Class 11 Structural Changes in Japan...

Copyright © 2007 Keio University

Structural Changes

Class 11

Class 11Copyright © 2007 Keio University ｜ 2

Quote of the Day

“When we are no longer able to change a situation, we are challenged to change

ourselves“Victor Frankl


This Lecture

• Structural Changes in the JapaneseBusiness Environment– Reforms needed– Effects of structural changes– Current attempts of structural changes

• Case Study Renault/Nissan


Development Problems of theJapanese Economy in the 1990s

• Recession– Increasing unemployment– Increasing national debt

• Financial crisis– Weak banking sector– “credit crunch“

• Price differences between Japan and othercountries– Import pressure and “hollowing out“

• Aging population– Expensive social systems (Waldenberger 2001)


Financial Crisis

• The Japanese banking system (ancient regime) was already in trouble in the 1970s

• The profit situation was really bad and should have led to a strong consolidation of the banking sector

• Also globalization did only have the effect of internationalization and could avoid domestic problemsfor a while

• They also started to give a high number of real estateloans

• After the bubble burst the banking sector realized thatstrong changes and consolidation activities are needed


Financial Crisis

• Even though consolidation was needed, nothinghappened, even if legal regulations wereallowing it (e.g. the government did not influencethe interest rate any more in the 1990s)

• However the banks were a strong communityand did not want to let down a member (gosôsendan = 護送船団 naval unit)

• They tried not to lose any of their members and therefore prefered to “save“ them with the helpof profitable members


Financial Crisis

• The public and the government were veryconvinced of this system and expected thebanks to solve their problems on their own. However, there were not enough profitable banks to do so

• This became evident when Hokkaido TakushokuBank went bankrupt in 1997

• So the ancient regime collapsed after 20 yearsand showed that structural reforms alone are notenough to change the Japanese economy


Price Differences between Japan and Other Countries

• From 1985 to 1998 the yen increasedabout 100% in value

• This put enormous pressure on Japanesecompanies– It made production in Japan extremely

expensive = production moved abroad– It made imports a lot cheaper = Import wave

• The yen so forced Japanese corporationsto internationalize


Imbalance in Production

• Considering its purchasing power the yen isovervalued (in comparison to other currenciesone has to pay more for a yen and gets lessvalue when buying something in Japan for it)

• Considering Japan`s export and its rentabilitythe yen is undervalued

• How does this work?– Japan has a very profitable export industry, but an

extremely unproductive domestic industry = strongprice differences in comparison to foreign markets


Aging Population

• More jobs in the future or not?? • Who will work?• Saving rate may go down• Higher costs for health care


Big Bang

• The financial Big Bang was initiated in November 1996 and formulated into a formal agenda in June 1997– Foreign exchange law was revised to liberalize cross-border

transactions in 1998– The Financial System Reform Law (a revision of laws including

the Banking Law, the Securities and Exchange Law, and theInsurance Business Law) came into effect in December 1998 (MOF, 2000)

• Deregulation and liberalization program in the financialsystem by the Japanese governement

• Is supposed to lead to deregulation but in fact led to a stronger influence of the government and not to a higherdegree of independence


Other Big Bang Reforms• Efforts were made to increase competition

– Promotion of entry of banks, securities companies to enter eachother`s business

• New markets and channels for fund raising have beencreated by abolishing the requirements to trade equitiesonly through stock exchanges and by introducingelectronic trading systems– MOTHERS (Market of High Growth and Emerging Stocks) in

November 1999– NASDAQ-Japan market at the Osaka Stock Exchange in 2000

• The disclosure system was improved, setting up fair trading rules (e.g. stricter insider trading controls and protecting customers in times of failure of financialinstitutions) (Kwan 2000)


Post-Crisis Trends in JapaneseManagement: M&A

• Mergers and acquisitions have become morewidely used in corporate reorganization and restructuring to achieve economies of scale and economies of scope

• The trend was led by the banking sector– Mitsubishi Bank and Tokyo Bank (1996) and Dai-ichi

Kangyo Bank, Fuji Bank and Industrial Bank of Japan (Mizuho Bank 2002)

– Foreign partners were eager to cash on the Big Bang (e.g. Merrill Lynch took over Yamaichi Securities in 1988)

– Japan also became a part of global M&A activities(Renault-Nissan, DaimlerChryslerFusô)


Governmental Reforms

• Ministries were restructured• Decentralization (from Tokyo)• Income tax was lowered to its current rate at

37%• Capital gains tax on sales of stocks was lowered

from 20 percent to 10 percent in 2003• Inheritance laws were changed• Health and pension benefits were decreased


Other Reforms

• The governement tries to facilitate corporaterestructuring by reducing restrictions that hinder M&A, cross-border investments, alliances and financialtransactions both within and across national borders(JETRO 1999 in Kwan 200)– Permanent corporate tax cut from 46% to 40%– Supporting the creation of new industries and business start-ups

by private entrepreneurs (clusters)– Japan´s anti-monopoly law has been revised to facilitate M&As

(e.g. only mergers with transactions higher than a certain amountneed to be reported, not all mergers any more)

– Corporate acquisitions by stock transfer rather than cash purchased have been approved


Other Reforms

• The large-scale Retail Store Law was finally abolished in June 2000 (this was a measure to protect small retailersand a huge entry barrier for retail chains)– The number of large retail stores increased by 41.1% between

1991 and 1997 (large stores will no longer be based on supply/demand considerations but on the degree to which a large store opening affects the local environment)

– Keener competition led to lower prices• In the telecommunications sector deregulation has

allowed businesses and consumers to access a far wider range of services (this was in the 1990s)

• The postal savings system was meant to be privatizedfor many years already, hopefully this plan will berealized soon.


Effects

• For years the Bank of Japan took a passive approach before aggressively boosting themoney supply in February 2003 to keep the yenweak

• Combined with cost-cutting by Japaneseexporters let to a rise in business profits and investors

• Now unemployment is the lowest in 8 years• In July 2006 the Bank of Japan raised interest

rates above zero for the first time in almost 5 years


Effects

• Japanese GDP growth was over 5% in the firstquarter of 2005

• Japanese consumer confidence increasednearly 36 percent from the start of 2003 to thestart of 2005 (Consumer Confidence SurveySummary)

• Japanese unemployment fell to a six-year low in April 2005 (Fuller and Beck 2006)

• Even though the egalitarian way of thinkingremains deep-rooted, the importance of competition has been greatly emphasized (Kwan2000)


Case Study

Renault-Nissan


The Merger• In 1999 Renault invested $ 5.4 billion in Nissan

– for 36.8% of the company at a time whenNissan was a struggling automaker rumored to be days away from bankruptcy

• In 2002 a cross-shareholding agreement was executed, wherein Renault raised its stake in Nissan to 44.4% and Nissan acquired a 15% stake in Renault for roughly $ 2.2 billion

• This is the largest ever investment by foreignersin a Japanese industrial company


New CEOs

• Louis Schweitzer became Renault‘schairman and CEO, held the position of president of the BNVB board

• Nissan CEO Claros Ghosn holds theposition of the vice president


The First 3 Years

• Nissan, under Ghosn`s leadership, hadimproved its finances dramatically and was rapidly reemerging as a major player in theglobal auto industry

• Nissan`s profit accounted for 47% of Renault`sprofit for the fiscal year 2001

• The alliance share of the world market is 9.2% (4.4% for Renault and 4.8% for Nissan) positioning the alliance among the world`s topfive automakers


History of the Alliance

• Renault, France`s oldest automaker was profitable until the late 1990s when its` financialperformance had been buoyed by a strongEuropean car market, several popular modelsand extensive cost-cutting

• Renault was strong on the European market(85% of its cars and one third of this in France) selling mostly small – to medium sized cars butno premium cars or light trucks

• They were looking for partners, but an attemptwith Volvo failed


The Asian Financial Crisis as Opportunity

• Finding a partner became a matter of survival forRenault

• Nissan emerged as a favorite for cooperation• Nissan was a company on the verge of collapse

and under pressure from its bank• Analysts blamed Nissan`s pooer performance

on bland styling, infrequent model changes, high manufacturing and parts costs, and bureaucraticdecision making


Due Diligence

• Schweitzer dispatched his second-in-commandCarlos Ghosn, who had joined Renault as executive vice president in October 1996 after18 years at Michelin Tire Company

• “On paper, the deal made sense for both sides: Nissan`s strenght in North America filled an important gap for Renault, while Renault`s cash reduced Nissan`s mountain of debt. Thecapabilities of the two companies were also complementary: Renault is known for innovative design and Nissan for the quality of itsengineering“ (Carlos Ghosn)


Perceptions

• A Daimler executive said “Bailing out Nissan would have been like putting $5 billion into a steel container and throwing itinto the ocean“


The Alliance in Practice

• 11 cross-company teams (CCTs) were formed(in power trains, vehicle engineering, purchasing, manufacturing, logistics, product planning, and sales and marketing)

• Each CCT consists of 10 members from theranks of middle managers and there was a number of sub-teams

• Altogether about 500 people worked in CCTs, which had clear goals


Joint Purchasing

• Joint purchasing efforts were impacting bothcompanies, resulting in significant savings

• Renault adopted Nissan`s quality managementand Nissan was following Renault`s use of modules in vehicle design

• RNPO was formed (a 50/750 joint venture) to purchase parts, materials and services for thetwo companies (mirror effects)


R&D

• The two companies intended to work together in basicresearch and development

• As a first step, in March 2001 the companies launched a joint program for basic fuel-cell technologies that was expected to cost about 85 million yen

• In manufacturing there were strong influences for bothcompanies (Nissan has a very productive manufacturingsystem and high reliability)

• Kaizen was introduced to Renault, Renault introducescost management and factory ergonomics to Nissan

• Japanese like details. French like a macro, general ideaand abstract concepts.


Sharing Factories and Joint Distribution and Information System

• In Mexico the joint manufacturing allowedRenault access to the market

• In Brazil Nissan got access to the market• During 2000 back-office operations were

merged• Renault-Nissan Information System

(RNIS) was established


Managing Two Cultures

• English was the second language for bothpartners

• In 2000 about 4000 employees from eachcompany wer surveyed to gauge their viewon the alliance (Commitment Renault 83% and Nissan 68%)

• Renault employees are less worried aboutlosing their corporate identity

• Stress because of additional work


Homework

Mini EssayWhat has Nissan`s transformation told

us about reforming Japanesemanagement systems?

Mini Essay (min 2 pages)

Class 11 Structural Changes in Japan...

Documents

Transcript of Class 11 Structural Changes in Japan...