Japanese companies face double challenge; They need to consolidate at home and grow overseas

November 21, 2013 6:58 am

Japanese companies face double challenge

By Henny Sender

They need to consolidate at home and grow overseas

After the Japanese government recapitalised ailing Japan Air Lines and installed Kazuo Inamori, formerly Kyocera’s chief executive, in the cockpit, the airline’s new chairman discovered that it took the country’s once flagship airline a full 50 days to figure out whether it was making money or losing money on any given day. Like many Japanese companies, or many Chinese state owned enterprises for that matter, JAL was more focused on sales than on profits, and had never developed the information systems that enabled it to be efficiently run.In the future, Japanese companies will no longer be able to survive with that sort of inefficiency. But to prosper, they face a double challenge. Given the daunting demographics, excess capacity, inadequate demand and low margins at home, they need to consolidate and rationalise within their home market. At the same time, though, they have to look abroad, because that is where the growth is.

In recent months, a number of Japanese companies have been doing just that. Hitachi and Mitsubishi Heavy have combined their thermal power units within Japan. Lixil, a housing equipment company, has ventured overseas, buying Grohe in Germany and American Standard, both plumbing and bathroom fixtures companies, with the financial support of the Development Bank of Japan for the former. And Tokyo Electron has agreed to be acquired by Applied Materials.

Reasons for hope

Such activity has led many Japanese and foreigners to hope that “Abenomics”, which to some observers is more of a mindset than an economic programme, has finally revived the dynamism of corporate Japan.

There are reasons for hope. Japanese companies have ample cash to spend. The stock market is up, making equity raising attractive. Suntory, for example, took its beverage and food business public and used the cash it raised to help finance two acquisitions.

Japanese banks are (remarkably) healthy and have stronger balance sheets than many of their counterparts elsewhere. With little loan demand, they are happy to make funds available to finance acquisitions for less than 1 per cent over their own low funding cost, according to the head of one local private equity firm.

Still, it is too early to tell if such transactions are outliers or the beginning of a trend. But to the extent that they are a trend, there is ground for some optimism because the signals from a more macro perspective are not encouraging.

Come March, Japanese companies will enter into wage talks with their staff. So far, most business people say they do not intend to raise wages. A cheap yen – the first and perhaps the only real arrow in the Abe quiver – is not enough to lead most employers to either raise wages or expand production because corporate leaders say wages are already too high in Japan. In Thailand, for example, wages are a mere 10 per cent of those in Japan, according to Masaaki Kanno, head of economic research in Japan for JPMorgan. Without higher wages, Japanese people will see a fall in their standard of living as the cost of imported goods rises.

Weaker yen hurts some

For a sober harbinger of future developments in the world’s third largest economy, consider the recent earnings announcement from ANA. The airline’s third quarter results were much worse than expected largely because its fuel costs were way higher as a result of the weaker yen. At the same time, Japanese tourists are slowly disappearing from the capitals of Asia as their spending power abroad shrinks. The Japanese airlines do not make as much money on their domestic routes as they do on international travel, so as more Japanese stay home, the outlook darkens.

Moreover, a 3 per cent rise in the consumption tax to be introduced in April will further erode the spending power of consumers, while continuing low interest rates starve savers of income.

To many observers, this is still the honeymoon period for Prime Minister Shinzo Abe. After a series of prime ministers rotating in and out on an annual basis, there is finally political stability in Japan and a political party that controls both houses of the Diet. The stock market is up as are asset prices generally. The banks are selling their Japanese government bonds to the Bank of Japan, and are big buyers of shares, making them more profitable, at least temporarily. The government is spending again, and never mind if that is not likely to have much of a multiplier effect since it never does.

But easy money in Japan, as in the US, is all about buying time. Already there are signs that the momentum is slipping in the face of a disappointing lack of any real structural reform. Eventually, things can only get worse as either inflation picks up, bringing rising interest rates, or deflation continues to bite. Buying time only works for a finite period.