Hermann Hauser in a recent article on Project Syndicate, entitled “The Struggle for Technology Sovereignty in Europe” argues for “the UK and EU to jointly establish a €100 billion ($120 billion) Technology Sovereignty Fund to counter the $100 billion that the US is spending on its technology sovereignty and the even larger amounts China is mobilizing”. I argue here, that we should be thinking that 27+1 countries could create much larger funds in a world where single individuals like Masayoshi Son can create funds of that order.
Hermann Hauser became an entrepreneur right after finishing his PhD in the Cavendish Lab (Cambridge University, UK) around 1978 – on the same lab bench in the Cavendish as myself – and is arguably Europe’s first and most important technology venture investor. Hermann Hauser can be seen as the initiator of Europe’s VC industry. Hermann Hauser is also one of the co-founders of ARM and many other high-tech companies. For a discussion with Hermann see:
The thought of a €100 billion Technology Sovereignty Fund is of course a fantastic plan. As a starting point, thats of course a great idea, however in my opinion, much much more is needed. My thought would be that for European Technology Sovereignty, five or ten, or even more funds of that €100 billion size will be needed. In my opinion, better not only by governments, but by private individuals like European versions of Masayoshi Son.
Three thoughts, which I will illustrate below
a €100 billion fund for 27+1 countries is a lot smaller than the US$ 391 billion the single man Masayoshi Son is estimated to control (Vision funds plus three companies)
a €100 billion fund for 27+1 countries is much smaller than the sovereign funds of very much smaller countries:
Singapore (5.7 million people), sovereign funds: US$ 715 billion
Norway (5.3 million people), sovereign funds: US$ 1327 billion
My third point is that the assets in question (ARM) in Hermann Hauser’s Project Syndicate article would already use a large part of the proposed €100 billion fund.
To put a €100 billion fund for 27 EU Countries + UK into context:
Just one single man (Masayoshi Son, from a Korean immigrant family to Japan) controls at least two funds + and to some extent several companies, worth in total on the order of US$ 391 billion as follows:
the current “fair value” of the first + second Vision Funds is reported as US$ 154 Billion.
In addition, Masayoshi Son also controls (to some extent) the listed companies, which he often uses as acquisition and finance vehicles:
SoftBank Group Corp [TSE: 9984]: market cap = US$ 130 billion
SoftBank Corp [TSE: 9434]: market cap = US$ 67 billion
Z Holdings Corp [TSE:4689]: market cap = US$ 40 billion (includes Yahoo Japan Corp + LINE)
That is just one single man, who created all this from zero, not 27+1 countries.
Or as another comparison, Singapore has built at least two sovereign funds in total estimated to be worth US$ 715 billion. Singapore is one single relatively small country compared to 27+1 European countries (population of Singapore is about 5 million, about the same as Norway, and about the same as the Berlin region)
Singapore Sovereign Wealth Fund GIC estimated value US$ 488 billion
Temasec Holdings US$ 227 billion
Norway’s sovereign funds (population about 5 million):
Sovereign Pension Fund – Foreign US$ 1300 billion assets
Sovereign Pension Fund – Norway US$ 27 billion assets
My third point is that a single €100 billion fund is of comparable size of developed assets in question. eg. ARM’s current value would be a substantial part of a potential €100 billion fund. This means that after acquiring two or three companies of the value of ARM this fund would already be exhausted.
As another example, the strategic German mRNA company BioNTech (which among other therapies developed the BioNTech Covid Vaccine in cooperation with Pfizer) has a current market cap of US$ 51 billion. If a situation would arise that such a Sovereign fund would acquire a company such as BioNTech, that would again use up a large fraction – if not almost all of this fund. In my opinion, although of course a €100 billion fund investing in European technology companies in addition to existing substantial VC and investment funds would be great, this is not huge – even relatively small – compared both to the value of many assets in question, and also to the funds some private individuals (eg Masayoshi Son) or 5 million people countries (like Singapore or Norway) manage to build.
So I think many more than a single €100 billion fund would be needed for Technology Sovereignty – I hope circumstances will develop where even more can be invested in European ventures than today. Hermann Hauser’s proposal is certainly a great step in the right direction- many more such steps would be great!
Former President of the EFTA Court, Carl Baudenbacher
Former President of the EFTA Court, Carl Baudenbacher
Gerhard Fasol: Professor Baudenbacher, could you explain in simple terms, what the EFTA Court and your work leading the EFTA Court for many years, means for businesses in Europe, and also businesses in Japan.
Carl Baudenbacher: The EFTA Court is the second tribunal in the European Economic Area (EEA) next to the Court of Justice of the European Union (ECJ). The EEA consists of the EU and its 28 (soon 27) Member States which form one pillar and the three EFTA States Iceland, Liechtenstein and Norway which form the other pillar. Businesses from these countries have access to the EFTA Court. That includes Japanese companies which are active in Europe. I should add that a group of leading Japanese professors from the universities of Waseda, Tokyo and Kyoto have for many years been doing research concerning the EFTA Court.
Gerhard Fasol: Can you illustrate the impact of the EFTA Court with an example? What do you consider your most important case?
Carl Baudenbacher: In Fosen-Linjen (E-16/16), we decided that a public authority which awards a public contract to the wrong bidder, may be liable for a simple breach of public procurement rules and not only for a serious breach. This judgment may have an impact on the jurisprudence of the ECJ, but also of the highest courts, say, in the U.K., Sweden, Norway, Denmark. It could also be that it influences a Japanese court.
Our most important case was probably Icesave (E-16/11) where we held that in a systemic financial crisis a State is not liable for the incapability of its banks’ deposit guarantee scheme to compensate depositors in other countries.
Gerhard Fasol: Do I understand correctly, that the EFTA Court is focused on the relationship between Governments and business. Surely the impact is bigger and beyond Government and business only?
Carl Baudenbacher: The EFTA Court decides cases involving the relationship between Governments and business, for example concerning ownership in energy companies or concerning taxation but also between businesses, for example conflicts between banks and insurance companies and consumers.
Former President of the EFTA Court, Carl Baudenbacher
Gerhard Fasol: Professor Baudenbacher, you devoted your life to lead the development of international business law, which is at the core of the post WW2 rule based global system, which is now faced with stronger nationalism, in particular the Trump presidency.
Can you explain us what you see as your main achievements, and do you feel these achievements are now in danger in view of recent political developments?
Carl Baudenbacher: I have been a university professor in Switzerland, Germany, the US and Iceland, an author, arbitrator, corporate and political consultant, and a European judge. As a professor, I have founded the post graduate program Executive Master of International Business Law of the University of St. Gallen. This autonomous global program entertains cooperations with American and Asian universities. In Japan, Waseda is our partner. My main achievement has probably been the positioning of the EFTA Court as a voice to be heard. The establishment of international courts, such as the ECJ, the EFTA Court or the WTO Appellate Body has been called the “judicialisation” of international law. This has been beneficial for businesses. With the Trump presidency, there is the risk that the rule based global system will be replaced by archaic mechanisms such as retaliation. Free trade has already suffered and will further suffer.
Gerhard Fasol: While we do see this emergence of nationalism, important major trade agreements between the EU and Japan, between the EU and Canada and many others have been agreed. From your experience leading the EFTA Court, do you think we will see a future of several ECJ or EFTA-type courts for different regional trade groups? Or will we go back to national courts, driven by renewed nationalism?
Carl Baudenbacher: What we are seeing is in all likelihood more than a crisis of the post WW2 global trade system. The former German Foreign Minister Joschka Fischer speaks of the end of the Pax Americana. I leave the question open whether the EU has done its homework as regards its trade balance. A natural reaction to the American move would be that Europe and Asia move closer together. If global trade is in peril, regional trade agreements come to the fore. In my experience, regional courts such as the ECJ and the EFTA Court offer a lot of advantages. But the judges must be aware that they cannot interfere excessively with the sovereignty of the Member States. At the same time, going back to national courts is in my view no solution.
Former President of the EFTA Court, Carl Baudenbacher
Gerhard Fasol: You often refer to judicial dialogue. Why do you think judicial dialogue is so defining for your work at the EFTA Court, what is its importance beyond? How do you see criticism?
Carl Baudenbacher: What I mean with judicial dialogue is the dialogue between high courts. In Europe, we see such interaction between the ECJ, the EFTA Court and the European Court of Human Rights. National Supreme Courts may also be involved. Let me give you an example. In many countries around the globe dockers have been able to impose collective agreements on ship owners that give them a priority right to load and unload ships. In 2016, the EFTA Court ruled in the landmark case Holship (E-14/15) that such a system is incompatible with competition law. The Supreme Court of Norway has followed the EFTA Court. The Norwegian unions have now brought the matter before the European Court of Human Rights. At stake is, inter alia, the right of businesses to employ non-organised dockers. Sooner or later, this question will also arise in the ECJ. Obviously it could also end up before any other high court in the world. Then it would be natural for that court to look into how other courts have resolved the problem.
Gerhard Fasol: How do you see the developments between EU, UK, EFTA and Switzerland? You are actively promoting the EFTA court, and by extension EFTA for a possible future home for the UK. Where do you see the advantages for EFTA and UK – keeping in mind that EFTA was co-founded by UK.
Carl Baudenbacher: The UK intends to leave the EU because it wants to limit integration to economic matters; it doesn’t want to be part of a political Union. EFTA which was founded under British leadership is an intergovernmental club which focuses on trade. The EFTA Court has in its case law upheld EFTA values such as free trade, open markets, efficiency, a modern image of man.
Gerhard Fasol: Finally, here in Japan many business people are concerned with Brexit – especially Japanese manufacturing and financial companies have a strong presence in the UK. How do you see Brexit – from your neutral Swiss viewpoint, and from your EFTA Court viewpoint – both outside the EU. How do you see Europe develop?
Carl Baudenbacher: The Brexit decision of June 2016 was obviously a shock for Japanese businesses which had used the UK as a gateway to the EU. I have already elaborated on this at Keidanren on 1 September 2016 and then again in September 2017 at RIETI. But the British people have spoken. In my view it would be crucial for Britain to retain access to the EU single market. This would also be important for Japanese investors. The countries which are members of the EFTA Court do have this access. If Britain would subject itself to the EFTA Court, Switzerland might do the same. We would then have two structures in Europe and consequently a certain systemic competition.
Former President of the EFTA Court, Carl Baudenbacher
Carl Baudenbacher – Profile
Professor Dr. iur. Dr. rer. pol. h.c. Carl Baudenbacher has served as a judge on the EFTA Court in Luxembourg from September 1995 to 9 April 2018. From 2003 to 2017 he was the Court’s President. Baudenbacher was the Judge Rapporteur in many of the Court’s landmark cases.
From 1987 to 2013, Carl Baudenbacher was the Chair of Private, Commercial and Economic Law at the University of St. Gallen (Switzerland). Between 1993 and 2004, he was a permanent visiting professor at the University of Texas at Austin. In 1996 he founded the global autonomous program Executive M.B.L.-HSG of St. Gallen University which has a foot in Japan.
On 9 April 2018, Baudenbacher stepped down from the EFTA Court bench. He will open his own firm focusing on arbitration and corporate and government consulting. His special fields are EU and EEA law, Brexit and the relationship Switzerland – EU.
EU-Japan Free Trade Agreement and Economic Partnership Agreement nearing conclusion, maybe this summer.
EU and Japan started to prepare for Free Trade Agreement (FTA) and the political framework Economic Partnership Agreement (EPA) at the 20th EU-Japan Summit in May 2011, three years after Japan and USA had jointed the Trans-Pacific Partnership (TPP) negotiations.
For several years, TPP was catching headlines, Prime Minister Shinzo Abe saw TPP as a core component of his Abenomics program to restarted Japan’s economy from 20 years of stagnation. The EU-Japan FTA and EPA negotiations always seemed to be in the shadow of TPP.
In the meantime, President Trump has decided to withdraw from TPP, and the UK seems to be on the way to BREXIT.
The EU-Japan FTA and EPA negotiations have moved to the center of attention, and seem to near conclusion.
Trade in goods is only one of 14 different working groups – a modern FTA is very complex
Trade in goods (including Market Access, General Rules and Trade Remedies)
Non-Tariff Measures and Technical Barriers to Trade
Other issues (General and Regulatory Cooperation, Business Environment, Animal Welfare)
Trade and Sustainable Development
Dispute Settlement
General, Institutional and Final Provisions and Transparency
Don’t be blinded: Free Trade Agreements reduce business costs and risks and create access – but they don’t guarantee business success
the Free Trade Agreement will open new sectors previously closed to any foreign company in Japan, e.g. railways procurement, and reduce many barriers, however, top-class leadership, deep Japan knowledge at all levels of management, sufficient investments, and products or services with a large competitive advantage remain crucial to success in Japan.
Free Trade Agreements reduce business costs and risks, but do not eliminate them.
More about the EU-Japan Free Trade (FTA) and Economic Partnership Agreements (EPA):
Japan’s economy grows five quarters in a row, and Japan Post books losses of YEN 400.33 billion (US$ 3.6 billion) for an acquisition in Australia
Japan GDP growth, growth of 2%/year. Still, Japan’s economy is the same size as in 2000, while countries like France, Germany, UK today are double the size as in the year 2000
Japan GDP growth: We have seen 5 quarters of economic growth in Japan, for the January-March 2017 quarter the consensus is that the Japanese Government is likely to announce economic growth corresponding to an annual growth rate of around 2%/year (update: Japan’s Government announced an annual growth rate of 2.2%/year).
Generally the business mood in Japan is optimistic now, personal consumption and industrial orders are growing. We see investments in preparation for the 2020 Olympics. Venture start-ups and venture investments are growing, while still at a low level, we see venture businesses developing not only in Tokyo, but also in regional centers around Japan.
One mid-term risk to Japan GDP growth is the potential implementation of the postponed consumption tax rate increase.
The big picture however is, Japan’s economy today is approximately the same size as 17 years ago in 2000. During the same 17 years most major economies, e.g. France, Germany, UK have doubled in size. France, Germany, UK’s economies today are about twice the size as in 2000, while Japan’s economy today is about the same size as in 2000. Quarterly GDP figures just measure the short term fluctuations of this long term behavior.
Rico Hizon: so what would Japan have to do to restart long term growth?
Gerhard Fasol’s answer
Japan would have to do three things to restart economic growth long term:
Population: Implement policies to make it easier for families to have children, shift spending from the aged to children, improve eduction, shorter work hours, build children’s day care centers, gender equality
Implement Prime Minister Abe’s “third arrow”, the reforms. Deregulation not just in a few “special zones” but nation wide.
Improve corporate governance to improve company’s growth, globalization and management.
Japan Post trips up on globalization: books YEN 400.33 (US$ 3.6 billion) losses due to an acquisition in Australia – with a Toshiba connection
Japan Post announced a loss of YEN 400.33 (US$ 3.6 billion), and a resulting net loss of YEN 28.98 billion (US$ 260 million) for the fiscal year ending March 31, 2017.
Japan Post Holdings was launched on the Tokyo Stock Exchange with the IPO on Nov 4, 2015.
Investors expect major growth of Japan Post Holdings into a global business, such as Deutsche Post has with privatization and later the acquisition and merger with the global logistics group DH about 20 years ago.
Around the time of the IPO Japan Post announced the acquisition of the Australian logistics group Toll for about YEN 620 billion (US$ 5.5 billion), while Toll’s market cap previous to the acquisition was about YEN 410 billion (US$ 3.7 billion).
Japan Post’s recent write-down at Toll is about equal its pre-acquisition market cap, or about 65% of the acquisition prize.
The deep problem of Japan Post’s steep write-downs at the Australian acquisition Toll, is that this casts doubts on Japan Post’s developments into a global business.
The Toshiba connection: Japan Post’s former CEO, Taizo Nishimuro (西室 泰三), previously served as CEO and Chairman of Toshiba
CEO of Japan Post at the time of the questionable Toll acquisition was no other than Mr Taizo Nishimuro (西室 泰三), former CEO and Chairman of Toshiba, now honorary advisor of Toshiba, who spent all his career at Toshiba, working at Toshiba since 1961. Toshiba is currently in severe difficulties caused primarily by Toshiba’s acquisitions of US nuclear construction firms, however Toshiba’s fundamental problems go back much much longer.
Japan Post Holding [6178]
Japan Post Holdings was founded on 23 January 2006, following the path to privatization of Japan’s national Post Office initiated by Prime Minister Koizumi.
Japan Post Holdings is listed on the Tokyo Stock Exchange (No. 6178), IPO was on 4 November 2015, and has five divisions (since October 2012 three divisions):
Japan Post Service (日本郵便株式会社): mail delivery. Merged on October 1, 2012 with Japan Post Network to form Japan Post Co. Ltd.(日本郵便株式会社). Japan Post Co. Ltd is a 100% subsidiary of Japan Post Holdings (Tokyo Stock Exchange: 6178)
(Japan Post Network (郵便局株式会社): Post Offices = retail and real estate. Merged with Japan Post Service to form Japan Post Co., Ltd. on October 1, 2012).
Bill Emmott is an independent writer and consultant on international affairs, board director, and from 1993 until 2006 was editor of The Economist. http://www.billemmott.com
Gerhard Fasol is physicist, board director, entrepreneur, M&A advisor in Tokyo. http://fasol.com/
A conversation about Japan’s future
Bill Emmott:
I came first to Japan in 1983 as Economist Tokyo Bureau Chief, staying until 1986. Then in 1988 I came back on sabbatical leave and wrote “The sun also sets: why Japan will not be number one”, which against my expectation when it was published in 1989 found big resonance in Japan. The stock market was plunging, and mine was the most immediately available explanation. Ever since, journalists have constantly asked me what the sun is doing now! It also meant that even when I became editor in chief of The Economist in 1993 I spent much more time focused on Japan than I had expected, visiting as often as I could to keep track of the post-bubble developments, and wrote a book that appeared only in Japanese translation called “Kanrio no Taizai”, or the bureaucrats’ deadly sins. But later, with Prime Minister Koizumi consolidating reforms, and the banking system at last getting cleared up, I sent myself back in 2005 to research and wrote a much more optimistic special supplement for The Economist which became a book, “The sun also rises”.
Throughout the 35 years since I first came to Japan, I have both been fascinated and struck by the fact that although this is in so many ways an inward-looking self-contained nation, foreign observers are listened to and even have a chance of having a positive impact.
One element that had featured consistently in my writings ever since the 1980s had been observations and expectations for a growing role for women in employment and power. This seemed logical given that, at least before the bubble burst, Japan was heading for a labour shortage, but also the Equal Employment Law of 1986 had led to more females being recruited by major organisations. Japan’s excellent education surely meant that the underused half (= women) of the adult population would soon be used more productively.
Of course, this has developed a lot more slowly than I expected or hoped, partly for cultural reasons but also because Japan has not in fact had a labour shortage, until now.
I wanted to meet you, Gerhard tonight because we both are fascinated by the role Japanese women have in making Japan such a fascinating country, and how the many really strong Japanese women could have key roles in bringing growth and dynamic change back to Japan.
Could Japanese women have bigger roles for the development of Japan?
What is holding women back in Japan?
Who are the role models?
I am making interviews with high-achieving Japanese women to try to find answers, and plan to compile them into a book later this year. What would you say, Gerhard? And anyway, how did you end up here?
Gerhard Fasol:
My path to Japan is quite different than yours, Bill. I came to Japan first in 1984 as Fellow of Trinity College Cambridge, and scientist at the Max-Planck-Institute in Stuttgart, part of a project to build a research cooperation with NTT’s R&D labs. I saw that Japan was very important in technology and weakly linked to the outside – and still is today, I think. So in 1984 I decided to make Japan my second professional focus in addition to physics and electronics. Like you – the deeper I get into Japan, the more I learn about Japan, the greater my fascination, and my motivation to contribute.
Now I am working on many different projects, working on international technology M&A projects, and I am also one of a microscopic number of foreigners on the Board of Directors of a stock market listed Japanese corporation – reforming Japanese corporate governance hands-on.
Could Japanese women have bigger roles for the development of Japan?
Gerhard Fasol:
I think that the equal participation of women in leadership is directly linked to the population issue, ie the number of children born.
while in Sweden 44% of Members of Parliament are women,
37% in Germany and
26% in France –
the world average is 23% women in Parliaments.
In Japan the ratio of women in Parliament has increased from 1% in 1990 to 10% in 2016, so there is progress. If we extrapolate, and if the trend continues, then it might take another 30 years or so until Japan reaches world average in terms of women bringing women’s views into Parliament, and taking part in making the laws. And it might take Japan 100 years to reach Scandinavian standards of women’s participation in making the laws of the land – unless there is some acceleration in Japan.
Japan’s most powerful Ministry, the Ministry of Finance, did not hire any women into career positions for a period of about 10 years!
At the 2015 New Year event of Kyoto Bank, Keidanren Chairman Mr Sadayuki Sakakibara showed that Japan’s spending on aged people is dramatically higher than spending on children, and that this ratio is increasing with time, Japan spends more and more on aged people and less and less on children. There are two ways to look at this situation:
one way is to say: we have an aging society, therefore its only natural to spend more on
the aged, and less for children
the opposite way to look at the same situation is to say: we are spending less and less for children, no wonder we have fewer and fewer children. If we did more for young people, maybe people will have more children….
Actually most Japanese women I talk to want 2-3 children, but many cannot for financial reasons.
By nature, women give birth to children, not men, so more women in decision making positions including Government and Parliament will bring children’s issues into decision making.
As an example, child birth costs in Japan are not covered by health insurance, while they are everywhere in Europe. There are many other open and hidden costs of having children in Japan compared to Europe.
The most important factor are mindsets. The key to give more power to women in Japan is to change mindsets, to change the way of thinking.
As an example, the Prefecture of Kanagawa in 2015 created the “woman act” committee, under the slogan “women, step by step, take more responsibility”, however this committee both in 2015 and also in 2016 consisted of 11 men – not one single woman leader: http://www.pref.kanagawa.jp/osirase/0050/womanact/
here archived with photographs on the wayback-machine/ internet archive
Why not create a committee of 11 women leaders to lead efforts on gender equality in Kanagawa Prefecture? Why not promote women to leadership positions in Kanagawa Prefecture?
Another factor holding women back are the very long working hours common in Japan. As an example, at a recent EU-Japan gender equality conference, the Danish polician Astrid Krag, who was Minister for Health and Prevention at the age of 29 – 32 years, and who has two children, explaned that in the Parliament of Denmark the decision was taken not to take any vote after 4pm, so that Members of Parliament can be back home by 5pm, collect children from daycare centers in time etc. So in the Parliament of Denmark it is guaranteed that Members of Parliament can leave at 4pm. In today’s Japan such action is unthinkable, age 29 – with young children – would be unbelievably young for a Government Minister in Japan. https://en.wikipedia.org/wiki/Astrid_Krag
Late-night or overnight sessions at work, including Parliament, makes life incredibly difficult in Japan for parents with young children, doubtlessly contributing to the small number of women in top positions in Japan.
Who are the role models?
Gerhard Fasol:
Despite these difficulties, there is a substantial number of very strong women in Japan, who have worked their way up into leadership positions.
Examples are the Mayor of Yokohama, Ms Fumiko Hayashi, who succeeded in a very distinguished business career, and the Governor of Tokyo, Ms Yuriko Koike, who won the election on her own as an independent candidate, because she did not receive the backing of her party.
Bill Emmott:
That is great, as I have now interviewed Koike-san and plan to interview Hayashi-san during my next visit. Personally, as well as admiring women who have made it to the top in the tough political world I also admire and am interested in women succeeding as entrepreneurs and as executives in entrepreneurial companies. By starting and building their own companies, women can really create new realities, showing that new organisational cultures are possible in a Japanese context. Do you agree?
Science is also an interesting area. We have women leaders in Japanese medicine, I invited some for the Ludwig Boltzmann Forum on women’s development and leadership http://www.boltzmann.com/forum/2016-womens-leadership/
The tantalizing issue is that the key is to change mindsets, and thats at the same time superficially easy, but at the same time incredibly hard. Thus outstanding strong Japanese women – and there are many of them – have a choice either to work their way up to the top in Japan, start their own company in Japan, or on the other hand to move to Europe, elsewhere in Asia, or to the USA – I know several strong Japanese women, including several Japanese medical doctors, who have moved to Europe or USA. They might of course come back to Japan at a later stage bringing global views and experiences to leadership positions in Japan in the future. I am very optimistic for the future of Japan – sometimes I wish things were moving faster.
Bill Emmott:
I agree entirely. I see Japanese women as both victims of the slow speed of change and as solutions to it. They really could make the Japan of 2030 look quite different, in all sorts of ways. It will be fascinating to watch.
Bill Emmott and Gerhard Fasol met at the restaurant MusMus in Tokyo
left to right: Gerhard Fasol, Ms Atsuko Konta (Manager of the restaurant MusMus), Bill Emmott
Copyright (c) 2017 by Bill Emmott and Gerhard Fasol. All Rights Reserved.
NTT Docomo announced the start of i-Mode on February 22, 1999 at a press conference in Tokyo
Today, 18 years ago, on February 22, 1999, Mari Matsunaga, Takeshi Natsuno, and Keiichi Enoki announced the start of the world’s first successful mobile internet service to a small number of people who made it to NTT Docomo’s press conference in Tokyo.
For many years, Japan was the global hotspot for mobile internet, mobile broadband, fixed net broadband (FTTH), there is a very long list of inventions, innovation, new services and products which were successfully brought to market in Japan, and in some cases it took 10 years or longer for these same services to succeed elsewhere in the world.
Examples of services and products which saw their invention, or first successful global mass market introduction in Japan include:
first successful mobile internet services (i-Mode, EZweb, and JSky)
Inventing the mobile internet vs capturing global value
Undoubtedly the biggest success story emerging from Japan’s pioneering mobile internet days is SoftBank
After Vodafone acquired a controlling stake in Japan Telecom, it took Vodafone at least one year to realize that instead of a far east backwater waiting for Vodafone, Japan’s mobile market was actually years ahead of Europe at that time. By the time Vodafone realized that instead of sailing into an easy market, they had actually entered the world’s most ferociously competitive market, it was too late, Vodafone sold its Japan operations to SoftBank, which turned out the failing Vodafone-Japan within a few months of intense efforts. SoftBank’s acquisition of Vodafone-Japan and the successful turn-round became the basis for SoftBank to implement Masayoshi Son’s plan to create one of the world’s most important companies.
Other Japanese success stories resulting from pioneering the mobile internet
Beyond games, Japan has created a vibrant sector of internet and mobile ventures, founded in the wave of Japan’s mobile internet and FTTH broadband adoption. However, because of Japan’s well known Galapagos syndrome, few have made it into global success stories yet. However, its not too late.
eMoji made it into MoMa, and the iPhone.
QR codes are all over China, however not monetized by Denso Wave, the Toyota family company which invented QR codes for automotive parts management.
This morning 7:30am I was interviewed on BBC TV Asia Business Report about an update of Toshiba’s ongoing crisis, which has been 20 years in the making.
Here some notes in preparation for my interview.
What is Toshiba’s situation now?
Toshiba’s market cap today is YEN 1024 billion = US$ 9.6 billion.
Toshiba is expected today to announce write-off provisions on the order of US$ 6 billion.
Toshiba owes about US$ 5 billion to main banks as follows:
Mizuho YEN 183.4 billion
SMBC YEN 176.8 billion
Sumitomo Mitsui Trust Holdings YEN 131.0 billion
BTMU YEN 111.2 billion
Total YEN 602.4 billion = US$ 5.3 billion
Toshiba is on notice for delisting by the Tokyo and Nagoya Stock Exchanges, and faces the risk of being delisted by March 15, 2017, i.e. in about 4 weeks from now.
Toshiba is trying to raise capital e.g. by seeking investment in the IC/flash memory division, however, Toshiba seeks to keep control, so Toshiba is trying to raise a minority share, or non-voting shares or similar, in order not to lose control.
How did Toshiba get into a situation to potentially need to write off US$ 6 billion?
Toshiba acquired 87% of the US nuclear equipment manufacturer Westinghouse.
While Westinghouse is a famous name, what Toshiba actually acquired seems to have gone through a period of restructuring.
In 2015 Toshiba acquired the construction company SHAW’s assets from the Chicago Bridge & Iron Company CB&I for US$ 229 million plus assumed liabilities. CB&I had acquired SHAW for US$ 3.3 billion in July 2012, and SHAW has on the order of US$ 2 billion annual sales.
Why did Toshiba acquire a company for US$229 million, which has US$ 2 billion annual sales, and which was in 2012 acquired for US$ 3.3 billion? Which factors reduced the value of this company from US$ 3.3 billion to US$ 229 million within the 3 years from 2012 to 2015?
Presumably because there are large liabilities arising from nuclear construction, which Toshiba now seems to have to assume.
What is likely to happen now with Toshiba? Is Toshiba too big to fail?
Difficult to say what will happen. Toshiba is a huge corporate group with about 200,000 employees and many factories in many countries, so clearly Toshiba is not going to disappear without trace.
The immediate risk is that Tokyo Stock Exchange carries out its warning, and delists Toshiba, which will further increase Toshiba’s ability to raise capital. In the case of a delisting, private equity, and/or government might invest and restructure, and Toshiba might be split up. For example, Toshiba’s nuclear Westinghouse division is totally separate from its very successful flash memory division, there is not much business logic in having both under one holding company.
Impact on UK
Toshiba acquired 60% of UK based NuGeneration with the view to build nuclear power stations in the UK. This project requires Toshiba to contribute to the funding of the nuclear project, for which Toshiba would probably need a financially healthy partner.
What is the big picture? How did Toshiba get into this crisis?
Toshiba’s crisis has been building up for 20 years, and is in my view a consequence of corporate governance issues over a long time.
Essentially, Toshiba should have been reformed 20 years ago from the top down.
Japan’s 8 electronics giants have had essentially no growth and no profits for 20 years. This tragedy has been obvious for many years now, and was a big contributing factor for Japan’s government to reform Japan’s corporate governance laws and regulations, see:
Toshiba’s Board of Directors was exchanged in September 2015, and now includes several very capable and experienced Japanese independent Board Directors, but unlike Hitachi, even today neither Toshiba’s Board of Directors, nor Toshiba’s Executive Board include one single foreigner.
One might think that a huge global group like Toshiba with complex businesses around the globe might benefit from a variety of view points and experiences from different countries at Supervisory Board and Executive Board level – not all just from one single country. Japanese corporations including Hitachi, SoftBank, Nissan and a small number of others are now recognizing the benefits of diversity of experience and viewpoints at Supervisory Board and Executive Board level.
We can only hope that Toshiba’s executives and Board Directors have the experience and ability to solve the extremely complex issues deep inside the bowels of the US nuclear construction industry – far away on the other side of the world.
The global mobile internet revolution started with Docomo’s i-Mode on February 22, 1999
i-Mode, Happy Birthday!
i-mode menu NTT docomo
Today, exactly 17 years ago, on February 22, 1999, NTT-Docomo launched the world’s first mobile internet service, i-Mode, at a press conference attended only by a handful of people.
NTT-Docomo created the foundation of the global mobile internet revolution, and i-Mode is still a cash-cow for Docomo in Japan, but Docomo did not succeed to capture global value.
i-Mode pioneered many business models, which are today monetized by Apple and Google (mainly via Android).
i-Mode also contributed to make Japan the world’s biggest App market in terms of cash revenues, and helped Japanese app companies to be among the world’s largest and top grossing.
the future of Japan’s US$ 600 billion electronics sector, which dominated world electronics in the 1980s but failed to keep up with the evolution and growth of global electronics.
To survive Japan’s old established electronics conglomerates have two choices:
focus on a small number of key products (remember Apple CEO Tim Cook showing that all of Apple’s products fit on one small table)
actively managed portfolio model
however, for Japan’s economy to prosper, Japan needs many more young fresh new companies in addition to the old established conglomerates.
Interviews for BBC-TV and French Les Echos
Last week I was interviewed both live on BBC-TV and also by the French paper Les Echos about SHARP’s future:
In summary, I said that its not just about SHARP’s current predicament, but its about corporate governance reform in Japan, about reinventing Japan’s electronics sector, and that its more likely at this stage that Japan’s Innovation Network Corporation (INCJ) will take control SHARP, since INCJ is not just concerned with SHARP but with the bigger picture of restructuring Japan’s electronics sector.
INCJ has concepts for combining SHARP’s display division with Japan Display, and has plans for SHARP’s electronics components divisions, and for the white goods division, and other divisions.
SHARP governance: How and why did SHARP get into this very difficult situation?
Essentially SHARP assumed that the world market for TVs and PC displays will continue to demand larger and larger and more expensive display sizes, and thus took bank loans to build a very large liquid crystal display factory in Sakai-shi, south of Osaka.
In addition, SHARP, has a huge portfolio of many different products ranging from office copying machines and printers and scanners, mobile phones, high-tech toilets, liquid crystal displays, solar panels, and hundreds of other products. SHARP keeps adding new product ranges constantly expanding its portfolio of businesses, and rarely sells loss making divisions.
Effective and strong independent, outside Directors on the Board might have asked questions during the decision making leading to the building of the Sakai factory. They might have asked for a Plan B, in case the global display market takes a turn away from larger and larger and more expensive displays, or if the competition heats up and prices start decreasing, they might have asked about SHARP’s competitive strengths, they might have also questioned the wisdom to finance an expensive factory via short-term bank loans as opposed to issuing shares to spread the risks to investors.
Its not just outside Directors, shareholders could have also asked such questions.
SHARP has about YEN 678 billion (US$ 5.6 billion) debt, most is short-term debt, and in a few weeks, in March 2016, SHARP needs to repay about YEN 510 billion (US$ 4.2 billion), and needs to find this amount outside.
SHARP is a Japanese electronics company, founded in 1912 by Tokuji Hayakawa in Tokyo as a metal workshop making belt buckles “Tokubijo”, and today one of the major suppliers of liquid crystal displays for Apple’s iPhones, iPads and Macs.
SHARP today has about 44,000 employees, many factories across the globe, sales peaked around YEN 3000 billion (US$ 30 billion) in 2008, and show a steady downward trend since 2008.
Revenues (profits) peaked in 2008, and have fallen into the red since.
SHARP’s revenues (sales) peaked in 2008 around YEN 3000 billion (US$ 30 billion), and show a downward trend ever sinceAveraged over the last 14 years, SHARP shows average annual net losses of around YEN 38 billion per year (US$ 380 million per year)
What future for SHARP? Focus vs portfolio company
SHARP (or rather, its creditors, the two “main banks” Mizuho and Mitsubishi-Tokyo-Bank, and others controlling the fate of today’s SHARP) needs to decide whether it focuses on a group of core products, in which case it needs to be No. 1 or No. 2 globally for these products. Successful examples are Japan’s electronic component companies.
Or on the other hand, SHARP could be a portfolio company, in which case this portfolio must be actively managed.
What future for Japan’s US$ 600 billion electronics sector?
combined have sales of about US$ 600 Billion, similar to the economic size of The Netherlands, but combined for about 15 years have shown no growth and no profits. They are poster children for the urgent need for corporate governance reform in Japan.
These 8 electronics conglomerates are portfolio companies, and they need to manage these portfolios actively, such as General Electric (GE) or the German chemical industry are doing. Germany’s large chemical and pharmaceutical industries started active and drastic product portfolio management in the 1990s, and are continuing constant and active portfolio optimization via acquisitions, spin-outs, and other M&A actions, and so is GE.
Why “let zombie companies die” is beside the point
Concerning SHARP some media wrote headlines along the lines of “let zombie companies die”. Thats easy to write, however, SHARP is a group with 44,000 employees, many factories, about US$ 30 billion in sales annually.
“Let this zombie die” is not an option, SHARP has 100s of products, and divisions, and the best solution for each of these divisions is different. And that is exactly what the Innovation Network Corporation of Japan seems to be considering in its plans for SHARP.
I think the way forward is not “to let zombies die”, but to develop private equity in Japan
I think the move of Atsushi Saito, one of the key drivers of Japan’s corporate governance reforms, from CEO of Tokyo Stock Exchange/ Japan Exchange Group, to Chairman of the private equity group KKR is a tremendously important one in this context.
Will there be native Japanese private equity groups with sufficient know-how and ability to take responsibility of restructuring Japan’s electronics sector? Thats maybe the key question.
Why its not really about nationalism
Some media bring a nationalist angle into SHARP’s issues. However, Nissan was rescued by French Renault, UK’s Vodafone acquired Japan Telecom, and there are many other examples, where foreign companies acquire Japanese technology companies.
I don’t think nationalism is an issue here. The key issues is to create and implement valid business models for Japan’s huge existing electronics sector, and more importantly, create a basis for the growth valid new companies – not just reviving old ones.
Economic growth: Almost everyone agrees that economic growth is preferred over stagnation and decline. Fiscal policy and printing money unfortunately can’t deliver growth.
Governments best help economic growth by reducing friction, and by getting out of the way of entrepreneurs building, turning-round, and refocusing companies.
Some required action is counter to intuition: for example, in many cases reducing tax rates increases Government’s tax income, a fact known for many years. Effective education and research are key to create, understand and apply such non-obvious knowledge.
Companies need efficient leadership, leadership needs feedback, wise and diverse oversight by Boards of Directors, who ring alarm bells long before a company hits the rocks, or fades into irrelevance. Corporate governance reform may be the most important component of “Abenomics”. Read a Board Director’s view on Japan’s corporate governance reforms:
Japan’s electrical conglomerates are some of the poster children motivating Japan’s corporate governance reforms. In an interview about Toshiba’s future on BBC-TV a few days ago, I explained that Japan’s electrical conglomerates showed no growth and no profits for about 20 years, and the refocusing Toshiba has announced now should have been done much much earlier, 10-20 years ago (“Speed is like fresh food“). Refocusing Japan’s established corporate giants will release resources for start-ups, spin-outs and growth companies.
Japan can be very good at restructuring and turn-rounds, e.g. see
Corporate governance reforms in Japan are one component of “Abenomics” to bring back economic growth to Japan.
Corporate governance reforms in Japan are driven at least in part by the spectacular stagnation of Japan’s top 8 electronics conglomerates, which 25 years ago dominated world electronics, but largely failed to adapt to the changes driven by much more agile Silicon Valley or South Korea based competitors. The right type of Board Directors, could potentially have rung the alarm bells much earlier, and woken up executive management under their supervision.
A welcome factor is that corporate governance reform costs Japan’s heavily indebted Government almost no money – unlike public works programs, and similar traditional ways of stimulating the economy.
The speed with which Corporate Governance Reforms in Japan are being implemented surprised even one of their main promoters, emeritus Group CEO of the Japan Exchange Group, Atsushi Saito, as expressed in his recent talk.
In March 2014 the shareholders appointed me as independent Board Director of the Japanese cybersecurity company GMO Cloud KK, which is listed on the First Section of the Tokyo Stock Exchange. Our main business are internet security solutions, cybersecurity, digital identity management solutions, and cloud hosting and related services and solutions.
The Corporate Governance Code of the Tokyo Stock Exchange (TSE), issued on June 1, 2015, “Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term”
Japan’s Stewardship Code, issued by Japan’s Financial Services Agency (FSA) on February 26, 2014, “Principles for Responsible Institutional Investors ≪Japan’s Stewardship Code≫- To promote sustainable growth of companies through investment and dialogue”
Japan’s Corporate Governance Code, which was issued by the Tokyo Stock Exchange on June 1, 2015, defines Corporate Governance as “a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities”.
The subtitle of Japan’s Corporate Governance Code is its mission statement: “Seeking sustainable corporate growth and increased corporate value over the mid- to long-term”.
Corporate governance has been analyzed in great detail in Professor John Kay’s analysis of UK’s capital markets: “The Kay Review of UK Equity Markets and long term decision making“, which was triggered by certain M&A transactions among other factors, and published on 23 July 2012.
The Kay Review analyzes UK’s capital markets in depth, and argues that its companies’ duty to be successful in the long-term, and its only the success of companies that brings wealth to all stake holders and people who invest in companies, in many cases pensioners. Over the years a fine grained system of specialized service providers has developed between companies on one side, and individual investors on the other side. Professor Kay argues that this system of intermediaries (fund managers, analysts etc) can be seen as “overhead” and needs to be as efficient as possible.
Overall the capital market system needs to be built on long term trust and stewardship, not on anonymous one-time monetary transactions.
Martin Lipton, of the NY law firm Wachtell, Lipton, Rosen & Katz, in an article published on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog encourages the US Securities and Exchange Commission (SEC) to keep the UK developments in mind, when reforming the reporting requirements for US corporations, and also calls for an end to the requirement of quarterly reporting.
Why end the requirement of quarterly financial reports? Because short term focus on quarterly financial performance may cloud the view on long-term success and investment. Intense discussions between fund managers and management are strongly encouraged.
Will the end of quarterly financial reporting reach Japan?
Why Japan’s focus on corporate governance?
GNP as a measure of economic size has many flaws – however many signals, not just GNP, indicate that Japan is the only major economy that does not grow.
While there are many excellent Japanese corporations, overall it is no secret that Japan’s economy has the potential to do much much better.
Japan’s decline was even deplored by Keidanren and Toray Chairman Sadayuki Sakakibara at the 2015 Kyoto Bank New Year Gala event. Stanford Economics Professor Takeo Hoshi has analyzed the factors which caused Japan’s economy to stop growing after catching up with the developed economies, see Professor Hoshi’s recent talk about Abenomics for the Stockholm School of Economics.
There is much hope that outside directors supervising executive management will bring outside expertise, and improve the performance of company-insider executive management, and if necessary also insist on replacements.
The cheapest part of “Abenomics” – corporate governance reform comes at essentially zero cost to tax payers
Many measures of Premier Minister Abe’s “Abenomics” stimulation programs pump borrowed Government Bonds (JGB) money into the economy, thus cost money and ultimately increase Japanese very large Government debt.
By comparison, corporate governance reforms cost essentially zero cash and don’t further increase government debt.
Theory and practice
Non-diversity: about 0.6% of Japanese Board Directors of listed companies are non-Japanese
As of 17 December 2015 Japan has 3504 listed companies on the exchanges operated by the Japan Exchange Group:
TOKYO PRO Market: 14 (including 0 foreign company)
Total: 3504 (including 9 foreign companies)
In addition there are three regional exchanges:
Fukuoka Stock Exchange
Nagoya Stock Exchange
Sapporo Stock Exchange
Assuming there are about 10 Board Directors per company, there are about 35,000 Board Directors of listed companies in Japan. Of these approximately 200 are foreigners, ie. about 0.6% of Directors of listed Japanese companies are foreign (I am one of these).
Maybe 10-20 of Japan’s public companies are “Englishized” such as Rakuten or SoftBank, or hire simultaneous interpreters at Board Level (you’ll see Directors with headphones listening to the interpreted/translated version of what is being said – of course slowing and filtering understanding and communication)
All other approx. 3490 Japanese Stock Exchange listed companies are run 100% in Japanese language at all levels including Board level – and almost exclusively by Japanese men.
In a rapidly globalizing world, these companies desperately need global input from many nationalities, different backgrounds, and genders at Board level in Japanese language, but the number of people providing this depth of diversity, having the qualifications and being able to function at Board level in Japanese in addition to several other languages is severely limited – this is one of several factors limiting Japan’s growth after having caught up with developed countries in the 1980ies.
What are the main issues?
Diversity delivers better decisions and better results
Japan has many outstanding leaders, such as SoftBank’s founder Masayoshi Son, or Kyocera’s founder Kazuo Inamori, who also founded part of today’s KDDI, and who turned around Japan Airlines from bankruptcy in his 80s.
Some Japanese Executives are outstanding leaders, however, many are not, but function more like chief administrators – as in any other country.
Outstanding leaders don’t fear working with excellent people and will attract top leaders. However, chief administrator type executives will fear for their power and will assemble teams who fear to speak out, as can be observed in many recent corporate scandals in Japan, and many other major countries. Corporate scandals and corporate governance failures may happen anywhere, not just in Japan.
Diversity at top management levels and Board levels has many benefits, as has been proven in many studies. Diversity delivers better decisions and better results. Boards of Directors are one way to bring diversity to decision making.
Overcoming stagnation
Many major Japanese corporations show no growth and no income for the last 20 years.
A showcase example are Japan’s top-8 electronics conglomerates. Combined they are as large as the economy of the Netherlands, but contrary to The Netherlands, they have shown no growth for the last 17-20 years, as well as losing money on average over all these years. Of course, as a consequence the market capitalization = value of these top-8 electronics companies has decreased dramatically. While Japan’s top-8 electronics companies dominated 60% or more percent of the global electronics industry in the 1980, they have fallen steep. Clearly a dramatic example of failed corporate governance, and surely a big push for Prime Minister Abe to put so much priority on improving Japan’s corporate governance, together of course with the need to improve employment, and returns for pension funds to fund Japan’s aging population.
Three forms of corporate organization: splitting supervision and execution
Traditionally, executives supervised themselves at Board level
Traditional Japanese corporation have a Board of Directors composed of corporate executives, i.e. the executives supervise themselves without external supervision or input. Supervision is done by the Kansayaku Board (corporate auditor’s Board) which however has limited powers on corporate decision making.
Japan’s corporate government reforms now give Japanese companies options to split execution (executives, 執行役員) and supervision (Board Directors, 取締役).
Japanese corporations now can chose between three forms of organization
company with Kansayaku Board
company with Supervisory Board
company with three committees:
Nomination Committee
Audit Committee
Remuneration Committee
According to the new Corporate Governance Code, the Board (independent which of the three options is selected) has the following three duties:
setting the directions of corporate strategy
encourage and support appropriate risk taking by senior management
supervise Directors and executive management, including senior executives (執行役員)
Connecting the dots: the link between accounting issues and the space shuttle Challenger disaster
Space shuttle Challenger’s top management was insisting to keep the planned launch date fearing public relations issues, while the workers and engineers on the ground, “genba”, knew that they were not ready. But top management at space shuttle Challenger did not listen to “genba”.
My advice to Japanese corporations: embrace and learn to love diversity!
Embrace and learn to love diversity! Diversity delivers better results overall. We all learn from each other.
My advice to foreign investment funds seeking more influence on Japanese companies
Shouting at the CEO or Boards of Japanese companies will not help – many foreign activist investors have already proven this fact many times. Insisting on your superior knowledge will not make you many friends – as anywhere else.
You need to develop trust and relationships. You need to start by learning Japanese, understanding Japan, and earn trust and contribute with achievements, or partner with people who have: KKR hired Japan Exchange Group emeritus CEO Atsushi Saito.
There are no increasing numbers of examples, where outstanding Japanese corporations careful listen to outside advice from investors, and thus become even more outstanding: SONY and robotics maker FANUC come to mind.
My advice to foreign companies operating in Japan
Your subsidiary in Japan is a Japanese corporations and needs corporate governance. There have been a long list of corporate governance failures leading to huge problems and losses at foreign subsidiaries in Japan, in the financial sector, the elevator sector, the pharmaceutical sector and several others.
Make good use of the Board of Directors of your Japanese subsidiary corporation.
Dentsu dominates Japan’s media sector and advertising
Dentsu switches from JGAAP to IFRS accounting standards with big impact on KPIs
Dentsu dominates Japan’s advertising and media industries, and attracts some of the most creative Japanese talent, although Dentsu is not the first advertising agency in Japan – that priority belongs to Hakuhodo.
From April 1, 2015, Dentsu decided to switch to IFRS accounting standards from Japan’s JGAAP standards. For FY2014, Dentsu reports financial results both using IFRS and JGAAP standards, giving us the fascinating opportunity to compare both accounting standards for a major corporation.
So how big is Dentsu? For FY 2014 (April 1, 2014 – March 31, 2015) Dentsu reports (we have rounded the figures):
Net Sales (JGAAP) = ¥ 2419 billion (=US$ 19 billion)
Revenues (IFRS) = ¥ 729 billion (=US$ 6 billion)
For operating income, net income and other data IFRS and JGAAP measure quite different KPIs.
Disruption is on the way: CyberAgent based on blogs, Recruit based on classified advertising and HR, LINE based on sticker communications, and many more…
How big is Dentsu? US$ 37 billion, or US$ 19 billion or US$ 6 billion sales/year?
Managing Japan/West cultural issues via the Dentsu-Aegis-Network
As for many Japanese corporations, Dentsu’s challenge is to leverage a dominating position in Japan into a global business footprint, while managing the well-known cultural issues. Dentsu’s approach was to acquire the French/UK agency Aegis, and then via Dentsu-Aegis acquire a string of agencies all over Europe:
Dentsu dominates Japan’s advertising space, and is a very very strong force in Japan’s media industry sector, through control and management of major advertising channels with an overwhelming market share in Japan, and has been working hard to leverage its creative power and strength in Japan into a larger global footprint.
Only with freedom and democracy, the values of open society and professionalism can the investment chain function effectively
Japan Exchange Group CEO Atsushi Saito: proud of Corporate Governance achievements, but ashamed of Toshiba
The iconic leader of the Tokyo Stock Exchange since 2007, now Group CEO of the Japan Exchange Group gave a Press Conference at the Foreign Correspondents Club of Japan on June 12, 2015, a few days before his retirement, to give an overview of his achievements and to review the status of Japan’s financial markets today.
Atsushi Saito expresses his satisfaction and pride and surprise about the big improvements in corporate governance and the mind change happening in Japan now.
Atsushi Saito has worked as equity analyst in the USA, experienced the US pension fund debate, and when he was pushing for reform of corporate governance in Japan around 1990 was ignored or even criticized. He is surprised to see that these changes he has been keeping pushing for since 1990 are actually implemented now.
Atsushi Saito directly expressed his shame about the accounting problems recently revealed at Toshiba, and contracts Hitachi, which has independent outsiders, women and non-Japanese foreigners on the Board of Directors, with Toshiba which has not. Atsushi Saito directly said: “I am very puzzled why Toshiba is so lazy to check their accounting”.
Atsushi Saito – leading the Tokyo Stock Exchange since 2007
Leading the Tokyo Stock Exchange since 2007, Atsushi Saito aspired to create an attractive investment destination in Tokyo for investors from all over the world with the following achievements:
modernized the trading systems
developed a self regulatory body
merge with Osaka to create Japan exchange group
Reform corporate governance to improve capital efficiency and corporate value of Japanese companies
The most imperative challenge has been left untouched for far too long: reform of corporate governance in Japan to improve capital efficiency and corporate value of Japanese companies.
Recently we introduced the Corporate Governance Code and we see a shift of mindset in Japanese companies.
Structural impediments remain remain in Japan’s financial market
Structural impediments remain remain in Japan’s financial markets, indirect finance from Banks remain a significant force in corporate finance.
Japanese investment bankers continue to fall way behind European and US rivals.
The post financial crisis regime under Basel 3 puts breaks on excessive leverage.
When global economy returns to high growth, we are not able to rely solely on money centered banks – banks will not be able to provide enough capital satisfy demands in a growing world economy.
Foresee demands for international organizations WorldBank, ADB and new AIIB and private equity funds.
With FinTec, we expect unbundling across separate financial service lines
With fintec, combining financial services and technology, we expect increasing unbundling across separate service lines for banking services, between settlement, wire transfers, loans and other services.
We will see more financial services.
Over dependence on main banks, risk aversion, lack of sense of duty by corporate managers led to the death of Japanese equity as an asset class
In Japan, as a consequence of dependence on indirect finance by money centric main banks, deep involvement of the main banks in corporate management, Japanese companies grew increasingly risk averse shied away from dynamic investment, and ultimately damaged corporate value.
There was a demise of the sense of duty by corporate managers use equity capital efficiently, and as a consequence of these factors, we saw a global divestment from Japanese stocks, eventually leading to the death of Japanese equity as an asset class.
Pushing since 1990 for reform of corporate governance in Japan, Atsushi Saito was not only ignored but even criticized
Atsushi Saito working as an equity analyst in the USA, followed the US pension debate, and started to push for reform of corporate governance in Japan around 1990, he was not only ignored but criticized.
Japan’s recent miraculous turn on corporate governance took Atsushi Saito by complete surprise
Today Japan addresses corporate governance, there is a miraculous turn of mindsets and regulatory framework. We saw:
amendment of companies act
corporate gov code
stewardship code
That these changes could happen came as a complete surprise.
Atsushi Saito hopes that this momentum can be maintained, and fiduciary duties of pension fund managers towards beneficiaries will be strengthened to nurture greater professionalism among Japanese institutional investors, similar to The Employee Retirement Income Security Act of 1974, or ERISA act in the USA.
Only with freedom and democracy + values of open society + professionalism can the investment chain function effectively
Only with freedom and democracy, the values of open society and professionalism can investment chain function effectively. This pattern is what defines truly advanced economy
The recent transformation has brought Japan back into the focus of professional investors globally and a new dawn beckons for Japan.
All stakeholders must remain focused to follow through these early signs of change to ensure that Japan welcomes a brighter future.
Questions and answers
Q: Japan not joining the Asian Infrastructure Investment Bank (AIIB) will deprive Japan of opportunities?
A: The Japanese Government did not say that it will not join the AIIB, but today there is no clear set of rules for the AIIB, the governance structure is unclear. To use tax payers money our government needs to be prudent before they make a decision on investment. There are about 20 international banks and similar organizations, 19 of them have clear governance rules. All except AIIB have clear governance rules. In case of AIIB China will have about 30% holding. Probably our Government will wait before making a decision, and Atsushi Saito thinks this is reasonable.
Q: Will Tokyo Stock Exchange enter into international alliance?
A: Stock Exchange business is a very nationalistic business – only USA has multiple exchanges. All other states have one single Exchange totally under control, regulations, culture by single states. Theoretically Exchanges between different countries can merge, but none succeeded. We saw no case in the world were Exchanges from different countries merged successfully, all such cooperations failed.
Q: Plans of Toyota to have non-traded convertable shares?
Its up to their shareholders. Legally they did not violate any rule.
Japan does not have any priority on special stocks.
I see a discrepance in the USA: The US aggressively raises the voice for rights of shareholders, and corporate governance elsewhere. At the same time US companies are the largest issuer of special stocks for special owners, e.g. for Google or Facebook, more than 50-60% of voting power is dominated by the founders of these companies. –
I see a discrepancy, its an ironical discrepancy. I am talking to the leaders of US : US is very nosy about our corporate goverance, protection of shareholders, but how do they protect shareholders of Google or Facebook?
Q: What is your advice for Japanese economy to regain vitality and energy, for Japan to become No. 1 in the world?
A: I am very concerned about efficient capital use and corporate governance. When I was securities analyst in USA, I was always asked about financial data of Japanese corporations.
Fuji Film had huge cash on the balance sheet – their competitor, the yellow-color photo company was always diligent with share holders, paid dividends, did share buy-backs. Fuji spent much R&D on pharmaceuticals and diversification. The Yellow color photo company disappeared, and Fuji Film is very healthy. Accumulation of sleeping capital is useless. But efficient use of capital is crucial.
when GM went bankrupt it was discovered that they had great technology, like electrical car projects which had been stopped. GM had stopped these R&D projects, because shareholders had insisted to stop R&D spending, and pay hire dividends, and ultimately went bankrupt.
Toyota had 3 trillion yen cash. This was heavily criticized. Toyota was secretely developing electric cars – now LEXUS electric car is bestseller in USA.
We are concerned to respect shareholders, but shareholders’ short term wishes are not always best for the company.
Even BlackRock wants long-term enterprise development rather than short term cash benefits.
Q: Impact of weak YEN on Stock Exchange
A: Even with weak yen, our trade balance is negative. Yen rate is not pushing export from Japan. Japan is manufacturing outside of Japan. Trade account is negative, capital account is black, currency account is black. Overseas subsidiaries are sending dividends back to Japan at the yen rate of 120. Its smart return in the capital account. Our industry structure has changed, we are not exporting on the back of weak yen, so we are not criticized.
Q: plans after retirement
A: I decided: no job – I will take rest.
Q: Disclosure. Often financial data are exposed early in Nikkei or Japanese press prior to official disclosure.
A: I am often asked about this. I don’t know how the press gets their information, its a free market for the press. As long as they don’t do any insider trading or use this information privately, I don’t see anything wrong with early public disclosure. Its a competitive issue between journalists, we cannot critisize competition among journalists. Very sharp journalists pick up information, we are not the police we cannot stop them. Its a competitive world – even for journalists.
I live far outside from Tokyo, sometimes journalists wait at the door to my home in the suburbs. I think this is an invasion of my privacy, and I don’t tell them information at my home.
Q: Trust in the stock market, low Japanese retail investor participation.
A: Advanced states have 60-70% own domestic investors, not outside foreign investors.
Foreign professional investors have immediately responded to the logic of our corporate governance reforms. Especially US and UK pension managers have immediately responded to the improved efficiency of our markets. Investment professionals in London, New York, Scotland can evaluate the meaning of our regulatory changes.
Japanese professional or private investors could not understand the improvements we have done, they did not react.
Mutual funds however are at record hights and we have 8 million ELISA private pension investments in Japan now. People start to build their own pensions now, so retail investors are coming into the market.
We have a normal quiet market now here in Japan regarding sales of equities.
Q: Tokyo as a financial center?
A: If you ask the same question to London, they will say that with IT all transactions are global. There may be arbitrage on the prices. If you compare Shanghai and NY, the trading volume in Shanghai is higher than in NY, but Shanghai not a global financial center, because they are not liberalized in capital in and outflow, they are No. 1 only in volume.
The definition of Financial Center of the World has changed.
We want to be one of the better places in financial business globally. We want to offer convenient and friendly conditions for financial people to come to Tokyo, as one of the centers for financial business.
Tax plays a very important role to define financial centers. London or NY or Tokyo cannot follow a city state like Singapore. We cannot have the same tax system. Tokyo is far bigger than Singapore.
“Global financial center” is a vague subject for me.
Q: Do current prices accurately reflect corp performance. Foreign investors: speculative short-term gains? will foreign investors pull out when Bank of Japan money flush ends?
A: I don’t think the Japanese market is overheating at all. I think the short term speculators have already left Japan.
Long term investors have long asked for change in Japan, Japan did not listen, but now for the first time Japan is listening and changing, and I am feeling longterm investors are understanding this change. We have long term investors here now in Japan.
Q: is high-frequency trading a danger for Stock Exchange?
A: Flash Crash in US was due to the diversity of exchanges. There are 50-60 markets in US. Flash Crash artificially made, not becaue of speed of trading.
Our rules for pricing system here in Japan, we learnt this since the Edo era, we cannot have flash crash, we limit the price changes, we are cooling the trading. Our system of pricing is different than in the USA.
We have many high-frequeny traders from abroad, and they appreciate our system. US high frequency traders critized us up to 10 years ago, but today they appreciate our pricing system here in Japan, they want to learn our Stock pricing system. This has really been a big change for us.
Q: False accounting at Toshiba. Impact on trust in Japan’s stock market.
A: I feel very ashamed for Toshiba. Toshiba should be the mentor or leader of Japanese industry – not the opposite.
Hitachi is a huge contrast to Toshiba. Hitachi aggressively introduced outside board members, foreign and women board members. Hitachi is investigated by outside and foreign board members.
Toshiba is a total contrast to Hitachi.
I am very puzzled by that – why is Toshiba so lazy to check their accounting.
We hope that auditors and accounting houses are more professional and more serious. They told us that their subsidiaries have different accounting system. They must have intentionally checked that point.
My answer: my feeling is one of shame. We should definitely not repeat this type of thing.
Q: Why do Japanese company accumulate so much cash reserves.
A: One reason is that Japanese labor laws compel Japanese companies to have reserves to pay for restructuring. We introduced changes in corp governance, and many companies now use the cash for M&A to acquire foreign companies, or e.g. Fanuc has increased dividends.
I am optimistic for Japanese companies, because they are using cash more efficiently now.
The trick of course is the third arrow, the reforms. Read what Professor Takeo Hoshi has to say about Abenomics, Japanese economist, who has worked his way up US Universities, and has now reached the position of Professor of Economics at Stanford University. By the way, here is my talk at Stanford University – some years ago, but much of it still applies today.
Japanese people’s views on nuclear power are polarized, and its unclear and unpredictable when nuclear power stations will be switched on again in Japan. Read what the Governor of Niigata Prefecture has to say, who hosts the world’s largest nuclear power plant with 7 reactors and 8 GigaWatt capacity.
According to the Japanese Energy Fundamental Law, the Government has to publish an official Energy Basic Plan at regular intervals. You can read the 4th Energy Basic Plan published on April 11, 2014, and listen to a commentary on it for The Economist here on YouTube. The 4th Energy Basic Plan starts with the assumption that Japan is poor in natural energy resources, which of course is only true if we restrict “natural energy resources” to fossil resources. Japan is actually potentially very very rich in renewable energy sources, as the scenario plans developed by Japan’s Industry and Economy Ministry (METI) and Japan’s Environmental Ministry show.
Foreign companies in Japan, and Japanese companies overseas face a dilemma: expensive expatriates with limited local know-how, or local management? Japanese companies seem to have finally reached the conclusion that Japanese managers eg sent to Germany are in most cases not the best choice to lead a German-based multinational company – here are some great recent examples:
Docomo acquires a majority stake in net mobile AG, however net mobile AG remains a publicly listed company. Read details here.
NTT DATA acquires SAP solution provider itelligence AG, however itelligence AG remains an independently managed company under the founder’s management, and grows aggressively via acquisitions all over the globe. Read details here.
NTT Communications acquires a majority of Integralis, Integralis is renamed NTT Com Security AG, however NTT Com Security AG remains traded on the m:access market of the Munich Stock Exchange. Read details here.
Carlos Ghosn is very well aware of such multi-cultural management issues and how to solve them, however too many EU companies in Japan are not. If they were, EU investments in Japan could be at least 50% higher – as you can read here.
Free Trade Agreement (FTA) and Economic Partnership Agreement (EPA)
Preparations:
EU Japan FTA trade negotiations initiated: At the 20th EU-Japan Summit of May 2011 the EU and Japan decided to start preparations for both a Free Trade Agreement (FTA) and a political framework agreement (Economic Partnership Agreement, EPA).
May 2012: after one year of discussions, the EU agreed with Japan on an agenda for future negotiations covering market access.
On 18 July 2012, the EU Commission asked the EU Member States for agreement on opening Free Trade Agreement negotiations with Japan.
On 29 November 2012, the Council authorized the Commission to start trade negotiations with Japan.
The EU Japan FTA trade negotiations were officially launched on 25 March 2013 by EU President Jose Manuel Barroso, President Herman Van Rompuy and Japanese Prime Minister Shinzo Abe.
Impact Assessment of EU Japan FTA Free Trade Agreement, 18 July 2012 (pdf file)
In business the first-comer does not always win the game
Japan’s NTT-Docomo tested two types of wallet phones, manufactured by Panasonic and SONY with 5000 customers between December 2003 and June 2004, and introduced mobile payments and wallet phones on July 10, 2004 – over 10 years ago.
ApplePay therefore could be developed based on over 10 years of experience with mobile payments in Japan. ApplePay is expected to be introduced for the USA market in October 2014, and we can expect Apple to introduce ApplePay to other markets including Japan in due course.
It will be particularly interesting to see how ApplePay and the already established mobile payment and NFC payment ecosystems in Japan will integrate.
Japan’s Osaifu keitai mobile payments started on July 10, 2004, after public testing during December 2003 – June 2004
Two different types of Docomo‘s “Osaifu-Keitai“, manufactured by Panasonic and by SONY, were publicly tested by 5000 customers between December 2003 – June 2004. Docomo’s Oseifu keitai mobile payment system builds on SUICA NFC stored fare cards, which JR-East brought to market in Tokyo on November 18, 2001, after long years of development and public testing, where the author of this newsletter was one of the testers.
Apple-Pay was developed building on almost 15 years of NFC payments in high volumes in Japan
Therefore, those who wish to make predictions about how the Apple-Pay market is likely to develop can use the experience gained during 15 years in Japan.
There are also some open questions, which will probably be answered after we can all check out Apple-Pay after September 19, 2014. One point which is very important is the speed of transactions – especially in transport applications such as the London or Tokyo Subways – read about this in the next section of this newsletter below.
Read more below, and in our reports on mobile payments and electronic money in Japan:
The speed of NFC mobile payments – and why does it take 10 years to reinvent the wheel? and: what is the speed of Apple-Pay transactions? faster than 100 milliSeconds? or 500+ milliSeconds?
On July 17, 2012 The Wallstreet Journal reported, that as far as Transport for London is concerned, there is no viable mobile payment solution available at this time, because to the knowledge of Transport for London at that time, mobile payment transactions take longer than 500 milli-seconds, which is too slow for Transport for London requirements (e.g at Picadilly station during the rush hour).
Interestingly, in Japan “mobile SUICA” payments have been used in Tokyo successfully since January 28, 2006 at the world’s busiest railway stations including Shinjuku and Shibuya – arguably more busy than Piccadilly Circus in rush hour, with transaction speeds faster than 100 milli-seconds – according to The Wallstreet Journal, London Transport did not even know about this.
Therefore one obvious question we have about Apple-Pay is whether the speed of Apple-Pay transactions is in the 500+ milli-second range – unacceptable for Transport for London, or faster than 100 milli-seconds – as is Tokyo’s state of the art since January 28, 2006… I guess we will soon learn the answer to this question.
Why is it that Japan does not capture the global value which Apple and Apple-Developers will create and capture now?
Japan developed mobile payments, e-cash, credit cards in mobile phones and at least as much functionality as Apple-Pay and an open API and a mobile payment and e-cash developer ecosystem over the last 10-15 years.
Why does Japan leave all the global value on the table for Apple and Apple developers?
Actually, I personally had discussions over the last 15 years will all major players in Japan’s mobile payment and e-cash field, crowned by 1-1 discussions with Docomo’s CEO at that time – Dr. Tachikawa – I wrote about one of these meetings in The Wallstreet Journal, of course without mentioning the details: “Wallstreet Journal leadership question of the week – Japanese leadership“.
Essentially my conclusion at that time, and today is, that Japanese companies never showed any interest at all in developing global business to capture the global value of mobile payments, e-cash and the related businesses. Japanese companies did not even try, and were not even interested in discussing the globalization of mobile payment and e-cash technologies and business models.
All opportunities are not lost of course for Japanese companies in the mobile payments and e-cash fields, but most if not all of Japan’s early-mover advantage has evaporated with Apple-Pay.
In business, sometimes the second or third mover can be commercially more successful than the first mover, and it will be very very hard even for a united Japan Inc to stand up to Apple.
European Institute of Japanese Studies (EIJS) Academy Seminars
About the talk: Japan’s electricity architecture was put in place in 1952 and was not much changed until 2011. Electricity liberalization, introduction of smart meters and smart grids bring very large investments in Japan’s energy infrastructure, and are creating huge opportunities for Japanese and foreign companies in Japan’s energy sector. At the same time there is much uncertainty about Japan’s nuclear program -will Japan’s nuclear power plants restart? The talk will explain Japan’s energy architecture today and how we arrived at today’s situation and will give you some tools to understand possible scenarios for Japan’s energy and electricity future.
As an introduction, you may watch Gerhard’s interview for The Economist about Japan’s energy situation here
About the speaker:Gerhard came first to Japan in 1984 to help build what was NTT’s first international R&D cooperation and has worked with Japan ever since. Gerhard is founder and CEO of Eurotechnology Japan KK, where he has worked for 100s of US, EU and Japanese companies on M&A and business development, and he is independent Member of the Board of Directors
of the Japanese company GMO Cloud KK, a cloud services company with about 500 employees and traded on the Tokyo Stock Exchange. Gerhard is also the creator and curator of the Ludwig Boltzmann Symposia on Energy, Entropy and Leadership. Gerhard graduated with a PhD in Physics from Cambridge University, Trinity College, was tenured faculty at Cambridge University in Semiconductor Physics, Associate Professor at Tokyo University’s Electrical Engineering Department, and the first foreigner to lead an elite Sakigake Research project of Japan’s Science and Technology Agency.
Date and place – Japan’s electricity and new energy policy
Date: Wednesday, June 18th, 2014 Time: 6.30 p.m. – 7.00 p.m. Drink & Snack (served before lecture), 7.00 p.m. – 9.00 p.m. Lecture and Discussion Place: Alfred Nobel Auditorium, Embassy of Sweden, 10-3-400 Roppongi 1-chome, Minato-ku, Tokyo 106-0032 Fee: JPY3,000 per person, payable at the door, Free for those who are from sponsoring companies, Free for students, please bring your student ID Language: English Registration required:Please sign up by June 13 (Fri.) via e-mail to eijsjap (at) gmail (dot) com for the attention of Ms. Futagawa (EIJS Tokyo office) In cooperation with the Embassy of Sweden
Gerhard Fasol: Japan’s electricity and new energy policy
If you can’t attend the talk on June 18th, 2014 at the Embassy of Sweden, you can download our reports on Japan’s energy situation here:
Steve Jobs and SONY: why 180 degrees opposite decisions?
Steve Jobs donates history to Stanford University in order to focus on the future
Steve Jobs and SONY – when Steve Jobs when returned to Apple in 1996, and now SONY are faced with the same question: what to do about corporate archives and the corporate history museum? Interestingly Steve Jobs, and SONY reach exactly 180 degrees opposite answers to the same question:
Steve Jobs donates Apple corporate archives and company museum to Stanford University
SONY sells headquarters building, and keeps SONY corporate archives and company museum
Why opposite answers to the same question? Could it be good advice for SONY, to learn from Steve Jobs, and donate SONY-Museum and SONY-Archives to a University, and focus much more on the future?
Apple donates history collection to Stanford University:
EU Japan investment stock is expected to increase with the future Economic Partnership Agreement
European direct investments into Japan, European acquisitions in Japan
EU investments in Japan have been relatively constant around EURO 80 billion. There has been a marked reduction in EU investment in Japan in 2006 due to the withdrawal of Vodafone from Japan with the sale of Vodafone KK to Softbank for approx. EURO 12 billion (find details of the Vodafone-SoftBank M&A transaction here). This reduction of EU investment stock in Japan is clearly visible in the graphics below in 2006 and 2007.
Japanese direct investment in Europe, Japanese acquisitions in Europe
Japanese investments in EU are steadily increasing, as Japanese companies are seeking to grow business outside Japan’s saturated market, and as Japanese companies acquire European companies for market access, technology and global business footprint. In 2012 the total investment stock of Japanese companies in the EU-27 has reached around EURO 150 billion.
EU Japan investment flow is mainly from Japan to Europe and totals about EURO 10 billion per year
Investment flow between EU and Japan shows strong impact from the Lehmann shock economic downturn, and was very quiet between 2008 and 2010. In recent years, mainly Japanese investments to Europe have picked up, and currently about EURO 10 billion per year flow from Japan to Europe, Japanese companies acquiring European companies to globalize and also to pick up known-how and technologies.
Investment flow from EU to Japan remains at relatively low levels around EURO 1 billion annually, while investments by Japanese companies in the EU are on the order of EURO 10 billion per year currently.
Japan to Europe direct investment register:
Investment flow recently is almost one way from Japan into Europe.
EU Japan investment flow is mainly from Japan to Europe and totals about EURO 10 billion per year
With the expected Economic Partnership Agreement (EPA) we expect investment flows to increase in both directions.
The pressure to globalize, and saturation of Japan’s markets drives Japanese corporations to invest in Europe, therefore we expect the future Economic Partnership Agreement between Japan and EU to stimulate further Japanese investments in Europe more than in the Europe -> Japan direction.
EU Japan trade adds up to about EURO 160 billion/year if both directions are added up
Combining the amounts of trade for merchandise and commercial services, EU exports to Japan and Japanese exports to EU have reached equal levels, so that the trade between EU and Japan is now balanced around EURO 80 billion in each direction, i.e. a combined trade of EURO 160 billion.
EU Japan trade: EU is traditionally stronger in the export of commercial services while Japan is stronger in the export of manufactured goods
Japan is traditionally stronger in the export of manufactured goods, while EU is stronger in the export of commercial services. Combining both merchandise and services, the trade between EU and Japan is now balanced.
EU Japan trade: the trade deficit is balanced out now
There used to be a trade deficit and trade friction: Japan used to export much more to Europe, than Europe exported to Japan. Recently, Europe has increased exports to Japan considerably, and the trade is now balanced in both directions.
How do you see Yahoo KK’s latest move to reduce or eliminate merchant’s fees? Do you see this as an attack by SoftBank/Yahoo on Rakuten?
SoftBank and Rakuten are clearly two very different companies – they don’t compete on the same ground. SoftBank is a telecom company with a Government spectrum license – a quasi-monopoly on a certain wavelength spectrum. Rakuten has no such monopoly, but is an internet based ecommerce company.
How do you see the future of Rakuten now?
Rakuten is clearly squeezed between SoftBank/Yahoo on one side and Amazon.com on the other side.
Amazon.com’s Jeff Bezos, SoftBank/Yahoo-KK’s Masayoshi Son and Rakuten’s Hiroshi Mikitani are clearly some of the most brilliant minds on this planet earth, so any battle between these three is phenomenal.
You ask about Hiroshi Mikitani/Rakuten – he clearly has his job cut out to compete with Masayoshi Son and Jeff Bezos – that’s not easy at all.
In particular, Amazon.com has a lot of strengths in areas, where Rakuten does not compete, e.g. AWS – Amazon Web Services, which is a very important cloud services company.
In terms of globalization, I also see challenges ahead for Rakuten. Even though Rakuten has recently decided to train staff in English conversation, its not a trivial job for an essentially Japanese company to globalize.
How do you see globalization of Rakuten and Softbank?
SoftBank clearly has taken a big step in acquiring Sprint in USA. SoftBank’s very big challenge is now to make Sprint a very big success and this will take some time. Rakuten also has a huge challenge to globalize, and it will be interesting to see if Rakuten can become a global company
Originally published both in the print and online editions of the ACCJ Journal (Journal of the American Chamber of Commerce in Japan) on January 15, 2011 in “Chamber Events” based on a talk given by Dr. Gerhard Fasol to the Members of the American Chamber of Commerce (ACCJ) on July 12, 2010, at the Westin Hotel, Tokyo.
(c) 2011 Copyright by The American Chamber of Commerce in Japan (ACCJ). Reproduced with kind permission of ACCJ.
Dr. Gerhard Fasol, the founder and CEO of Eurotechnology Japan KK, spoke to ACCJ members about Japan’s “Galapagos Effect” at the Westin Hotel in Tokyo. The “Galapagos Effect,” for those unfamiliar with the term, is used to describe Japan’s unique culture of technology that has not expanded beyond Japan’s borders, in the same way that the Galapagos Islands exemplify unique evolutionary developments in nature.
Where Japan Leads
Investment is a prime reason why such developments as Internet-related mobile communications are so advanced in Japan. As Fasol pointed out, Japan has seven times the number of 3G base stations as the United Kingdom. Many of the related technical developments in mobile handsets that are only just coming onto the market outside Japan have been standard for many years in this country—Fasol gave high-quality camera phones as an example.
Quoting a Nokia spokesman, he claimed one reason for this leap was that Europe is conservative in regards to standards, which take a long time to develop and ratify in contrast to Japan. He amplified the Galapagos analogy by stating, “Japan is a Galapagos island, and doesn’t have to care about standards.”
Fasol also claimed that Japan is 10 to 15 years ahead of other nations in its use of electronic money. He contrasted Europe’s fragmented and overly bureaucratic nature with Japan’s, where large decisions—such as i-Mode and Suica—can be made by a mere two or three people, which may come as a surprise to those who see Japan as a bureaucratic nightmare.
The reverse side of the Galapagos effect, however, is that Japanese phones designed for the home market fail to find buyers outside Japan. Electronic money is another area where Japanese technology seems destined to remain within the borders of Japan, despite the fact it is now quite common and accounts for a relatively large proportion of currency in circulation at about two percent. Fasol claimed that the U.S. and Europe are not yet ready for the mass introduction of such a payment system like Japan. In the long term, he believes, non-Japanese global giants will probably win out over the Japanese innovators.
Shedding Light on Genius
Another area where Japan has led innovations in the commercialization of technology is the revolution in lighting, which is poised to offer new environmentally-friendly illumination options. Based on the invention of the blue LED by Shuji Nakamura, the new lighting systems are also wallet-friendly in that they offer a 6,000-fold advantage in terms of price for the same amount of light over kerosene-powered lighting, still a staple in many parts of the world.
However, Nakamura was largely ignored by the Japanese business community; he is not even named on the website of the company that employed him (Nichia), and is now working at a university in California—Tokyo University claimed they wanted more “ordinary professors.” According to Fasol, the “Galapagos effect” means that there is no room or need for geniuses like Nakamura in Japan.
Economy
Up to 1995, Japan’s economy was growing, but is now static, a unique situation within the G8. Indeed, extrapolated from present trends, South Korea’s economy could overtake Japan’s in 2022.
Japan has a huge electronics sector, from giants to smaller specialist makers with a $600 million market about the same as the Netherlands. However, the growth is almost zero compared with that of 10 years ago. The net income of the top 20 companies of the sector is actually less than that of a single U.S. company, GE or of Korean rival, Samsung. This has a disadvantageous effect on pension funds, who are the major shareholders of these companies, but the governance of Japanese corporate affairs by shareholders is much less than, say, in the U.S. Still, Japan enjoys a very large national market (unlike the UK, for example), which can help companies survive. On the other hand, this may have prevented companies from “going global” as their internal market has reached saturation. Fasol mentions rice cookers as an example of a consumer durable that is not purchased frequently, and accordingly has a relatively small and finite market footprint. Even so, every major electrical manufacturer designs and produces a range of rice cookers, with a very low profit margin of well under one percent, which may be part of the legacy of the zaibatsu (the large pre-war conglomerates). This legacy means that most present-day conglomerates feel the need to do everything—for instance, there are three global makers of trains, but ten in Japan.
The Galapagos Study Group
Fasol then went on to describe the 26-person interdisciplinary Galapagos Study Group—of which he was the only non-Japanese member—which met monthly for a year and concentrated on the mobile phone industry.
The results of these meetings were summarized in three sets of recommendations to telecom carriers, electrical manufacturers, and content companies, with the second category receiving the recommendations that Fasol described as most radical.
He surprised his listeners by saying, “I think it would be best for Japan if in five years or so there were no more Hitachi, or Fujitsu, or Toshiba.” This, of course, was not meant as a direct attack on these specific companies, but as an attack on their conglomerate nature. Instead of the current state, he suggested a move towards smaller companies, focused on profitable businesses, would be preferable and would restart growth.
On the content side, Fasol claims that Japan is the only country in the world with the intellectual and creative resources to create characters that can stand up to Mickey Mouse and the Disney empire, but has not succeeded in creating global businesses based on Pikachu or Doraemon. Accordingly, the committee made a recommendation that platforms similar to Disney be created in order to create global businesses using such characters.
Gerhard FasolGerhard Fasol
Coming to Japan from the Outside
On the subject of breaking into “the Galapagos market,” Fasol pointed out that good foreign companies can succeed in Japan if they know the market. As an example, he cites traffic lights, whose specifications in Japan are controlled by the police. Any company failing to recognize this kind of local quirk, no matter what its global standing, is doomed to failure when it comes to Japan. Examples of dramatic failures he cited were Nokia, Nasdaq, and Vodafone. To paraphrase the traditional real estate tag, Fasol claimed that the three biggest mistakes foreign companies coming to Japan make are “arrogance, arrogance and arrogance.” He claimed that this has nothing to do with Japan’s closed markets, quoting the iPhone’s success as an example.
He pointed out that there are other reasons for the failure of foreign entrants. Apart from the failure to listen to customers and understand the market, reasons include partnership with the wrong joint venture partners, and the management of Japanese ventures by managers who fail to understand the country.
However, the Japanese service lifestyle, allied with what he terms a “fashion society,” is a great opportunity for outsiders to break into the Galapagos market, and Fasol claimed that foreign companies can tap Japan’s creativity and use it to their advantage.
He also claimed that the relative isolation of Japan from global standards and practices in some cases actually enriches the global experience. But at the same time this also introduces life-threatening issues for Japan and this isolation must be addressed through two-way dialog from inside and outside of Japan.
(c) 2011 Copyright by The American Chamber of Commerce in Japan (ACCJ). Reproduced with kind permission of ACCJ.
Gerhard Fasol’s lecture at Stanford University: “New opportunities vs old mistakes – foreign companies in Japan’s high-tech markets”
Hiroshi Mikitani about how Japan should become more competitive
Hiroshi Mikitani: presentation of his new book = Competitiveness
Today Hiroshi Mikitani, Founder and Chairman of Rakuten, gave a talk at the Foreign Correspondents Club about his Japan Association of New Economy (JANE) and about his new book authored with his father entitled Competitiveness. Mikitani is also member of Prime Minister Abe’s Competitiveness Council.
Overall Mikitani explained some very reasonable sounding suggestions for changes towards overcoming Japan’s current 15 year stagnation. He made clear, that the No. 1 reason for Japan’s stagnation is not lack of technology or lack of innovation, but is due to insufficient quality of top managers/executives of Japanese companies. Therefore most of Mikitani’s suggestions for improvements focus on increasing the quality of top executives at Japanese companies both via education and also via bringing in more non-Japanese competition. Mikitani also emphasized his close relationship with Prime-Minister Abe, he mentioned having had dinner yesterday with Prime-Minister Abe, and expressed is confidence in Prime-Minister Abe’s abilities and his power to execute. One of the questions the audience asked during Q&A was that similar suggestions for improvements have been heard over many years, and asked whether this time these suggestions will be implemented.
Hiroshi Mikitani
Mikitani is Representative Director of the Japan Association of New Economy (JANE).
Japan Association of New Economy (JANE) has three focus areas:
Innovation
Entrepreneurship
Global standards
Mikitani emphasizes that the major reason for Japan’s stagnation is not lack of innovation, but top management with low capability and no vision. – Japan’s No. 1 problem are Japan’s executives.
To increase the competitiveness of Japan:
Japan does not lack technology, but global business management capability and business innovation
Current system protects top management with low capability and no vision. Top management needs to be renewed.
Efficiency of industries must be increased via competition
Japan must select Key Performance Indicators (KPI) and measure improvements in competitiveness against these KPIs. Must set targets, and measure progress.
Corporate tax rate in Japan should be lowered, and should target to be the lowest level of developed countries
Japan must improve global expansion and must improve quality of management:
Join TPP
Accelerate introduction of International Financial Reporting Standards (IFRS)
Increase quality of top business managers and human resources
Attract top talent from around the world: reduce tax progression, introduce stock based remuneration
Educational reform: improve English education, improve IT education, cultivate strategic thinking
Terrestrial digital media broadcasting (“Chi-Degi”, One-Seg)
Medical
Communication networks, NGN
Radio spectrum
Open up capital markets, bring market mechanisms into corporate management:
Ban extreme anti-takeover measures, ban poison pills etc
Reduce cross-shareholding
Japan needs education reform and needs to cultivate world-class business people:
Japan’s education system is ranked on 43rd position (out of 144) by the World Economic Forum (2012).
Quality of management schools is ranked on 80th position (out of 144) by the World Economic Forum (2012).
Hiroshi Mikitani submitted detailed materials to the Industrial Competitiveness Council Meeting on January 23, 2013. These materials can be downloaded here: http://jane.or.jp/img/english/pdf/jane20130129.pdf
Japan banks need to register with the Ministry of Finance, so we know exactly how many banks there are in Japan, and we know address and all details about each one (contact us if you need help)
One of our clients asked us, how many banks there are in Japan, when discussing possibilities for obtaining finance.
Banks in Japan need a license, therefore all Banks are registered, and details are published, there is a straight answer to this question: 198 + 1 (as of July 1, 2013).
Note that Japan’s banking sector is consolidating, especially regional banks, so there is some change over time.
Total number of banks in Japan = 198 (as of July 1, 2013) (not including The Bank of Japan)
Since a banking license is required, the number, names, addresses etc of all banks of Japan are easy to find.
For historic reasons the number of banks in Japan is quite large, and the Bank of Japan and the Government of Japan have mentioned recently, that they consider the number of banks too large, and consolidation of local banks is under consideration.
Bank of Japan
Not included in the listing above is the Bank of Japan.
The Bank of Japan is the central Bank of Japan, and has three main responsibilities:
issue bank notes (not the yen coins, the coins are minted by the Mint of Japan)
carry out currency and monetary control
act as settlement banks between all Japanese banks: “to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system.”
Trends and consolidation
As a consequence of the Japanese banking crisis following the “crash of the bubble”, many Japanese banks were in difficulties resulting in a wave of mergers of Japan’s mega-banks – as a consequence, three top banks were created:
Mizuho Financial Group (blue)
Mitsubishi UFJ Financial Group (MUFG) (red)
Mitsui Sumitomo Financial Group (green)
Regional banks are increasingly under pressure as local economies stagnate and contract, winners and losers emerge, and we expect waves of mergers among mid-sized and small-sized local banks.
Emerging new banks
With the development of fintech and online banks we see new giants emerge, examples are Rakuten Bank, and others.
On the Galapagos islands, Charles Darwin noticed a number of species which were extremely beautiful, had evolved on the Galapagos islands locally, and were not able to live anywhere else.
Similarly, due to language, culture, comparatively small interchange between Japan’s markets and foreign markets, some technologies and some products evolved in Japan differently than in other markets.
In part, Japan chose unique Japanese technology standards (e.g. PDC and PHS for mobile phones, 1-seg for mobile TV, FeliCa for RFID contactless and mobile payments) in the hope to achieve global adoption of these Japanese standards, and at the same time to make market penetration of Japan’s markets more difficult for foreign companies in these fields – thus giving an competitive advantage to Japanese companies in their home market Japan.
Japan Galapagos effect: Telecom industry
Japan’s telecommunications industry for a long time used wireless communication standards, and mobile data standards, and frequency bands quite different than those used in other parts of the world. This had several effects:
Foreign companies hoping to enter Japan’s market, had to invest and develop mobile phone and other equipment specifically for the Japanese market, which could not be marketed anywhere else. Thus competing Japanese mobile phone makers and base station makers had a (temporary) competitive advantage in their home market, Japan. However, because of Japan’s limited market size, this competitive advantage in their home market seduced these Japanese companies to neglect global business development. As R&D costs, and especially software development costs increased, lack of global scale made it more and more difficult for these companies to continue viable business.
Because of high investments, and the will of consumers to spend large amounts on mobile communications, and because of Japan’s innovative power and other factors, many mobile technologies and business models were invented in Japan, or came first to market in Japan. These include:
Japanese handset makers and mobile phone base station makers were until recently protected in Japan’s market, Japanese mobile phone operators preferentially purchased Japanese equipment. Japanese mobile phone handset makers and base station equipment makers were not able to compete in the much larger global market.
Necessary consolidation did not take place, so Japanese mobile phone handset makers and base station equipment makers did not scale globally.
Japan Galapagos effect: Galapagos phones (Galake, ガラケ)
Japan introduced mobile internet in February 1999, much earlier than any other country. “Galapagos phones” (Galake, ガラケ) are mobile phones (“feature phones”) typically based on the legacy Symbian operating system, and including a very rich set of features:
Mobile operator specific services, such as DoCoMo’s Concierge services
and more
Galapagos-phones are losing market share against iOS/iPhone and Android smartphones, and we expect Galapagos-keitai (galake) to disappear from the market within a few years to be replaced by iOS, Android, and other smartphones.
Kei car, K-car, 軽自動車 (meaning “light automobile”) is an automotive class, which exists only in Japan. Kei-cars enjoy tax advantages, and Japanese automobile manufacturers are creating very innovative and attractive Kei-cars, however this class of automobile is only restricted to Japan at this time, and cannot achieve global scale at this time.
Positive aspects: Japan Galapagos effect as an opportunity
Mobile internet, electronic money, camera phones and many other advanced technologies were invented and/or first brought to market in Japan, earlier than in all other countries, because of the positive aspects of the Galapagos effect. Japanese companies could develop and bring these new products to market without being slowed down by global standards. Creativity can run free in Japan because of Japan’s Galapagos effect.
Japan post-Galapagos effect working group
The “Post-Galapagos working group” was organized by Takeshi Natsuno (one of the three developers and long-years manager of DoCoMo’s i-Mode mobile internet service) during the years 2008-2009.
The Post-Galapagos working group consisted of about 15 Committee members (Gerhard Fasol was the only non-Japanese Post-Galapagos working group member), met once a month for about one year, and in mid-2009 prepared an released a set of reports with recommendations for
Gerhard Fasol: The Galapagos Effect (talk given for the American Chamber of Commerce in Tokyo, Tokyo Westin Hotel, July 12, 2010, 12:00-14:00), read the article here in the ACCJ Journal
Kazuo Inamori (80 years old, born January 30, 1932), Japanese serial entrepreneur, founded Kyocera Corporation on April 1, 1959, founded DDI (now KDDI) in 1984, and turned around Japan Airlines (JAL) during the last two years.
Japan Airlines (JAL) went bankrupt on January 19, 2010, Kazuo Inamori turned around JAL, and JAL went public again on Tokyo Stock Exchange on September 19, 2012, returning substantial profit for the Enterprise Turnaround Initiative Corporation of Japan Fund.
Legendary serial entrepreneur Kazuo Inamori (稲盛 和夫)
Kazuo Inamori used his “Amoba Management” (アメーバ経営) techniques to rebuild Japan Airlines from bankruptcy
Kazuo Inamori is famous for “Amoeba Management (アメーバ経営)”, essentially Amoeba management means divisional accounting, and has been refined for the management of Kyocera and many other companies.
Today Kyocera is divided into about 3000 “amoebas” – applying the amoeba management methods to Japan Airlines
Applying “Amoeba management” to JAL, Kazuo Inamori installed a real time system, to determine the profit of each route and each single flight in real time, while in the past profits (or losses) at Japan Airlines, were calculated months after the fact.
Kazuo Inamori on leadership: “the leader must have a vision and burning determination to carry out the vision whatever the obstacles”, and must communicate aims and targets to everyone in the company.
On nuclear energy:
Japan’s energy / electricity sector is in upheaval, and given Japan’s respect for seniority, given Kazuo Inamori’s standing in Japan, understanding Kazuo Inamori’s opinion is very important for understanding how Japan’s energy landscape is likely to evolve in the future.
“In the past the problems of nuclear energy were hidden from the public, and in the future must be disclosed”.
“It is not possible to maintain the current sophisticated society without nuclear power”. He thinks that nuclear power is a necessary evil.
Positive and negative aspects of Japan’s Galapagos issues
European Institute of Japanese Studies Academy Seminars presents
Speaker: Dr. Gerhard Fasol, President, Eurotechnology Japan K.K.
Wednesday, June 13, 2012, 18:30 – 21:00
Embassy of Sweden, Alfred Nobel Auditorium
Stockholm School of Economics, European Institute of Japanese Studies
About the talk:
In the last 20 years, several global revolutions were created in Japan, including the LED lighting revolution(1), mobile internet(2), electronic money(3). However, in each case Japan failed to capture much of the global value created by these revolutions. Dr. Fasol will talk about what is holding back Japan from capturing more global value from its unique creativity and how Western companies can do better in Japan, and avoid the most well-known traps
About the speaker:
For the last 15 years, Gerhard Fasol has worked with more than 100 investment fund managers in Japan, advising them on technology inflections, initiated and managed business development and assisted M&A projects. Dr. Fasol is currently working with several US and European companies in these areas, helping them onto successful paths in Japan. Dr. Fasol has been an Advisory Board member to the Chairman of JETRO and the only foreigner on Japan’s “Post Galapagos working group”.
Gerhard has an extensive business and academic career, as manager of one of Hitachi’s R&D labs, University Lecturer in Physics at Cambridge University. He also served as Director of Studies at Trinity College Cambridge, Research Scientist at the Max-Planck-Institute for Solid State Science in Stuttgart, and invited Professor at the Ecole Normale Superieure in Paris, was one of the first working on spin-electronics and magnetic memories in Japan, and has won a Sakigake research program from Japan’s Science and Technology Agency while faculty member in Electrical Engineering at the University of Tokyo. Gerhard graduated with a PhD in Solid State physics from Cambridge University and Trinity College, Cambridge, UK.
Gerhard Fasol lecture at Stanford University: “New opportunities vs old mistakes – foreign companies in Japan’s high-tech markets”
