Dark days for Japan

By on November 9, 2012

Not long ago, Japan’s economy was the second-largest in the world. But its sense of common
purpose has curdled into corporate sclerosis, managerial timidity and cover-up. And now the
Japanese economy is stagnating.

Make Love Not War. There’s a thing for the Japanese navy ratings to think about as they charge
around the East China Sea in their gunboats to defend the disputed remote and uninhabited
Senkaku/Diaoyu islands from Chinese aggression. For Japan is a demographic disaster and if the
Japanese don’t start reproducing soon, rather than locking horns with their neighbours, there won’t
be many of them left.

Japan’s population of 127 million, already hugely skewed towards the unproductive and costly
elderly – average female life expectancy is 86 years – is set to shrink by 800,000 every year between
now and 2060. That will then be 32% of its 2010 level. Such is the profound Japanese distaste for
inward-migrating foreigners who might keep the population numbers up that the more fatalistic
demographers have worked out that there will be only one person left in Japan by 2900. Little
wonder that Takahisa Takahara, head of Unicharm, Japan’s largest nappy producer, was recently
bemoaning the fact that he sells more products these days to the elderly than to the infantile
incontinent.

Japan has been falling behind for some while, and not just in its birth rate. By the time the rest of us
felt our own global economic malaise following the crash of 2008, the Japanese had been dwelling
in a deflationary economic mire of zero or very low growth for nigh on two decades. The nation is
stuck in perma-slump and on monetary life-support, with terrifying debt and deficit problems: public
debt is 239% of GDP, and taxes cover just about half of total government spending. And its leaders
– six prime ministers in as many years – seem clueless and lacking in the political will to do anything
about it. The government has just launched an eighth round of quantitative easing in an attempt to
weaken the yen, and Japan’s GDP, once nearly 20% of the global economy, will be down to less than
5% by 2042. (And you thought the UK was in schtuck.)

While tensions with the Chinese remain high – a cynical ploy on the part of Japan’s poor-quality
leadership to boost nationalism and thus divert attention from domestic angst – there is an export
cost to be paid. In September, Toyota sold only 44,100 new vehicles in China, a 48.9% drop on a year
earlier. How many of them will have to come back to the factory is anybody’s guess – this luckless
outfit, already hard-hit by the effects of last year’s tsunami, has just announced a recall of 7.5 million
vehicles. Meanwhile, in South Korea – with which Japan has another ‘chopsticks at dawn’ territorial

dispute – Samsung, the ‘Sony-killer’, has just announced an increase of 85% in operating profit.

For its part, the once mighty Sony is in poor shape. Once the proudest and mightiest of Japanese
corporations, the company’s last great idea was the Walkman and it is now making more money
from selling insurance than from cool hi-tech kit. When its Welsh-born boss, Sir Howard Stringer,
retired, wounded in battle, from the top job at Sony earlier this year, he had failed to turn the
behemoth around. Now desperate, Sony has announced 10,000 redundancies and an expected
annual loss of $2.9bn (£1.8bn). That was Sony’s fourth consecutive year in the red and it has lost
money on every single TV it has sold for the past eight years. The reins, have, unpromisingly, been
handed back to a Japanese national.

Sony isn’t the only corporation on the rack: Panasonic, Sharp, NEC, Fujitsu and Mitsubishi are all
suffering. Between 2000 and 2010, Japan’s electronics production tumbled by 41% and exports by
27%. Japan’s global market share fell by nearly half to 10% by 2009, whereas South Korea’s rose to
nearly 10%.

Poor corporate governance

The plight of another Japanese titan, Olympus – just seven years short of its centenary – and its
battle with ex-CEO Michael Woodford perfectly encapsulate what is wrong with Japan. Woodford’s
story was met with amazed disbelief around the world. Shortly after taking up his role as president,
he became aware of a massive $1.7bn fraud dating back to the early 1990s. His initial attempts
to discover what had been going on were stonewalled, and when he raised his level of protest by
bringing in outside auditors he was fired for ‘cultural insensitivity’ – for which read ‘asking too many
awkward questions’. He was summarily relieved of his mobile phone, limo and office pass and told to
take the bus to the airport.

The Olympus affair highlighted many serious, long-standing worries about the conduct of Japanese
business. Not merely dodgy dealing and the hiding of financial losses – tobashi, as the widespread
practice is known (literally ‘fly away’) – but also poor levels of corporate governance; the most tin-
eared approach to PR and communications outside the North Korean politburo; scant regard for the
interests of shareholders; weak and indifferent regulators; and a culture of denial that persists in
believing that problems, if kicked like a can down the road, will eventually just go away.

‘Really, I’d feel better investing with Bernie Madoff or the Marx brothers than Olympus’s board,’
noted the Bloomberg columnist William Pesek a year ago, as the Olympus share price halved within
days of Woodford’s arriving back at Heathrow and hot-footing it to the SFO, FBI and anyone one else
who cared to listen to his shocking narrative. Olympus handled the whole affair so badly that Pesek
suggested that future MBA courses should include an Olympus module in how not to handle crises.

It’s a measure of Olympus’s woeful incompetence that it appointed Woodford in the first place.
The hard-driving, obsessional salesman had a history of whistleblowing within the organisation
and exposing malfeasance in its European operations. He was certainly given a Sisyphean task and
seemed doomed to fail. Like Sony with its TVs, Olympus was losing money on its once-famous, David
Bailey-promoted cameras and was hugely flabby, with outside consultants crawling all over it. By
2011, losses in its imaging systems division had reached $175m.

With so many people now taking photos on smartphones rather than Olympus cameras, the whole
show was being kept afloat by the highly lucrative medical division and its high-margin, IP-protected
endoscopes. A refusal to close loss-making divisions is a classic Japanese habit. As Michael Porter
points out in his excellent book Can Japan Compete?, Japanese corporations cannot bear not doing
everything, even when their offerings have little to distinguish them from the products of rivals. And
when individual strengths exist, weak marketing fails to highlight them. ‘Japanese companies do
not have distinctive strategies,’ Porter writes. ‘In addition to each offering a full line of products and
serving all types of customers, they all employ the same vertically integrated business model.’

Porter’s book forensically takes apart most of the supposedly superior methods practised by
Japanese business: high quality and low cost; a wide array of models and features; lean production;
regarding employees as assets; permanent employment; leadership by consensus; strong inter-
corporate networks; long-term goals; internal diversification into high-growth industries; and staying
close to a pliant government.

Take the strong intercorporate networks (keiretsu), for example. This system of cross-holding of
stocks was devised during the period of rapid economic growth in the 1950s and ’60s, when Japan
was forced to remove restrictions on the holding of Japanese stocks by foreigners as a condition
of entry to the OECD. Typically, 30% to 50% of stocks were cross-held by companies in the same
keiretsu, as a means of preventing takeovers by outside investors. Keiretsu fostered incestuous
long-term relationships between buyers and suppliers. When applied to banks it proved even more
insidious.

Although he’d worked for Olympus for 25 years, Woodford remained an outsider. His undoing has its
origin in his inability to speak, read, write or be Japanese. Indeed, this may have been precisely why
he was appointed to the job, admitting at the time to the FT: ‘If I had been Japanese, then I wouldn’t
be president … Harmony and consensus have their place and time but scrutiny and challenging …
leads to better decision-making. You have to be able to confront and say: “Oi!” too.’

Olympus probably thought an unpopular gaijin (foreigner) could force through culturally
unacceptable job and cost cuts before he was dispensed with. Although he was constantly
accompanied by interpreters and did all the dinners, he was never going to be one of the boys in the
inner circle. The Japanese inner sanctum is notoriously impenetrable, and Woodford didn’t even play
golf.

He was not alone as a gaijin in this. Almost without exception, whenever Japanese corporations have
gone for foreign talent to lead them in an effort to shape up, it has ended in disaster. Craig Naylor,
who had previously enjoyed 36 years of success at Du Pont, threw in the towel at Nippon Sheet
Glass in April after just two years, citing ‘fundamental disagreements’. The one exception is Carlos
Ghosn of Nissan, who is revered to the extent that his life story was turned into a superhero comic
book series in Japan. His first move, incidentally, was to smash up Nissan’s keiretsu.

Uneasy relationship

Japan’s relationship with the outside world has long been uneasy. At the end of the World War
II, the new direction in which Japan was set was established by the Americans. It’s easy to forget
that before the manufacturing-led export boom that began in the 1950s and ’60s, Japan had

been anything but outward-looking. It was a private, introverted and highly chauvinistic country,
convinced that its ways and customs were infinitely superior to those of others. Many believe this
underlying mindset persists. It remains an odd, if frequently delightful, place: most foreign when you
expect it to be familiar and most familiar when you expect foreignness.

Born in 1960, Woodford watched the sunrise of Japanese economic power. In his bedroom, he had
a small Sony cassette player and, downstairs, the family listened to a Sharp music deck. The third-
rate tat in those days had ‘Made in Hong Kong’ or, worse, ‘Made in China’ written on it. He grew up
in Liverpool, which besides being a famous port was also a motor town, with many employed at Ford
and British Leyland. Down the road from where he lived, the Speke 2 plant in the 1970s produced
the Leyland/Triumph TR7 – which was an utter disaster. Speke had dreadful management and the
lowest productivity in British Leyland (which was saying something), and up to 25% of the workforce
regularly went sick on Mondays and Fridays. This wasn’t how they behaved at Toyota City in Aichi.

Woodford recalls sitting in the newly acquired Datsun Cherry of a friend’s parents and thinking,
they’re very clever, the Japanese. Indeed they were, and the rest of the world was forced to learn
and adopt all the Japanese manufacturing techniques of kaizen and lean production to make
themselves more efficient. All their foreign rivals practise them now, so they no longer offer
competitive advantage.

Japanese success reached its zenith, with the sun high in the sky, in the mid-1980s, and then the
long, slow descent began. Olympus’s problems, like those of so many Japanese corporations,
started when it was hit by the rapid rise in value of the yen, which made its exports uncompetitive.
Olympus’s profits fell from Yen6.8bn in 1985 to Yen3.1bn a year later. The company listened to
the siren voices of third-rate Japanese investment bankers, who promised to conjure easy money
from nothing through the dodgy world of speculative investments in arcane financial products.
The gambles backfired spectacularly and by the end of 1990 Yen100bn had gone down the drain.
Olympus was unusual in not fessing up, hiding its losses for two decades.

With the going tough, Japan has lacked the leadership to move forward. The acts of selfless heroism
shown by workers at the Fukushima nuclear power reactor after the tsunami have reaffirmed that
Japan is a nation of quiet lions led by donkeys. The Japanese are a hard-working, dutiful, courteous,
resourceful and steadfast people who deserve better leaders. But most who reach the top are
bloodless and faceless box-ticking characters lacking the courage and vim to take difficult decisions,
except to send more foot soldiers over the top in futile attempts to win back global market share.
This is a grave disappointment.

Japan’s success was founded on single-minded mavericks, often engineers who were willing to
go against the grain, take risks and stick their necks out. When he was interviewed by MT in 1981
about his decision to retire aged 66, the legendary Japanese engineer, entrepreneur and industrialist
Soichiro Honda noted: ‘I know what I can’t do. Today, automobiles require automation and I am too
old to study computers. Also, I have lost my sex power. I won’t say I have lost all my sex, but I must
admit that frequency of doing and recovery have not been the same as when I was young. Great
leaders love sex, and I am not a great leader any more.’ Then he went on to complain: ‘I can’t drink
any more, either. Two cups of sake is enough. Presidents should be able to drink more.’

A hard-drinking, mega-shagging boss is not going to be the answer to every Japanese corporation’s
problems, but their ranks-closing, consensus-insisting refusal to take hard decisions fatally weakens
them. A favoured expression in the Japanese language is ‘the nail that stands up gets hammered
down’. The pervasive cultural fear of failure and the loss of face that such a disaster brings mean
there is a very low level of interest in starting businesses anew. A new Soichiro Honda or, for that
matter, a Steve Jobs would have been whacked back down to size inside any modern Japanese
organisation.

Most major corporations also have backward attitudes towards women. Woodford was most likely
to find a female either kneeling to put his slippers on in his first class seat on ANA or bringing him his
coffee. He publicly wondered why their leaders continued to ignore 50% of the nation’s talent pool.
It was interesting that the journalists who ran hardest with his revelations in Japan were female,
although they were mostly employed by foreign media owners.

What’s troubling is the likelihood of a political lurch to the right as Japan seeks to cast out the old
order, reject bureaucrat-led national drift and return to growth. Corruption in government and
politics has been rife for years and a groundswell against the old order of the National party is
growing. The current man of action with a new broom is Toru Hashimoto, the mayor of Osaka and
the son of a smalltime gangster. ‘What this country needs now is a dictatorship,’ he has pronounced.
One of his ideas has been to force schoolteachers to sing the national anthem or face the sack.

Japan is surrounded by countries on the move. China’s might is increasing, India does not intend to
be left behind, South Korea grows more competitive and Indonesia is in boom times. Meanwhile,
Japan’s standing wanes fast. But still it looks inward and tries to solve problems within its tight-knit
old boys’ network.

Olympus announced in October that as a short-term fix for the ravaged state of its balance sheet,
it was receiving a cash injection of £400m in the form of 11.5% of its shares from its fellow sufferer
Sony. Woodford received a £10m settlement at an employment tribunal in Stratford, east London,
and the likelihood of him taking a senior executive position in a large corporation, Japanese or
otherwise, is slim. Salvation will have to come from elsewhere.

By Matthew Gwyther

Source: http://www.managementtoday.co.uk/news/1155926/JapanThe-descent-rising-sun

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