the curious case of Toshiba and the Mitsui keiretsu

The Financial Times, now owned by the Nihon Keisai Shimbun (the Nikkei newspaper)–and which should therefore have a particularly sharp insight into goings on in corporate Japan, had an interesting article the other day about Toshiba.

Toshiba is facing possible bankruptcy and potential delisting from the Tokyo Stock Exchange as a result of the disastrous performance of its nuclear power business.  To avoid this fate, it has decided to sell its flash memory business, which is a world leader in this important class of semiconductor devices and owns essential intellectual property for their manufacture.

The Japanese government is intervening in the matter, with the aim of ensuring that this important asset remains in Japanese hands.  What is distinctly not happening, as pointed out in an FT article two days ago, is any aid being offered by other members of the Mitsui industrial group.  This is very unusual.

background

At the core of Japanese economy in the first half of the twentieth century stood a number of powerful industrial conglomerates, called zaibatsu, which emerged from the samurai culture of shogun-era Tokyo.  The zaibatsu were outlawed after WWII for their role in Japan’s participation in that conflict.  But their dissolution was in name only.  The groups continue to exist in substance but were referred to as keiretsu.

One of the principal features of the keiretsu is mutual assistance in times of trouble.

For example,

Some years ago, Mistubishi Motors tried to buy its way into the US car market with a “0-0-0” financing campaign.  That meant zero down, a zero interest rate on 100% financing, and no loan repayment for the first year.  As it turned out, there was also a fourth zero–no credit checks.  And very large number of buyers (if you can call them that) simply made no payments when the time came.  They continued to drive the cars until they were repossessed.  Mitsubishi Motors as a whole, not just the US subsidiary, was faced with financial failure as a result.

What happened?

The other members of the Mitsubishi group injected hundreds of billions of yen into the auto company so that it remained afloat.  I remember speaking about this at the time with the chairman of Mitsubishi Corp, the group’s trading company.  He was deeply unhappy about having to invest in the auto arm of the group, and knew that this made no economic sense, but felt that his honor demanded that he do so.

today

Fast-forwarding to today and Toshiba     …not a peep from other Mitsui group members.

There may be something unusual about Toshiba.  More likely, the zaibatsu concept, a vital aspect of the samurai culture, may have finally passed its best-by date.  Interesting, too, that this should come while a descendant of the samurai is the prime minister.

Toshiba and the Japanese business establishment

First there was the Fukushima Dai-ichi nuclear disaster, where nuclear power plants were installed incorrectly and both the utility and government regulators falsified inspection reports to cover this up.

Then there was Olympus Optical, whose tip management lost billions in stock market speculation because it was unwilling to restructure loss-making operations and covered up the fact for over a decade by fabricating its financial statements.

Now there’s Toshiba, which falsified results for years, under pressure from unrealistic profit goals set by a series of CEOs  (shades of Jack Welsh at GE).

 

Not that surprising, in my view, given the Japanese corporate world’s widespread adherence to a samurai-like code of absolute, unquestioning obedience to instructions given by older/more senior managers in one’s company.  After all, many of these enterprises have their origin in samurai cast adrift as regional warlords were marginalized during the early shogun days.

This mindset is also a reason why a lot of Japanese business is still stuck in the 1980s–that the world is changing at a fast clip, but you pretty much have to have white hair before anyone will listen to what you have to say.  To be clear, I don’t think this samurai-ness is a universal attitude in Japan as a whole.  Unfortunately,it thrives in the Tokyo/Osaka-based, export-oriented industrial sector which is the primarily beneficiary of the deep depreciation of the yen engineered by PM Abe.

Why don’t out-of-date sixty- and seventy-somethings just retire and let a younger generation take the reins?

For one thing, speaking as a sixty-something myself, it’s hard to go from being king of the world to being just another nameless retiree.

I think, however,that there may also be a deeper, more damaging reason than the ego problems of the people in charge:

One of the first companies I followed as an analyst was a small copier manufacturer/distributor.  The firm was in enough financial trouble that it bought breathing room by selling a large chunk of its plant and equipment and leasing it back from a bank.  That netted $50 million or so in cash.

Soon afterward, Carl Icahn bought  5%-10% of the company’s stock and threatened to make a hostile bid for the rest.  The firm quickly bought back Icahn’s shares for, as I recall, about a 30% premium.  I was shocked.  I didn’t get it at all.

Only when the firm subsequently went into Chapter 11 did I learn the CEO, a former accountant, had been fiddling with the books for years.  That fact was the real leverage Icahn had over his target, whether he knew it or not.  The CEO couldn’t let an outsider in, because the accounting shenanigans would be discovered and he would be disgraced.

I don’t know, but I suspect–because I’ve seen the same pattern in numerous smaller firms in Japan that Olympus and Toshiba are only the tip of the iceberg in Tokyo.  If I’m correct, Abenomics is even more problematic than I’ve been writing.