Category Archives: Japanese development

Takata airbags (ll)

November 7, 2014 By in Current Market Thoughts, Japanese development Tags: , , , , , Leave a comment

Today’s New York Times contains an article saying that two former North American employees of Takata have come forward to say the company knew about airbag defects as early as 2004.  The company reportedly conducted secret tests at night and on weekends, but ended them and covered up the results when they showed the metal container holding airbag propellant had a tendency to crack, potentially spewing shrapnel into the body of the car’s driver if the airbag deployed.

The article seems to confirm that Takata is another name to add to the long list of Japanese operational or financial coverups–from milk companies, to refrigerators, to solar panels to Olympus’s enormous losses in failed financial markets speculation, to Tokyo Electric Power and Fukushima Daiichi, to the “hot potato” practice of tobashi in the 1990s (see my post on Repo 105 and tobashi).

I want to draw a distinction between Takata and GM.  Maybe it’s right, maybe not.  Anyway,…

…what I’ve read about the GM ignition switch problems makes me think of the GM culture of the time as one that might be called shared conspiracy.  That is, everyone in middle and upper management knew the company was dysfunctional.  So they defended themselves from potential personal liability by taking care to leave nothing in writing and by employing an army of lawyers to advise them on how to dance around the potholes.  While outsiders may not have known details, the company had an aura that told people something was wrong and to stay away.

For Takata, on the other hand, my sense is that the officials who orchestrated the airbag coverup thought they were simply fulfilling an ethical obligation to their CEO, sort of the way a samurai would have protected his daimyo centuries ago.

You might say that this is a distinction without a difference, it involves only the motivations of the coveruppers, not the bad consequences of their actions.  My point would be that the latter behavior is much harder to detect–and is a reason to think twice before owning a Japanese industrial or financial.

 

Takata’s airbag problems

November 6, 2014 By in Industry Analysis, Japanese development, Stock ideas Tags: , , , Leave a comment

The National Highway Traffic Safety Commission issued a Consumer Advisory late last month urging owners of a long list of Japanese-, EU- or US-made cars to act immediately on a recall notice they may have received about Takata airbags in their cars.

Although the facts are not yet clear,  Takata appears to have produced and sold defective airbag products since at least 2008.  Regulators seem to suspect that both Takata and some of its auto company customers knew the airbags didn’t work but used them anyway.   The immediate connection being made in the press is with GM’s ignition switch issues and related coverup.

 

I should emphasize that I don’t know any more about Takata than I’ve read in the financial press. The company may have done absolutely nothing wrong.  My immediate reaction, however, is not to think of GM but a medium-sized, family-controlled manufacturing company I researched years ago instead.

I was interested in that firm because at that time it made the best cellphone batteries.  The company had a bunch of other divisions, as well.  One made solar panels for sale to Japanese homeowners.  The panels had to meet certain specifications to qualify for a government subsidy that was a major attraction of the panels.  The division came close, but couldn’t quite get up to the minimum government requirements   …so it mislabeled its panels and sold them as meeting the required specs.

The company had another division, one that made commercial refrigerators.  It couldn’t make them well enough that the doors would stay on, though.   Naturally, the division shipped them anyway.  At the time I was doing my research, it was being sued by restaurant workers who had been badly injured when heavy refrigerator doors fell on top of them.

The solar panels and the refrigerators were enough to convince me that I didn’t want to have an investment in the parent firm.

My research back then alerted me to two things that I’ve since found to be true of traditional Japanese companies:

1.  If an older person, or a higher-ranking person, in the company gives operating instructions–no matter how crazy they may be–it’s very difficult (in a way that I as an outsider can’t imagine) to do anything other than try to carry them out.  No give and take, no questioning feasibility   …just try to make the impossible happen.

2.  There’s no “fail hard, fail fast, fail often.”  It’s exceptionally difficult for a subordinate to report to a superior that he is unable to perform a task–even if (point 1) the task is absurdly difficult, or just absurd.  Reporting failure shames the employee, the boss, the company, the employee’s family…  Psychologically, it’s much easier to report success even if it hasn’t been achieved.  That’s why the faulty panels and fridges get shipped.

In short, in the absence of heroic efforts (which may be futile anyway) to create a corporate culture of free dialogue, traditional Japanese companies are prone to the risk that situations like the solar panels or the refrigerators will happen.

, This is perhaps the biggest reason I’m not interested in Japanese manufacturers as investments.  Let’s hope this isn’t the case with Takata.

 

 

overnight: sharp drop in the yen, global stock market rally

October 31, 2014 By in economics, Japanese development, Long-term themes, Strategy Tags: , , , , , , , Leave a comment

what’s going on

A month or so ago–I don’t remember the exact timing–the Japanese central bank expressed concern that its weak yen policy was great for export-oriented companies but was hurting ordinary citizens, since food, fuel and other daily necessities are generally priced in dollars.  So these items cost a quarter or a third more today than they did before Abenomics kicked in.  The Bank of Japan intimated strongly that, because of the deterioration in citizens’ living standards, it was no longer interested in further yen weakness.

This morning in Tokyo the Bank reversed course and voted 5 – 4 to increase the amount of extra money it’s pumping into the economy, in what is now an all-out effort to create 2% inflation.

The yen has dropped by about 2.5% against the dollar, as I’m writing this just at the NY open.  The Japanese stock market rose by about 5% on the announcement.  Europe and US stock index futures are up as well.

my take

As I’ve written, probably too many times, I think Abenomics will end in tears.  Continuing currency weakness will just make the ultimate bad outcome worse.  That’s because I believe the root cause of Japan’s quarter-century economic malaise is that the country has chosen to defend its traditional way of life at the expense of economic progress.  One result has been to perpetuate a culture of covering up industrial/manufacturing mistakes.  Fukushima Daiichi is a terrible example; Takata airbags are the latest.  Impossible legal and cultural bars, many erected in the 1990s, still exist to removing from power people at the top of the pagoda, so to speak.

Continuing currency weakness will, in theory, buy more time for change to occur.  Admittedly, I’m no longer in close contact with the Japanese economy, but I don’t see any signs that effective change is happening.  Without it, the depreciation of the yen will mostly mean a massive loss of national wealth–and more time in power for incompetent industrialists.

(In my view, France and Italy have almost exactly the same issues.)

So, while the new tide of central bank money into the world will likely make markets move higher for a while, its main effect will probably be to smooth over economic bumps in the road for the US and China.  We should enjoy the ride.  But we’ve also got to think about how to defend ourselves from the ultimate negative consequences for Japan–and anyone who does business with/in the Land of Wa.

 

 

 

2Q14 results for Wynn Resorts (WYNN) and Wynn Macau (HK: 1128)

July 30, 2014 By in Casinos, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Japanese development, Macau, Stock ideas Tags: , , , , , Leave a comment

it’s been same old, same old for the big casino operators…

I haven’t written about WYNN and its subsidiary Wynn Macau (1128) for a while.  That’s mostly because I perceive the company to be in a holding pattern.  It has two casino operations:  Las Vegas and Macau, the latter through 72%-owned Wynn Resorts.

–In Las Vegas, all the major casino resort operators, WYNN included, upped their operating leverage by opening big new casino and hotel capacity in 2007-08, just as the recession was unfolding.  Demand dropped through the floor.    Profits disappeared faster.  Results since have been consistently weak as the casinos wait for demand to pick up and/or for weaker entries to close up shop.

–In the Macau market, which is now many times the size of Las Vegas, 1128 has been capacity constrained for some time.  Its next expansion, the Wynn Palace, isn’t slated to open until early 2016.

…until now

Las Vegas

For WYNN, the near-term story is Las Vegas.  And the change is for the better.  Room revenues in 2Q14 were up by 7.3% year-on-year in the quarter.  Average room rates rose to $283, up from $268 in 2Q13.  Occupancy increased from 88.4% from 86.9%.  To my mind, the room rate rise is a particularly important indicator of increasing demand.

In addition, the amount bet at WYNN’s Las Vegas tables was up by almost 15%, year-on-year.  The company’s win percentage was an unusually high 27.4%. vs.  the company’s expected range of 21% – 24%.  In all likelihood, the “extra” win from this quarter will be offset by sub-par “luck” in coming periods.  But, again, the more interesting number is the sharp jump in table games betting.

Slot machines were flat.

Management said on the earnings conference call that the 2Q strength was continuing into 3Q.

Macau

In Macau, the individual pluses and minuses for 1128 may be a little different, but the near-term profit profile–flattish–remains the same.

Overall market growth in Macau has slowed as an economic lull in China and Beijing’s anti-corruption campaign have tempered VIP’s  enthusiasm for high-stakes gambling.  This has been offset by a sharp jump in visits by the mass affluent, who–unlike their high-roller counterparts–are more concerned with being entertained than at winning a lot at baccarat.  They also want to eat, shop and go to shows.  So from the casinos’ point of view, they’re great customers.

While it waits for the new capacity the Wynn Palace will bring, 1128 is refurbishing its existing hotel and casino spaces.  It’s also raising salaries considerably, both to reinforce its reputation for superior service and to retain staff.  While these actions may make profits a bit weaker than they would be otherwise, it makes sense to use the current lull to set the stage for stronger growth in a year or two.

my take

WYNN has a market cap of $22 billion.  Its stake in 1128 is worth $16 billion, meaning that Wall Street is valuing the Wynn name, Las Vegas operations, royalties from Macau and the potential of future casino development in, say, Japan, at $6 billion.  That’s roughly 25x earnings.

WYNN shares yield 2.3%, 1128 about double that.

Last year, I sold the 1128 I had held since just after the IPO, partly because my casino holdings had become too large a part of my portfolio, partly in anticipation of the current fallow time.  I’m beginning to think about buying it back.  But I’d prefer to do so in the mid- to high-HK$20s.  Rightly or wrongly, I think I have time before the market begins to discount the opening of the Wynn Palace–with a presumed strong profit upsurge–in 2016.

I bought a lot of the WYNN I hold during the market collapse in early 2009.  I may be influenced by the tax I’d pay if I sold (I hope not, because this is virtually always a bad way to think), but I’m content to collect the dividend while I wait for Las Vegas to recover and the Wynn Palace to open.  To me it sounds as if the first may already be happening, which would be good news for WYNN shares.

What would I do if I owned nothing in this sector?

The least risky thing to do would be to buy a small amount of either WYNN or LVS and try to add on weakness.  LVS has the better near-term profit profile; WYNN has the better management, in my view.  Their valuations are similar, although their business models are a bit different.  LVS runs convention hotels; WYNN focuses on the high-roller niche.  (I own both.)

The most attractive firm I see at the moment is Galaxy Entertainment.  It’s a Macau-only operator and trades either in Hong Kong, or on the pink sheets–so it’s riskier than the other two.

 

 

 

 

 

 

 

 

two types of inflation?

June 24, 2014 By in Asian economic development, economics, inflation, Japanese development Tags: , , , , , , , Leave a comment

two forms

Back in the 1970s, when inflation actually was a serious global economic problem, economists tried to distinguish between two types of inflation:

demand-pull

—demand-pull is what we typically think of as inflation today.  It’s the situation where an economy is at full industrial capacity and full employment but is still growing strongly.  The only way to find new workers to staff business expansion is to lure employees away from rivals.  How to do this is?  …offer them more money.  An intercompany bidding war for talent ensues. Salaries rise.

Newly flush workers want to spend on goods and services.  But these are also in limited supply because industry is capacity constrained.  How to get the stuff we want?   …bid higher prices.

Voilà!   …rip-roaring inflation.

This problem can be laid squarely at the feet of too-loose money policy.

cost-push

—cost-push.  This is the idea that the price of one or more key agricultural or mineral commodities rises by a lot (think;  the two oil shocks of the 1970s, when crude doubled or tripled in price).  Such a price increase is passed on to manufacturers and to consumers, causing the overall price level to rise.

This type of inflation is no longer talked about, for several reasons:

—-monetarists have successfully argued that oil shock inflation was caused more by the decision of central banks to soften the blow by rapid money supply expansion than by the price increase itself.  It was, they said, accommodation that caused the inflation, not oil.  After all, falling oil prices in the 1980s didn’t cause deflation.

—-wages are no longer routinely indexed for inflation for the vast majority of workers, so a key pass-through mechanism is no longer operating

—-advanced economies are much more involved in providing services that use intellectual resources, which are less subject to the physical constraints of plant, mine or farm capacity.

—-globalization has put significant upward pressure on commodities prices, but has also created downward pressure on wages in industries making tradable goods.  Of course, in the internet age, a lot more stuff is in the tradable category, too.

—-advanced economies, particularly the US, have evolved to the position where labor costs are perhaps three-quarters of the total economy, and therefore effectively the only thing that matters.

cost-push making a comeback?

I think so.

Japan recently depreciated the yen by 20%.  This has caused a surge in profits for export-oriented manufacturing, and a tsunami of Asian tourists seeking to buy, among other things, heated Toto toilet seats.  Prices have shifted from falling to rising.

But wages haven’t gone up at all.  So, yes, the depreciation has created inflation, but most individuals are worse off than they were before–because they’re paying 20% more for imported items like fuel and food.  (This isn’t quite correct.  There’s a substitution effect along with the income effect, meaning that people shift what they consume in order to lessen the harm to their well-being from higher prices.  They, say, eat tofu instead of beef or get clothes from a consignment store instead of Uniqlo.)

There’s also the effect of price rises on the long-term unemployed in the US or the EU.  It’s not quite the same thing, but it’s certainly different from the demand-pull world, where everyone is better off–but tricked by the fact nominal (but not necessarily real) wages are rising into thinking they’re better off than they are.

investment significance?

I’m not sure, other than to take a trip to Japan before the place falls apart.

But I do think that the failure of wages to rise, either in Japan or the US, despite highly stimulative monetary policy is a potentially explosive social/political issue.   It may reach a tipping point where big social changes are demanded.