came easier for companies to spin o non- nese investment fund that was the largest resolutions, double the 2006 gure. Many core divisions. Accounting rules were also shareholder in Pentax, a camera-maker. In of them demanded higher dividend changed, forcing companies to produce April Pentax changed its mind over an payouts. All such resolutions were de- consolidated statements and disclose agreed takeover o er from another Japa- feated, notes Steven Thomas of UBS, an in- cash ow gures and making it harder to nese rm, Hoya, the world’s biggest pro- vestment bank, but in many cases compa- hide poorly performing subsidiaries. An- ducer of optical glass, and ousted the com- nies subsequently introduced their own other rule change requires companies to pany’s president who had devised the resolutions to increase dividends by a list assets at market value, which makes it deal. But Sparx, along with other investors, smaller amount, in e ect meeting the ac- easier to work out whether a company’s felt that being bought by Hoya would be market capitalisation is lower than the the best option for Pentax as well as for its value of its assets (not uncommon in Ja- shareholders, so it got the ousted president Getting the hang of it 3 pan). There have been very drastic reinstated, prompting the Pentax board to M&As involving Japanese companies, number changes in this area in the past ten years resign. The deal went ahead on improved 3,000 more drastic than anything seen before, terms. Sparx prevailed by handling the says Mr Niwa. situation delicately. That’s their style not 2,500 With each change, the rate of deal-mak- to put up a loudspeaker, says David ing picks up. The latest one, which took ef- 2,000 Marra of A.T. Kearney. fect in May, covers triangular mergers in Similarly, in February another Japa- 1,500 which a foreign rm uses its own shares, nese investment fund, Ichigo Asset Man- via a Japanese subsidiary, to buy a Japa- agement, successfully persuaded share- 1,000 nese rm. The rst triangular deal, the holders in Tokyo Kohtetsu, a steel 500 takeover of Nikko Cordial by Citigroup, company, to reject a merger with Osaka was announced in October. Things are Steel. This was the rst time that share- 0 getting bought and sold in a way we didn’t holders in a Japanese company had ever 1985 90 95 2000 05 07* see in the 1980s and 1990s, says Mr rejected a merger plan already approved Source: RECOF *Year to August Thomas. Managers used to regard M&A as1 The Economist December 1st 2007 A special report on business in Japan 5
2 a sign of weakness, unnecessary for rms they acquire will be di cult to run. good companies. But now they under- No longer so cross 4 But there is no question that attitudes stand that M&A can be a good thing, that Cross-shareholdings in Japan* on things like mergers and shareholder this is a standard part of the corporate tool- % of total market capitalisation value are changing, even if they still stop box, he explains. Admittedly, the average far short of Anglo-Saxon enthusiasm. Ac- 50 level of M&A as a proportion of GDP, at cording to gures from the Cabinet O ce, around 3%, is much lower than that in 40 the proportion of Japanese companies America or Britain, at about 10%, but it is a that describe themselves as shareholder- lot higher than Japan’s gure in 1991, when 30 focused increased to 40% this year from it was just 0.4% of GDP. 33% in 2002, and the proportion describing 20 A bigger concern is that M&A activity is themselves as worker-focused fell from not playing its proper part, which is to 10 18% to 13%. In other areas of corporate gov- make companies more e cient. That is be- ernance, too, Japanese companies have cause acquired companies often continue 0 shifted towards a more Anglo-Saxon ap- to be run as distinct rms within a rm, 1990 92 94 96 98 2000 02 04 06 proach, but in a way that respects tradi- and the usual cost savings from laying o Source: Nomura *Excludes JASDAQ tional Japanese sensibilities. sta do not materialise because Japanese In 2002 the commercial code was rms rarely sack people. Similarly, the value of which has since declined. Had amended to give Japanese companies a opportunity to save money by replacing Oji’s bid succeeded, it would have set a choice of two models for corporate gover- two brands with a single one is not always fantastic precedent, says Mr Thomas. But nance: the traditional Japanese system taken. Companies have a face problem, hostile bids still seem to be regarded as ta- with statutory auditors and an alternative explains Katsumi Ihara, the head of Sony’s boo though a recent survey by Japan’s committee-based system, modelled on the electronics division. Employees and cus- Cabinet O ce found that 66% of compa- American approach, which involves sepa- tomers have strong attachments to compa- nies said they were interested in pursuing rate audit, remuneration and nomination nies and brands and want them to live on, M&A, and a further 6% said they would committees with a majority of outside di- which hinders M&A, he says. consider making a hostile bid if necessary. rectors. This was the most explicit example Mr Marra points out that the average A precedent would be a good thing, of the government’s e orts to encourage takeover premium paid in America is 25%, since it would help to convince Japanese Japanese companies to adopt a more which re ects the cost savings that the rms of the merits of a more dynamic ap- American style of corporate governance. buyer hopes to achieve. In Japan, the aver- proach to M&A, says Marc Goldstein of In- But although several large companies age premium is zero. You don’t pay any- stitutional Shareholder Services (ISS), a re- immediately adopted the new system in- thing because you’re not going to do any- search rm. He cites Renault’s alliance cluding Sony, Hitachi, Toshiba, Hoya, No- thing, says Mr Marra. Instead, sta with Nissan, which convinced Japanese mura and Nikko Cordial very few others numbers are reduced by natural attrition, bosses that selling a big stake to a foreign followed suit. Of the 1,750 companies in and brands live on. rm could be a good idea, and also illus- the Tokyo Stock Exchange’s rst tier, only Mr Niwa is more optimistic. Japan is trated, in the person of Carlos Ghosn, that 100 or so have adopted it. Still, many have now at the beginning of a new era of fully foreign managers could use their expertise gone for something in-between, sticking edged M&A , he says, which will go be- to turn a Japanese company around. with the Japanese system but appointing yond mere asset-shu ing to more radical There always needs to be a success story more outside directors to their boards. restructuring. Japanese managers have to convince corporate Japan of the merits Around one-third of Japanese companies spent the past decade getting used to the of foreign practices, says Mr Goldstein. now have outside directors. idea of M&A. Now, at last, M&A is not Similarly, he says, a successful triangu- The Japanese de nition of outsider is something odd but a normal part of busi- lar merger might change attitudes towards not necessarily one that foreigners would ness. There have even been a few at- foreign takeovers. At the moment, many recognise. One survey found that 30% of tempts at hostile takeovers, something that Japanese rms are worried that the new outside directors came from partner com- was previously unheard of in Japan’s cosy triangular-merger law will lead to an out- panies, 18% from other companies in the corporate culture. break of hostile takeovers by foreign buy- same keiretsu, 16% from a parent company ers. The law was delayed for a year after a and 5% from the company’s main bank . Hostile intent campaign by Keidanren, Japan’s conserva- True, some Japanese companies Sony is a When in August 2006 Oji Paper, Japan’s tive big-business association, which gave notable example have installed genu- biggest paper rm, tried to take over Ho- companies time to put in place defensive inely independent outside directors on kuetsu Paper, a smaller rival, it was the rst measures, such as poison pills and cross- their boards. But others, such as Toyota, hostile bid by one blue-chip rm for an- shareholdings with other companies a still do not have any outside directors at all. other. Oji’s bid made commercial sense: in once common practice that had been in de- In this aspect of corporate governance, an industry lumbered with overcapacity, cline for many years (see chart 4). Yet the as in many others, Japan has shifted to- it seemed a better idea to buy Hokuetsu, new rules make it almost impossible to wards a more American approach, but has which had just invested huge sums in new pull o a triangular merger without the ap- retained many elements of the traditional equipment, than to splash out on updated proval of the target rm’s management. Japanese way of doing things. Japan sees equipment itself. But Oji’s move was And the big foreign rms that are most a new thing and says: ‘Hold on, we don’t widely criticised, and the bid was blocked likely to take advantage of the new law do that’, says Mr Thomas. Then it says: when Nippon Paper, the industry’s num- would prefer to do friendly deals anyway, ‘Oh, it’s not so bad but let’s do it in a Japa- ber two, bought a stake in Hokuetsu, the says Mr Goldstein, otherwise the Japanese nese way’. 7 6 A special report on business in Japan The Economist December 1st 2007
Still work to be done
Japan’s labour market is becoming more exible, but also more unequal
N THE summer of 2007 Toshifumi Mori ment on steadily increasing pay, with Imoved back to Japan, having spent 14 generous fringe bene ts and a lump years in America, Canada, Britain and Ger- sum on retirement. Employees many working for Mitsubishi, one of Ja- worked their way up through the pan’s big industrial groups. He was struck ranks, so age and seniority were by some of the advertisements he saw on tightly intertwined. This made it the Tokyo subway. Such hoardings, he hard for people to switch compa- feels, tell you what’s in . Alongside the nies in mid-career. Women who left posters promoting mobile phones and to have children found they could beer he was surprised to see advertise- return only to more junior, part-time ments for headhunters and recruitment positions. People competed ercely rms. There was nothing like that 15 years for jobs at the best companies but ago, he says. He joined Heidrick & Strug- once they were in, their performance gles, one of several companies both pro- made no di erence to their pay. At Mit- moting and pro ting from a more exible subishi your salary went up by the same Japanese labour market. amount, no matter how hard you worked. Where he worked before, the tradi- My friends at foreign rms found this un- tional Japanese lifetime employment believable, recalls Mr Mori. model was deeply entrenched. It is often But this is now changing. Young people as people realised that companies could said that this model is now collapsing and who start work at a big company no longer fail. Today, she says, seven or eight out of that the era of jobs for life has come to an expect to stay there for their entire career. ten people she contacts are prepared to end. But the reality is more complicated. Some of them want more of a challenge, meet her. Many do not move, but they are For one thing, the traditional lifetime-em- says Mr Mori; others have seen what hap- interested to see what their options are. ployment system existed for only a few de- pens to people who move to another com- For their part, Japanese rms have be- cades, and only at large Japanese rms; it pany and do well . Foreign rms in Japan come more willing to hire outsiders. With was never universal. The system is now helped things along by poaching sta from the fall from grace of the Japanese model in slowly crumbling, but only at the edges, Japanese rms, o ering attractive bene ts the 1990s and the increasing competitive- notes Akira Kawamoto, the director of re- and better prospects for promotion on ness of foreign rms, Japanese companies search at RIETI, a government think-tank. merit. That creates more mobility, says started to realise that they might bene t Most of the salarymen inside the tradi- Mr Mori. People hear success stories by from outside expertise. There was also a tional system will stay there until they re- word of mouth. If some people jump and Carlos Ghosn e ect. When he rst ar- tire. But the labour market is becoming become top managers, others want to do rived at Nissan, Mr Ghosn was held in con- more exible in several ways. the same. This is particularly noticeable tempt by the corporate establishment. But Mid-career job changes, once unheard in nancial services, he says, but is spread- within two years he had turned the com- of, are no longer quite such a rarity. The ing to other industries too. A common pany around, prompting a rethink among strict seniority system is giving way to a strategy is to start at a Japanese rm, move Japanese bosses. greater emphasis on performance-based on to a foreign rm and then return to a More portable pensions have further pay and promotion on merit. And the Japanese rm in a more senior position. increased labour mobility. Under the tra- number of non-regular workers (a term ditional Japanese system, employees qual- that encompasses temporary, part-time Signs of movement i ed for a lump sum at retirement (over and contract workers) is increasing. But A greater willingness to switch jobs also re- and above the state pension scheme) after much of this re ects e orts by Japanese ects declining con dence in the guaran- 30 years at the same rm, which strongly companies to shore up the lifetime em- tee of lifetime employment, says Sakie Fu- discouraged mid-career moves. But some ployment system for its regular workers , kushima of Korn/Ferry, an executive- rms, most famously Matsushita, a big involving necessary concessions to keep search rm. When she moved to Korn/ electronics manufacturer, have introduced the old system going. Useful though the re- Ferry in 1991, she says, on average only one a new scheme in which employees waive forms have been, they have also raised in ten of the candidates she called was pre- the lump sum at retirement in return for a concerns about the growing inequality be- pared to meet her. Others would say they higher salary. They can then put some of tween regular and non-regular workers. were not interested in moving or were their extra pay into a personal pension Under the traditional system, compa- scared by the term ‘headhunting’ we plan, akin to an American 401(k), which nies hired graduates and then invested were thought to be industrial spies. But they can take with them if they switch em- heavily in their training and development. after the dramatic collapse in 1997 of Ya- ployers. This is particularly popular with To keep workers loyal and protect their in- maichi Securities, a securities-trading rm, women, says Mr Kawamoto. Workers who vestment, they o ered lifetime employ- there was a huge change in psychology opt for it do not seem to be seen as disloyal.1 The Economist December 1st 2007 A special report on business in Japan 7
2 The tax system could be changed to en- risen to 33%. This created a lost genera- Canon say they are still keeping lifetime courage more people to use the scheme, he tion of graduates who were unable to get employment, but to do so they are intro- suggests: as things stand, the tax on tradi- full-time jobs during the 1990s, got stuck in ducing a large number of non-regular tional retirement income is low, but the tax low-paid, non-regular positions in which workers, says Keio University’s Mr Seike. treatment of portable personal pensions is no training was provided and found it dif- Canon, for example, now employs 70% of comparatively ungenerous. cult to move into regular employment. its factory workers on non-regular terms, Performance-related pay has been an- There are di erent grades of people up from 50% in 2000 and 10% in 1995. Non- other example of Japanese rms’ experi- without regular employment. First come regular workers typically earn half as mentation with American ways of doing the freeters (a combination of free and much as regular workers for comparable things. In some cases it started o as a form Arbeiter, the German word for worker), work. About half of them are not covered of wage restraint in the dark days of the those in temporary or part-time employ- by company pension or health-care 1990s: companies cut basic wages and em- ment, whether by choice or necessity. schemes. But although the use of low- ployees hoped that performance-related Some freeters enjoy itting between jobs, paid, non-regular workers reduces rms’ pay might make up the di erence, which it but many would prefer regular employ- costs, says Randall Jones of the OECD, it did not always do. ment. According to a survey carried out in has the broader e ect of constraining con- The idea met with sti resistance. 2003, 40% of temporary workers and 22% sumption, so the expansion is still not r- When Fujitsu, a Japanese computer giant, of part-time workers said they would ing on all cylinders. introduced a performance-based pay rather have a regular job but could not nd That said, as the economic recovery scheme during the 1990s, it proved so un- one. Next are the NEETs (those not in edu- causes the labour market to tighten un- popular that the company had to scale it cation, employment or training ) and the employment hit a nine-year low of 3.6% in back. Managers found that workers be- July companies are starting to move some came demoralised if they were not given non-regular workers into regular posi- above-average grades for performance Running out of workers 5 tions. UNIQLO, for example, a clothes re- which, by de nition, most could not be. Labour force* as % of total population tailer, said in March that it would turn NEC , another Japanese computer giant, in- 75 5,000 of its 6,000 non-regular workers troduced a similar programme and also South Korea into regular ones within two years, and had to modify it. Many rms now o er Canon said it would do the same for 1,000 performance-based pay and other incen- 70 of its 13,000 factory workers. Companies tives, such as stock options, only to certain United China are also readier to hire workers in their 30s, Germany States categories of worker, and keep the perfor- particularly those with speci c skills, says mance-related component small. 65 Mr Mori. That is helping to mop up some Along with performance-related pay Brazil of the lost-generation freeters. Japan has come a greater emphasis on merit- India The danger remains that Japan will nd ocratic rather than seniority-based promo- 60 itself with a generation of middle-aged tion. In recent years some rms have ap- workers with inadequate levels of train- † † pointed younger chief executives, in their 2000 2010 2020 ing, says Mr Seike. What is needed, he says, Source: United Nations *Aged 15-64 years †Forecast 50s, but many salarymen are unwilling to is a scheme to encourage companies to in- work under managers who are younger vest in training those in their 30s, with than themselves or who used to be their hikikomori, the twenty-somethings who some of the training costs provided by the subordinates. Even within Sony, one of withdraw from social life. government. But the best way forward the most Americanised companies, old Most notorious are the so-called net- would be to close the gap between regular habits die hard. I o ered someone a se- café refugees , an underclass of non-regu- and non-regular workers by reducing the nior job and he said: ‘But I’m only 48!’, lar workers who cannot a ord accommo- pay and bene ts of the rst group and cre- says Sir Howard Stringer, the company’s dation in the cities where they work and ating better conditions for the second. chief executive. People thought seniority instead sleep in rented cubicles in internet and skill were totally intertwined. cafés. A recent government report put the Tick, tick As the labour market has become more number of such refugees at some 5,400 The reform of Japan’s labour market is be- dynamic for regular workers, however, the nationwide. That is not a lot, but it high- ing driven by the need to become more gulf between regular and non-regular lights an area of growing concern: inequal- competitive and exible in the face of workers has widened. When the recession ity was one of the issues on which the global competition. But Japan also needs took hold in the early 1990s, the idea that Democratic Party of Japan fought its suc- to tackle a longer-term threat: the ageing of Japanese rms would make workers re- cessful upper-house election campaign in its population. The share of its population dundant was unthinkable. Instead, to July which led to the downfall of the prime aged 65 or over, currently 21%, will rise to maintain lifetime employment, compa- minister, Shinzo Abe. 25% by 2014 and 36% by 2050. Japan’s fertil- nies held down pay and bene ts for exist- The protection of regular workers, in ity rate has also been declining, hitting a ing employees and stopped hiring new short, has come at the cost of a growing low of 1.26 in 2005, though it has since graduates. Spurred by changes to employ- army of non-regular workers. The irony is risen slightly, to 1.32. But that is still far be- ment law, they also began to take on more that companies that claim to be committed low the replacement rate of 2.1 children non-regular workers on lower pay and to lifetime employment can meet this com- per woman. So as well as ageing, Japan’s short-term contracts. Whereas in 1994 mitment only by cutting back on hiring population is now shrinking. By 2030 Ja- non-regular workers accounted for only regular workers and relying increasingly pan will have two workers for every pen- 19% of the labour force, the gure has since on non-regular workers. Toyota and sioner; by 2050 there will be only 1.5.1 8 A special report on business in Japan The Economist December 1st 2007
2 Large-scale immigration, the solution fa- voured in other rich countries, is not cul- A tale of three pyramids 6 turally acceptable in Japan. So it will have Japanese population, m Men Women to put more women and old people to 19502005 2050, forecast work in order to maintain its workforce. 1.2 0.8 0.4 0 0.4 0.8 1.2 1.2 0.8 0.4 0 0.4 0.8 1.2 1.2 0.8 0.4 0 0.4 0.8 1.2 To this end, the government has al- Age Age Age ready passed a law requiring companies to 100 100 100 raise their mandatory retirement age or provide retraining and re-employment for 80 80 80 older workers. Most companies favour the second option: the seniority-based pay Total: 60 60 60 system makes the oldest workers the most 95m expensive, so it is cheaper to o er them Total: 128m lower-paid work in semi-retirement than 40 40 40 to keep them on as full-time employees. 20 Total: 20 20 Japan’s elderly are still willing to work, 83m unlike their counterparts in Europe, notes Mr Seike. In theory, older workers could be 0 0 0 put to good use training their younger col- Source: National Institute of Population and Social Security Research leagues. Raising the retirement age to 70 would roughly halve the rate of decline of based pay and promotion, would also im- came into force in April. Big companies the workforce. Increasing the participation prove exibility more generally, notes Ku- tend to o er child-care facilities already, rate of women from its current level of 61% niko Inoguchi, who was minister for gen- but 90% of women in jobs work at small (versus 69% in America) would help even der equality under the Koizumi govern- rms, which need to be persuaded to fol- more. Japan’s working-age population is ment. But other measures that would low suit, says Ms Inoguchi. expected to decline by nearly one- fth by speci cally bene t women, such as better Japan is doing its best to combine the 2030, and boosting female participation provision of child-care facilities, are also stability and equality of its old labour- would be the single most e ective means needed. Only 33% of children between the market system with the dynamism of the of limiting the decline. age of three and the mandatory school age new. But as it becomes clearer that condi- Many of the measures needed to do (six in Japan) are in formal child care, com- tions for non-regular workers need to be that, such as reducing the inequality be- pared with the OECD average of 73%. New improved and more women have to be en- tween regular and non-regular workers rules for corporate child-care schemes and couraged to enter the workforce, the crum- and placing more emphasis on merit- maternity leave for non-regular workers bling of the old system will accelerate. 7 Not invented here
Entrepreneurs have had a hard time, but things are slowly improving
AKASHI MASUDA wiggles his nger He founded Acutelogic after leaving would have been better to do it at 40, he Tnext to an apparently random collage Sony, where he worked on the team that says. But had he done so, he would have of tinsel, cuddly toys and cutlery, illumi- created the Cyber-shot digital camera. He lost his company pension. His story illus- nated by a spotlight. A small black chip, felt that the electronics giant’s manage- trates not how easy it is to start a company glued to a plastic ruler, is propped up ment had lost its way and wanted to start in Japan, but how di cult. nearby, with wires running to a circuit his own company. So he set up Acutelogic, Japan scores poorly on almost every board festooned with blinking red lights. with venture-capital funding, some invest- measure of entrepreneurship. It has the From this another cable runs to a large ment from Fujitsu, a computer giant, and second-lowest level in the OECD of ven- high-de nition TV where every ridge of money raised from friends and family. ture-capital investment as a share of GDP, the skin on Mr Masuda’s nger, every All this sounds very similar to the way and what little venture capital is available twinkly highlight on the tinsel and every things are done in America’s Silicon Val- goes disproportionately into existing rms hair on the cuddly toys can be clearly seen. ley, where large rms such as IBM, Oracle, rather than start-ups. Venture-capital in- Mr Masuda’s company, Acutelogic, Sun and Hewlett-Packard often act as unof- vestment in Japan amounts to some $2 bil- makes specialist image-processing chips cial incubators for engineers who lion a year, around a tenth of the gure in and software for digital cameras. Its new- spend a few years learning the ropes and America. Start-ups account for 4% of all est product, which picked up every nuance then leave to set up on their own. But Mr rms, compared with 10% in Europe and of Mr Masuda’s wiggling nger, is a tiny Masuda’s story di ers in one crucial re- 14% in America. Japan also came last in the high-de nition video sensor that can t spect: he was 50 when he left Sony, and International Institute for Management into a mobile phone. The idea is to make was able to make the leap because he was Development’s rankings on entrepreneur- camcorders obsolete, says Mr Masuda. o ered an early-retirement package. It ship and second-last in the Global Entre-1 The Economist December 1st 2007 A special report on business in Japan 9
2 preneurship Monitor’s ranking of early- cooking. But his behaviour served to rein- of patents awarded per million people. Ja- stage entrepreneurial activity (de ned as force the traditional Japanese scepticism pan generates 51% more patents than the proportion of people of working age towards showy entrepreneurs. America in absolute terms, which works who are involved in such activity). Why? If you stand out too much you become out at around 3.5 times as many patents Cultural factors are a big part of the ex- a target, says Yoshito Hori, a venture cap- per person. It also has more scienti c re- planation. As a hoary old Japanese saying italist and the founder of Globis Manage- searchers per million people (5,900 com- has it, the nail that sticks out is hammered ment School, a business school. That alone pared with 4,200 for America) and a down. Conformity is valued over individ- persuades many entrepreneurs to keep a higher research-and-development (R&D) ualism. Students work hard at school, but low pro le. But they face more than just intensity, at 3.4% of GDP compared with they learn how to take tests, not how to cultural obstacles: the rigidity of the Japa- 2.8% for America. think, laments Sakie Fukushima of Korn/ nese labour market makes life that much But things may not be as rosy as these Ferry. And unlike American culture, which harder for them. Anyone who leaves a reg- numbers suggest. Patents are an imperfect venerates the maverick self-made million- ular job for a start-up will nd it di cult to proxy for innovation; Japan’s armies of re- aire and is tolerant of failure, Japan frowns get another job if the venture fails. And searchers spend more time than their for- upon public displays of wealth and stig- pensions are a particular problem: as Mr eign counterparts on non-research activi- matises business failure. Masuda’s example shows, people working ties such as administration, which reduces for large companies are reluctant to leave their e ectiveness; and a report by the On the outer edge their jobs in their 30s and 40s because they Cabinet O ce found that the e ectiveness Take Takafumi Horie, an example of the will lose their retirement bene ts. of Japan’s private-sector R&D the ratio of sort of entrepreneur who remains ex- Other di culties facing entrepreneurs operating pro ts to R&D expenditure de- tremely rare in Japan. With his characteris- include the lack of venture-capital fund- clined throughout the 1990s (see chart 7). tic jeans, sneakers and spiky hair, this self- ing, a dearth of knowledgeable angel in- All this has fuelled concerns that Japan styled rebel against Japan’s corporate vestors, di culty in hiring experienced might now be on the wrong side of several establishment transformed his internet managers and a lack of support networks, trends. Japan’s most famous innovations, start-up, aptly named Livin’ On The Edge, says Joichi Ito, an internet investor with ex- such as the Sony Walkman and the Toyota into a vast conglomerate, which he re- perience both in Japan and in Silicon Val- Prius, originated in big companies. But the named livedoor in 2004. At its peak, live- ley. This forces some entrepreneurs to rely internet boom highlighted the vibrancy of door was worth some ¥930 billion ($8 bil- on foreign funding. VCs and entrepre- the American way of innovating, in which lion) and owned an accounting-software neurs are not as professional as they are in a host of entrepreneurial start-ups try out rm, an internet travel agency, a securities Silicon Valley, says Sachio Semmoto, the risky new ideas and the most successful of house and a second-hand car business. entrepreneur behind a series of successful them either become, or are acquired by, In 2005 Mr Horie mounted a takeover Japanese telecoms rms. Goldman Sachs, larger rms. The American approach sup- bid for Nippon Broadcasting System, a ra- an American investment bank, put $25m ports radical technological breakthroughs dio station, which would have given him into his most recent venture, whereas local but depends on plenty of risk capital. control of Fuji Television, Japan’s biggest Japanese venture funds contributed just a Akira Takeishi of the Institute of Inno- commercial television station. The battle few hundred thousand dollars. vation Research at Hitotsubashi Univer- ended in a truce between Fuji and live- Given the innovative prowess of Ja- sity has investigated why Japanese rms door, but Mr Horie had infuriated the busi- pan’s industrial giants, does it matter if are highly competitive in some industries ness establishment. In January 2006 raids start-ups have a hard time? The Economist (carmaking, electronics, imaging products, on his home and o ce were broadcast live Intelligence Unit, a sister company of this video games) and less so in others (per- on television, and in March this year he newspaper, ranked Japan rst in a recent sonal computers, software). He concluded was convicted of fraud and sentenced to study of innovation, based on the number that Japanese rms did best in manufac- two-and-a-half years in jail. turing industries with closed product de- Mr Horie’s critics regarded his use of signs that do not require collaboration elaborate nancial engineering as evi- Spending more on less 7 with the rest of the industry, and worst in dence that pro-market reforms had gone R&D efficiency in the manufacturing sector elds based on open standards and modu- too far; his supporters claimed that the at- Operating profit* lar architectures. So if the nature of inno- tack on his empire had been orchestrated In-house research R&D efficiency† vation has changed, and it now depends by Japan’s corporate old guard. But his fate spending* % on collaboration with other rms around sent a clear signal to anyone who regarded 1.0 160 the world, Japan could be in trouble. Japa- Mr Horie as a new role model for Japanese nese patents with foreign co-inventors ac- entrepreneurs, says Hirotaka Takeuchi, 0.8 140 counted for less than 3% of the total, com- dean of the school of corporate strategy at pared with 12% in America. Hitotsubashi University. He showed you 0.6 120 Another worry is that Japanese compa- can be an entrepreneur and be successful, nies concentrate too much on incremental but you shouldn’t take it to excess. You’ve 0.4 100 innovations rather than radical break- got to abide by the rules. throughs. This served them well in the sec- 0.2 80 In truth, Mr Horie was not the Ameri- ond half of the 20th century. But given the can-style capitalist people imagined him 1994 96 98 2000 02 03 disruptive impact of the internet and the to be; indeed, the way he concealed the *¥bn, per company need for entirely new energy technologies precarious nancial state of his sprawling †Cumulative preceding 5-year operating profit to mitigate climate change, it may no lon- empire reeked of old-style Japanese book- Source: OECD divided by cumulative 5-9-year expenditure ger be the right thing to do. 1 10 A special report on business in Japan The Economist December 1st 2007
ductivity in Japan’s service sector is notoriously low, o ering plenty of opportunities for start-ups. He says 70% of his venture-capital investments are in ser- vices companies, from nursing homes to wedding planning. Apart from services, says Mr Hori, we are betting in areas where Japan has an edge, such as mobile 2 The government has formulated a se- skilled workers. Things are changing technology, optics, robotics, digital anima- ries of plans and targets, including mea- people are coming out of big rms to join tion and video games. sures to boost international co-operation us, says Mr Masuda, whose rm has hired Despite these hopeful signs, however, and increased funding for researchers in engineers from JVC, Canon and other elec- some worries remain. One concern is that elds such as nanotechnology and clean tronics giants. He says start-ups also o er if economic growth strengthens and more energy, where breakthroughs could open more opportunities and better prospects full-time jobs are created, would-be entre- up big new markets. It has also set about to Chinese and South Korean engineering preneurs may be tempted to take the safer improving the climate for entrepreneurs students in Japan: We evaluate people for option of a job instead. Japan’s recent and start-ups, for example by o ering their skills, not their skins and eyes. wave of enterpreneurship, suggests Ran- more favourable tax treatment for venture- Mr Hori goes so far as to suggest that dall Jones at the OECD, was caused in part capital investments, reducing the mini- start-ups have played an unacknowledged by the lack of job opportunities for tal- mum capital requirement for new busi- role in helping to turn around Japan’s ented graduates during the hiring freeze of nesses to ¥1 and making it easier for start- economy in recent years. He says the re- the 1990s. But Mr Hori insists that times ups to issue share options to sta . bound was partly driven by the emergence have changed, and the best and brightest of new companies in knowledge-based are now going into the entrepreneurial Land of opportunity? industries, led by entrepreneurs in their eld, which has never happened before. One sign of progress is the higher turnover 20s and 30s. He points to Rakuten, an in- Another concern is that too much gov- of new rms. Between 1997 and 2004 an ternet-shopping rm that now has a mar- ernment e ort to encourage start-ups and average of 99 new companies a year were ket capitalisation of nearly $6 billion, mak- promote innovation is concentrated on listed in Japan, up from 26 a year in 1981-89 ing it one of the largest internet-commerce manufacturing and technology rather and 36 a year in 1990-96. The number of rms in the world. Other Japanese success than services, which is arguably where delistings also rose, from four or ve a year stories include DeNA, an internet-auction change is most needed. To keep the mo- in the 1980s and early 1990s to an average and shopping site, and Mixi, a social-net- mentum going, the OECD recommends re- of 41 a year in 1997-2004. This is due in part working site. Mr Ito is heartened by Japan’s ductions in capital-gains tax to encourage to the rise of second-tier stockmarkets latest crop of internet entrepreneurs, such venture capital; more portable pensions such as Mothers in Tokyo and Hercules in as Mixi’s Kenji Kasahara. The new genera- and performance-based pay for research- Osaka, and the loosening of listing re- tion of internet CEOs are very humble. ers to encourage mobility between acade- quirements on JASDAQ, which has made They don’t spend all their money in Ginza mia and industry; a broader educational it easier for start-ups to go public. Mr Hori buying cars, he says. curriculum; and the promotion of cross- notes that there were 747 IPOs in Japan be- It seems that entrepreneurs can do well border trade and investment, since good tween 2001 and 2005, compared with 617 in Japan as long as they do not draw too ideas often come from abroad. Changing in America. much attention to themselves. Mr Hori Japanese attitudes to entrepreneurship The slightly more exible labour mar- thinks they have excellent prospects. There will take time and further reforms, but at ket has made it easier for start-ups to attract are still relatively few of them, and pro- least the wheels have started turning. 7 No country is an island
Japan is reluctantly embracing globalisation
HROUGHOUT its history Japan has OECD (see chart 8, next page). Foreign a l- era of unprecedented mobility of people, Toscillated between openness to foreign iates’ share of turnover in manufacturing as well as goods and services, Japan’s net ideas and erce isolationism. This ambiva- and services, at 3% and 1% respectively, is migration since the second world war has lence is still re ected in its attitude to the lowest in the OECD. Nor has Japan par- been approximately zero. And so on. globalisation. Despite the worldwide pres- ticipated in the global wave of cross-bor- Why is Japan such an outlier? Part of ence of companies such as Toyota, Honda, der mergers and acquisitions (M&A). In the reason is regulatory hangover from the Canon and Sony, Japan’s integration into 2004 the sale of companies in the Euro- post-war period. Rules restricting inward the world economy is surprisingly weak. pean Union to foreign rms accounted for ows of goods and investment, put in Japan has the lowest levels of import 47% of global M&A by value, and that of place to protect growing domestic indus- penetration, inward foreign direct invest- American rms for a further 22%. The Japa- tries after the second world war, have hin- ment (FDI) and foreign workers in the nese share, by contrast, was just 2.3%. In an dered economic integration. So too have1 The Economist December 1st 2007 A special report on business in Japan 11
2 complicated regulations governing par- Other options for Japanese rms, notes ticular markets, which deterred foreign Self-contained 8 Mr Marra, are to move into high-value spe- rms from entering the Japanese market. Manufacturing imports and inward FDI cialist products, as many Japanese steel (In one infamous example, Japan re- and chemicals rms have done; adopt a re- 100 stricted imports of foreign skis, arguing Netherlands gional strategy, focusing on Asian markets; that Japanese snow was di erent.) The use 80 or form a global alliance with a foreign of cross-holdings made it very di cult for Iceland Germany Hungary rm, as Renault-Nissan has done in cars 60 foreigners to take over Japanese rms. Britain and Sony Ericsson in mobile phones. Alli- Italy Czech Rep. For their part, many Japanese rms 40 ances have the advantage of allowing Jap- have been too preoccupied in the past 15 France Spain anese rms to avoid the indignity (in their 20
years to expand abroad, says Heang Import penetration, 2003 United States eyes) of a takeover. They also provide Japan Chhor, the head of the Tokyo o ce of 0 them with quick access to foreign markets McKinsey, a consultancy: They have been 0 20406080 and management expertise, says McKin- so busy with the domestic crisis that they Inward FDI, 2002 sey’s Mr Chhor: Allying with interna- Source: OECD have forgotten to remain connected with tional players will be the name of the the rest of the world. Having been enthu- game for the next ve years. siastic about overseas expansion in the ship with other countries. Even as they globalise, Japanese rms 1980s, many Japanese companies re- Some Japanese rms, of course, em- continue to do some things in distinctly trenched at home during the dark days of braced globalisation years ago and have Japanese ways, points out Steven Vogel of the 1990s. Now that the domestic market prospered as a result notably Toyota, the University of California, Berkeley. has matured and the population has which is now nearly the world’s biggest Toyota, for example, has to some extent started to shrink, Japanese rms must look carmaker. For the past two decades, says replicated its domestic supplier networks abroad for growth opportunities. Fujio Cho, the company’s chairman, we in other countries. It doesn’t act exactly That is the main reason for Japan to have been changing our business and like it does at home, but it doesn’t act like globalise more vigorously, but not the management style to respond to the race an American company either, he says. only one. As well as seeking new markets, of globalisation. Today the company has Japanese electronics rms have also taken Japanese rms will be able to bene t from factories in 27 countries around the world. a cautious approach to outsourcing. Sony, foreign ideas, which could help to boost in- Other Japanese multinationals include for example, outsources the manufactur- novation. There should have been a Japa- Sony, which makes 74% of its sales outside ing of standardised items such as mobile nese Silicon Valley, says Mr Chhor. But Japan, and Nintendo and Canon, Japan’s phones and PCs to India, China and Tai- during the 1990s, he explains, Japan’s con- second- and third-largest companies by wan, but for digital cameras and video nection to the outside world actually market capitalisation after Toyota. camcorders, where it has specialist manu- weakened, so the engine for innovation facturing technology, it prefers to keep pro- became much less powerful. How to go global duction in Japan, says Katsumi Ihara, head Globalisation should also speed inter- But what of the Japanese companies that of the rm’s electronics division. nal reform as more e cient foreign rms, have come late to the globalisation party? Japan’s relative lack of enthusiasm for particularly in services, shake up the do- They have several options, says Mr Marra outsourcing to China is due partly to the mestic market. The government has duly of A.T. Kearney. The boldest is to try to deep-rooted enmity between China and set about dismantling regulations that hin- achieve global scale through domestic and Japan, but also to Japanese rms’ desire to dered tighter integration with the rest of foreign acquisitions. This was the route protect their intellectual property and to a the world, and in 2006 the Council on taken by Nippon Sheet Glass, Toshiba and belief that manufacturing remains a core Economic and Fiscal Policy even produced Japan Tobacco as well as by Takeda, Ja- Japanese competency. The two countries a globalisation strategy for Japan to en- pan’s largest pharmaceuticals company, have strikingly complementary econo- hance the country’s international compet- of which Mr Hasegawa is president. After mies and look like natural partners: Japan itiveness by making better use of goods, spinning o non-core businesses in chem- makes high-tech, high-margin goods1 services and expertise from abroad. icals, agriculture and food, Takeda went on Better late than never but it will not be an acquisition spree, buying domestic and easy. For while corporate Japan spent the foreign pharmaceutical and biotech rms. Home’s best 9 past few years restructuring, a global M&A A decade ago 50% of Takeda’s revenue Foreign affiliates in manufacturing and service binge created multinational giants in came from Japan; now the gure is below sectors, as % of turnover, latest year available many industries, often leaving Japanese one-third, and falling. 40 rms looking puny by comparison. Japa- Mr Hasegawa notes that Europe ac- Hungary nese rms also face a shortage of managers counts for 30% of the world market for 30 with international experience and the pharmaceuticals but only 14% of Takeda’s Belgium Norway Poland mindset and skills needed to operate glob- sales, so future acquisitions in Europe are 20
ally. In addition to competitors in America on the cards. And further consolidation is Services Britain Germany Italy and Europe, they now also have to con- looming in Japan, he says, where there are 10 France tend with new rivals from China, India still dozens of drugs companies that will Japan United States and South Korea in many markets. But Ja- be vulnerable once protectionist measures 0 pan cannot continue to live as an isolated are unwound. Rather than grumble about 0 10203040506070 island, says Keizai Doyukai’s Mr Hase- this, says Mr Hasegawa, it is best to accept Manufacturing gawa. Japan must strengthen its relation- what is coming and plan accordingly. Source: OECD 12 A special report on business in Japan The Economist December 1st 2007
2 whereas China tends to concentrate on Japan was 60% higher than the national what they want, not what you think they high-volume, low-tech products. But average in manufacturing and 80% higher should buy, says Mr Fasol. Another for- China represents both an opportunity and in services. Foreign companies operating eign giant that has failed to gain traction in a threat: it is a big market on Japan’s door- in Japan also outperform domestic rms in Japan is Wal-Mart, which in 2002 bought a step, but it seems set in due course to dis- pro tability, capital investment and R&D controlling stake in Seiyu, a Japanese re- place Japan as Asia’s biggest economic and spending. This is partly because they are tailer, and has yet to turn it around. political power. not bound by existing business relation- The introduction of the new triangular- China recently surpassed America as ships, but also because only the most glob- merger law, which enables foreign rms to Japan’s main trading partner, but new in- ally competitive and e cient rms enter use their own shares to buy Japanese rms vestment by Japanese rms in China actu- the Japanese market. We are bene ting a via local a liates, should encourage more ally fell by 30% in 2006, to $4.5 billion. In a lot from the stimulus that foreign capital is foreigners to enter the Japanese market. survey asking Japanese rms to rate the bringing, says Kuniko Inoguchi, a mem- The rst example Citigroup’s takeover of best countries to invest in over the next ber of parliament and a former minister in Nikko Cordial will set a precedent for Ci- three years, the proportion picking China the Koizumi government. tigroup’s customers, says Mr Fasol. More fell from 91% in 2004 to 77% in 2006. That is Deregulation has encouraged foreign deregulation is still needed, says Mr Na- still an impressive number, but the decline rms to enter elds such as telecoms, re- gashima, but we are changing. re ects both the expense of making things tailing and nancial services. The arrival in China (compared with India and Viet- of Starbucks forced outmoded and over- Under new management nam) and growing concern over anti-Japa- priced kissaten co eeshops to do better. That foreigners might have useful exper- nese sentiment. Foreign insurers o ered new products that tise was strikingly demonstrated by Carlos had previously been unavailable in Japan, Ghosn’s turnaround at Nissan; another in- Come in, gaijin prompting local rivals to follow suit. When structive case was the rescue by Ripple- Globalisation is a two-way street, and Ja- an old rule banning roadside advertising wood, a private-equity rm, of Long-Term pan has as much to gain from letting in for- hoardings was abolished, JCDecaux of Credit Bank of Japan in 2000. The bank eign rms as it does from sending its own France introduced bus-stop advertising. It was relaunched as Shinsei (which literally rms out into the world. So in 2003 JETRO, now operates in 13 Japanese cities. And the means newborn ) with new manage- a government agency that used to be in simpli cation of complicated rules relat- ment, including many foreigners who had charge solely of promoting exports, was ing to large shops prompted IKEA, a Swed- previously worked for nancial institu- given a new mission: to encourage more ish furniture retailer, to open superstores tions in Japan. Shinsei went public in FDI in Japan. This is not because Japan is in Japan, o ering a wider range and lower 2004, netting Ripplewood and its partners short of capital; it has an excess of the stu . prices than local rms, along with an un- over ¥100 billion in pro t. Goldman Sachs It is because the government recognises usual shopping experience. All this shows recently xed and resold Universal Stu- that inviting in foreign rms is an indirect that Japan is not closed to foreigners, says dios Japan, an ailing theme park, and is means of promoting reform, by exposing Mr Nagashima, but when things are very part of a consortium trying to sort out Sa- sleepy Japanese rms, particularly in the di erent, it just looks closed. nyo, an electronics conglomerate. service sector, to a dose of competition. Foreign rms going into Japan need to In theory, Japan ought to o er rich pick- It is important to have new players in understand the local market but must also ings for foreign private-equity rms. There the Japanese economy with new ideas o er something distinctive, says Gerhard are lots of troubled companies that would and new business models, says JETRO’s Fasol of Eurotechnology, a consultancy bene t from an injection of management Nobuyuki Nagashima. In 2003 the then based in Tokyo that advises foreign com- expertise, and Japan itself has few turn- prime minister, Mr Koizumi, set a target of panies about doing business in Japan. Star- around specialists. But suspicion of priv- doubling FDI between 2001 and 2006, bucks, he notes, carefully crafted a strategy ate-equity rms is even greater than else- which was only just missed. Now JETRO for the Japanese market; but Vodafone, a where, so investors must tread carefully. has a new target: for FDI to reach 5% of GDP big European mobile operator, provides a It’s a market with a lot of potential, but re- by 2010, more than twice the 2005 gure. cautionary tale. When it took control of Ja- quires an enormous amount of patience But even if that target is reached, Japan’s pan’s third-largest mobile operator in and determination, says Thierry Porté, gure will still be far lower than other rich 2001, it made the mistake of trying to intro- who became boss of Shinsei Bank in 2005. countries’ (around 15% in America and duce European-style handsets into Japan, But, he points out, foreigners have often 30-40% in Britain, France and Germany). causing customers to defect in droves. (Vo- been catalysts of change in Japanese his- There is clear evidence that foreign in- dafone sold its Japanese arm to SoftBank tory: They can be used in Japan to bring in vestment has a galvanising e ect. In 2002 in 2006.) When you want to sell to Japa- new ideas, which are then adopted and get labour productivity in foreign a liates in nese consumers you have to give them adapted to the Japanese system. 7 The Economist December 1st 2007 A special report on business in Japan 13
JapAnglo-Saxon capitalism
Have Japanese business practices changed enough?
O AN observer watching a Toyota ical example: it has switched from bank - world. And although they accounted for TPrius drive by, the car’s hybrid propul- nancing to bonds, has a high level of for- only 24% of Japanese rms, this included a sion system is invisible, but its improved eign ownership and has introduced stock disproportionate number of Japan’s in- performance shows up clearly in its fuel- options. But it remains committed to life- dustrial giants, so the hybrid cluster ac- consumption gures. The same applies to time employment and has resisted putting counted for 67% of the workforce. Japan’s new hybrid industrial model. Out- outsiders on the board. This raises the question of how stable siders cannot always tell how much a par- All of the traditional Japanese rms of- the hybrid model is, and whether it is just a ticular company has changed the way it fered lifetime employment and none step on the way to a total embrace of the does things. But the improvement in Ja- merit-based pay; 19% awarded employee Anglo-Saxon model. Mr Jackson points pan’s economic performance is clear, and share options. They generally had boards out that the number of companies intro- at least some of it is due to the adoption of consisting entirely of insiders, relied on ducing the American-style committee sys- the hybrid model. bank nance rather than bonds and had tem has begun to slow and the debate on Japan has both embraced and rejected few foreigners and institutional investors corporate-board reform has cooled. Now American capitalism, observes Mr Vogel holding their shares. They were typically that the economy has started to recover, of the University of California, Berkeley. involved in industries such as construc- the decline in cross-shareholdings has Having identi ed the American style of tion, chemicals, textiles, machinery and halted and even gone into reverse. All of capitalism as a possible model, Japan’s food. Companies in the third cluster re- this, he suggests, implies that the hybrid business leaders were highly selective tained traditional ownership and nance model is stable, and will not prove to be about which aspects of it to adopt, he says. structures, but some rms had adopted just a halfway house on the way to an Under the resulting hybrid model, Japa- more market-oriented employment poli- American model. nese companies may well maintain close cies. Firms in this group included retailers, co-operation with employees yet at the technology rms and family-controlled Halfway to America same time profess support for shareholder companies in a variety of industries. We don’t have to go all the way to Amer- value; remain committed to lifetime em- On average, notes Mr Jackson, hybrid ica, says Yukio Yanase, deputy president ployment but also o er merit-based pay companies performed signi cantly better of Orix, a nancial-services rm whose and share options; and engage more fully (measured by return on assets) than tradi- founder, Yoshihiko Miyauchi, is a strong with the global economy yet keep certain tional Japanese rms or those in the inter- proponent of more American-style cor- activities in Japan and replicate some Japa- mediate group. Evidently the hybrid porate governance. At Orix we often say: nese practices even in foreign markets. model allows rms to bring their distinc- ‘Let’s go to Hawaii.’ It lies in the middle, How prevalent is the hybrid model? tive competitive strengths to the wider explains Mr Yanase. Appropriately Gregory Jackson, an expert on interna- enough, Orix is listed in both Tokyo and tional comparisons of corporate gover- New York, and half of its board members nance at King’s College London, and Hi- are outsiders. deaki Miyajima of Waseda University The idea of a middle way that can act as analysed data on 723 Japanese companies a model for other countries is seductive. A gathered by the nance ministry and iden- lot of Asian countries are saying: ‘We hope ti ed three clusters: 24% had adopted hy- Japan will succeed, so we have a new brid models; 42% were traditional Japa- model that combines capitalism with so- nese rms; and the other 34% were cial values’, says Hirotaka Takeuchi of Hi- somewhere in-between. totsubashi University. Does that mean it is Of the rms with hybrid models, 94% something like the European model? Yes, o ered lifetime employment, 45% merit- but not identical, because taxes are lower based pay and 39% employee stock op- and the state is smaller in Japan and un- tions. These companies were more likely like in France, Germany or Scandinavia, to have outsiders on the boards than tradi- companies provide a lot of social support. tional rms, made more use of corporate Another di erence with many parts of bonds as a source of nance and less use Europe is that in Japan business is regarded of banks, and had a high level of foreign or as a respectable pursuit that provides so- institutional share ownership. This group cial goods rather than a necessary evil, included many large, internationally ori- notes Mr Marra of A.T. Kearney. But he ented rms, such as Toyota, Canon, Ya- thinks taking the middle way would be a maha, NTT DoCoMo, Hitachi and Mitsu- mistake. Unless it becomes more like bishi. Toyota, regarded as an archetype of America, he argues, Japan risks ending up corporate Japan in many respects, is a typ- like Switzerland: comfortable and compla-1 14 A special report on business in Japan The Economist December 1st 2007
2 cent, but irrelevant. Japan is undoubtedly changing, he argues, but not fast enough. Other Japan-watchers express similar concerns. Japan may be the world’s sec- ond-biggest economy and may represent around half the entire Asian economy, but it could yet become an economic backwa- ter as America and Europe focus instead Porté. He is particularly concerned that Ja- ducing internet start-ups and software on China, says Mr Jones of the OECD. The pan’s brightest youngsters may leave the companies. But if the next big technologi- danger is that having bypassed Japan since country in search of better opportunities. cal wave involves clean-energy technol- the early 1990s, foreign companies might The actual outcome will probably be ogy, as seems likely, Japan could have an not even notice that the Japanese econ- somewhere in-between: a slow muddling- advantage. Once it is a matter of incremen- omy is recovering. Mr Porté of Shinsei through, suggests Gerald Curtis of Colum- tally re ning new energy technologies and Bank says faster reform is needed because bia University. But there are two things manufacturing them in vast quantities, Ja- Japan is changing more slowly than the that could change the picture dramatically. pan will be very well placed. After all, it is rest of the world. China and India are The rst is that the demographic shift and already the leading manufacturer of hy- changing very rapidly, so we need to be the resulting labour shortage might actu- brid cars and solar panels. concerned about keeping up with all of ally help to spur faster reform and new Inevitably, Japanese observers tend to that, he says. The job is not nished, but technological developments. Rather than stress how far their country has come over we risk being stuck. being the biggest threat, the retirement of the past decade, while foreigners empha- Kuniko Inoguchi, a member of parlia- the boomers is the biggest opportunity, sise how far it still has to go. Yet there is ment and a former minister in the Koizumi says Mr Takeuchi. general agreement that reform will con- government, does not think that the pace tinue; that the hybrid model will be de- of reform has slowed. Instead, she says, Out of misfortune veloped further and re ned as more com- the focus has shifted to ne-tuning the im- When Japan is faced with a crisis, it often panies adopt it; but that this does not mean pact of the reforms. There is no question of responds by devising new technologies, Japan will drop its way of doing things in backsliding, she insists: companies now he notes. So this will be a big impetus for favour of an all-American approach. see there is no way to go back and are con- Japan to move into robotics, nanotech and Look at the Toyota Prius again. Its hy- tinuing with their own programmes of in- so forth to replace manpower. I’m really brid design is also being re ned. The next ternal reform. looking forward to it. Atsushi Seike of version, due in 2010, will be a plug-in hy- Mr Vogel goes further, arguing that Mr Keio University recalls that Japan has suc- brid with a better battery pack that will be Koizumi’s in uence has been overstated cessfully adapted to big changes in the able to make short trips entirely on electric and that his departure does not mean that past. And he points out that China and power. Toyota’s Mr Cho says he has re- change has halted. The most important South Korea also have ageing populations, cently ridden in a prototype, and believe reforms are technocratic things that just though they are further behind so if Ja- me, it’s wonderful. The hybrid design will plod along, so that process will continue, pan can solve the problem, it could pro- also form the basis of cars powered by fuel he says. He even argues that it is dangerous vide a model for those countries. cells. To be sure, some people think cars to reform too fast, and that Japan has been The second intriguing possibility is that should simply go all-electric, just as some sensible to adopt reforms in a selective, in- the pace and nature of technological people think that Japan should go all- cremental way. change might shift in Japan’s favour. It is American. But there are plenty, too, who Where will corporate Japan be in a de- clearly less successful than America in pro- believe that the future is hybrid. 7 cade’s time? The optimistic scenario, says Mr Chhor of McKinsey, is that Japan’s hy- O er to readers Future special reports brid model will enable it to re-emerge as Reprints of this special report are available at a Countries and regions global leader, driving progress in electron- price of £3.50 plus postage and packing. America and the world February 2nd 2008 ics and environmental technology in par- A minimum order of ve copies is required. ticular. That would provide the country Corporate o er Business, nance, economics and ideas with the vitality to address the two-Japans Customisation options on corporate orders of 100 Migration January 5th 2008 challenge, he says, referring to the di- or more are available. Please contact us to discuss The ethical company January 19th 2008 vergence between rich and poor, global your requirements. 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