Manufacturers such as Nissan, Toyota and Kubota have proven that Japanese companies can be world-class global competitors. But Japan has too few of them. Domestic firms with well-known brand names that we often think of as ‘big’, are in fact ‘small fry’ in global terms. That’s important, because as globalization intensifies, domestic incumbents will either get squeezed out or bought up by their global competitors.
To highlight the extent of the challenge Japan faces, Beacon Reports spoke to Stephen Givens. Givens is principal at Givens Gaikokuho Jimu Bengoshi Jimusho, a Tokyo based attorney and counselor at law who has been helping Japanese firms in outbound mergers and acquisitions since 1980. He teaches law at Keio University, Sophia University and Aoyama Gakuin University. Previously, Givens studied as a graduate fellow at Kyoto University after which he graduated from Harvard Law School.
Givens argues that the companies now trying to expand overseas through mergers and acquisitions are companies in non-manufacturing sectors that were focused exclusively on the Japanese domestic market during the post WWII boom years. He believes these firms are not well positioned to compete in an increasingly globalized world. Further, he believes Japan’s cultural isolation makes it ill-equipped to compete in many sectors of the global economy. He fears that Japan’s recent flood of outbound M&A, designed to grow overseas market share, has come too late in the game to make a difference.
According to Givens, there are two criteria a firm must meet to effectively compete in any global market. First, a firm’s sales should be spread ‘evenly’ across the globe in proportion to any given region’s share of world GDP. Second, the firm should be a top competitor in its field. He cites Louis Vuitton as being an almost perfect example of a (non-Japanese) firm with an international presence matched to the global economy. Their sales and store numbers across regions match the corresponding GDP figures for those regions as shown in this chart:
The corollary, says Givens, is that firms with a regional focus will struggle to compete in a global market. He points to what has happened to European car companies, many which no longer exist as stand-alone firms, as proof of this corollary. Their brands were bought by global competitors. “Renault is a regional company,” says Givens. “It has zero sales in the United States and zero sales in Japan. The market capitalization of Renault today is equal to its shareholdings in Nissan. That means the market values Renault at zero.” The logical conclusion is that regional players in a global market face at best an uphill battle.
That uphill battle is made more difficult by the existence of hard and soft trade barriers. Toyota and Volkswagen are global competitors of almost equal size. Yet close to half of Toyota’s sales are in Japan and close to half of Volkswagen’s sales are in Western Europe. Givens infers, “It is hard to go outside your home jurisdiction and equally hard for outsiders to come and play in your ballpark.”
Many well-known Japanese manufacturing companies successfully compete globally. Most built their overseas markets after WWII when Japan’s economy was manufacturing-based and export-led. Kubota is an example of a heavy equipment manufacturer whose revenue is more or less evenly spread across the world. It competes globally with the US based Caterpillar. Both make great products. Neither firm relied on M&A to secure their slice of the global pie.
More recently, Japanese firms from less manufacturing intense industries have tried to grow their overseas businesses through M&A. Among them are branded consumer product and service companies, including Kirin (beer), Ajinomoto (food), Rakuten (e-commerce), Dentsu (advertising), Mizuho (banking), Tokyo Marine (insurance) and Nomura (financial services). None of these firms have a dominant overseas footprint. Each wants to expand its overseas business, typically from a current low-level to 30% of sales − nowhere near the 90% Given’s suggests is required to effectively compete in a global market.
Take Kirin, for example. Seventy-three percent of Kirin’s sales come from Japan. The rest comes from Asia/Oceania and Brazil. It competes with the world’s largest beer company, AB InBev, whose sales are not only significantly larger than Kirin’s, but they are more evenly spread across the world. “To put things into perspective,” says Givens, “the beer market has become a truly global market over the past decade.” Ten years ago the top 10 global beer companies represented 34% of the world market. Today, they hold 74% market share. The global beer industry has consolidated, with local companies having been swallowed up by larger firms. Kirin is the 9th largest beer company in the world. Its beer sales, by volume, are 1/10th that of AB InBev’s. “Kirin is a small-fry in the global scale of things,” remarks Givens.
AB InBev vs. Kirin (2011 Revenue)
Kirin is under pressure to globalize. Its domestic market is shrinking as Japan’s population ages and will further shrink as the population declines. Kirin went on a spending spree buying foreign companies over the past five years to carry out their strategy to increase sales by 30%. But, according to Givens, that effort was poorly executed and came ‘too little, too late.’ Kirin’s current $10 billion market capitalization amounts to roughly what they spent on their acquisitions, so they probably overpaid for them. Kirin also bought less than a controlling interest in the companies they acquired in China, Singapore and the Philippines. “This strikes me as being the worst of both worlds,” says Givens.
AB InBev on the other hand, has sales in every major region in both the developed and developing world. It sells beer as ‘global brands’ in the same way that Kraft sells cookies, candies and cheese.
AB InBev is the product of two mergers − a large European Belgian-based company that first merged with a South American brewer. It, in turn, acquired Anheuser-Busch − the maker of Budweiser. Its management consists of Belgians, Dutch, Brazilians and Americans all mixed together. “Senior management is not exactly a United Nations − but comes close to it,” says Givens. He asks, “Could a Japanese company ever be part of such an arrangement?” That most Japanese companies would have difficulty with the idea, Givens believes, is symptomatic of the problem Japan faces as it attempts to globalize.
Kirin’s Senior Management Team
Kirin’s senior management may be smiling, but Givens feels there is little to smile about. They are up against a multi-cultural global competitor that has both global economies of scale and an intimate understanding of the local culture in the markets in which they compete, he says, noting that Kirin’s return on equity is 0.83% while AB InBev’s is 16%. Kirin’s sales are stagnant too, while AB InBev’s continue to grow. “I just can’t see Kirin reinventing itself as an AB InBev,” says Givens. “That takes a whole different mindset.”
Givens believes that Kirin’s management has been insulated from global realities within the Japanese domestic market. “They say their brewing craftsmanship and the emotional bonds they have built with Japanese customers are their key competitive advantages. They are not looking over their shoulder at the global competition knocking at the door.”
Givens further questions if Japanese managers have the requisite, intimate understanding of local cultures to succeed in overseas markets, noting there are already too few Japanese brands with a global footprint. Uniqlo was the only well-known domestic brand mentioned on a Fortune 500 list containing 60 consumer brand names that included Kraft, JELL-O, Miracle Whip, Velveeta, Oscar Mayer, Ritz, Oreo, and so forth.
Often well-known domestic brands are much smaller than their global competitors. One well-known Japanese brand is Ajinomoto. It competes with global competitors such as Nestlé and Kraft. In 2011, Ajinomoto had sales of about $12 billion compared with Nestlé’s $83 billion and Kraft’s $49 billion. The firm has plans to become a global competitor by making acquisitions. Givens wonders how a small firm like Ajinomoto is realistically going to accomplish that goal.
Further highlighting how much smaller Japanese firms are to their foreign global competitors, Givens points to the e-commerce sector, where global companies Apple, Amazon and Google have close to half their sales outside the United States. Rakuten’s much smaller sales in comparison, come mostly from Japan. “Rakuten is so much smaller than Amazon,” says Givens. “One wonders what the heck they’re doing trying to go overseas.”
Global Incumbents vs. Rakuten
Givens is concerned that large global players will infiltrate Japan and take market share away from Japanese firms. Mixi used to be the social network of choice by Japanese youngsters. Recently, there has been a massive flight away from mixi to Facebook. The problem, according to Givens, is that branded products and the advertising that goes with them are inherently culture-based. “To expect Japan, which has its own unique insular culture, to both understand cultural values outside the country and to project itself effectively overseas, may be asking more than it is currently able to achieve.”
That has not prevented one company, Dentsu, from trying. Dentsu is Japan’s largest advertising agency. Before its acquisition of Aegis in March of this year, 83% of Dentsu’s sales came from Japan. The remainder in overseas sales came largely from Japanese clients. Post-acquisition, Dentsu’s overseas sales ratio jumped to 42%. But Givens says that when you consider the overseas clients they acquired, Dentsu still does not have the size or geographic balance to compete effectively with the world’s largest advertising agency, WPP. (Omnicom and Publicis will replace WPP as the world’s largest ad agency when recently announced merger plans are finalized.)
WPP vs. Dentsu/Aegis (2010 Revenue)
Given surmises, “If Budweiser or Kraft want to conduct a global campaign, WPP is the place to go. WPP can help you. It has an evenly balanced presence across the world.” He feels Dentsu has succeeded in extending its global footprint, but falls short of the mark. “When you put the two firms together, Japan still represents 58% of its revenues, rather than mirroring Japan’s 8.8% of world GDP.”
The same sorry tale repeats itself in banking, where Japanese banks have failed to gain a global toehold. Seventy-eight percent of Mizuho’s $25 billion in sales come from Japan. This compares with global competitor HSBC, whose $75 billion in worldwide sales are regionally, evenly distributed. Givens believes Mizuho is iterating the same doomed-to-fail strategy of aiming to raise foreign sales to 30% of revenues through M&A, largely by targeting firms in Southeast Asia. He asks, “Have we heard that strategy before? Yes. Just like with Dentsu − when Mizuho works overseas, it works for Japanese clients − the same Japanese clients that are buying companies in Southeast Asia. They’re going out there together with the same strategy.”
HSBC vs. Mizuho (2011 Revenue)
The story again is repeated in insurance. Eighty-one percent of Tokyo Marine’s $31 billion in sales comes from Japan. This compares with the much larger AXA, whose $119 billion in global sales is also regionally balanced. Givens reports that Tokyo Marine too is trying to grow its overseas sales from about 20 to 30%.
Axa vs. Tokio Marine (2012 Revenue)
What about investment banking? The story is no different. According to Givens, Nomura thought it could go head-to-head with Goldman Sachs in the wake of the Lehman shock by raising their overseas sales ratio to 70 – 80%. Then, Nomura lost money in Europe. They have since scaled back plans to increase their overseas sales to 30%, focusing on the high-growth markets of Southeast Asia.
Givens refers to the Prada $2.14 billion initial public offering of June 2011 to explain why Japanese firms might feel ‘challenged’ outside of Japan. “This is what globalization looks like,” says Givens, holding up a photograph of a group of internationally looking, smart, aggressive, investment bankers from Goldman Sachs based in Hong Kong and London who were involved in the deal. “Prada, an Italian company, launched the IPO together with this international team of people. My question is, those smart people in London and Hong Kong – ‘Why would they ever want to work for Nomura? Would Prada ever consider using Nomura as the underwriter for its IPO?’ ”
Moving to the industry he knows best of all − legal services, Givens asks the rhetorical question, “Can Japanese law firms hope to be global players in the same way that Nomura hoped to be a global player?” He feels the question answers itself − “There is no way.”
Professional service firms like PwC, Deloitte and McKinsey are increasingly becoming global. They are doing big deals for global clients, much in the same way that WPP does global work for global clients. Within the legal profession, however, Japanese law firms are small compared to their international rivals. They often employ only one or two people in major cities such as New York and Beijing, providing only limited services.
The Beijing offices of Japanese law firms are staffed with only two or three Japanese lawyers. Their job, says Givens, is to talk to Japanese clients who don’t feel comfortable doing so directly with a Chinese lawyer. Freshfields, on the other hand, is a non-Japanese global law firm that has 40 or 50 lawyers in Beijing, many of them Chinese. Says Givens, “They work together like the team from Goldman Sachs.” He poses the same question raised about Nomura and Dentsu − “Why would any non-Japanese company use a Japanese law firm in China?” He believes there is no reason to do so if you speak English or are happy dealing directly with Chinese lawyers. “Would Prada use a Japanese law firm as its lead counsel for its global IPO?” asks Givens. “No. The kinds of Japanese companies that use a Japanese law firm in China are those that want to raise their overseas sales ratio from 20 to 30% and who don’t feel comfortable dealing directly with Chinese people. It is too ‘mendokusai’ (troubling, bothersome).”
Givens ends his global competitive analysis by raising a concern shared by Beacon Reports: How is this going to play out? “I don’t think we’re going to see Japanese companies transforming themselves into an AB InBev, a Goldman Sachs or even a Freshfields,” says Givens. “Rather I ask, ‘How much longer will it be before foreign global firms penetrate the Japanese market?’ I think the day is coming, when the barriers get low enough, that the Japanese may lose control over the very domestic markets they had assumed were theirs.”
That day may arrive sooner than many realize.
(Data and charts, based on company financials, are provided courtesy of Stephen Givens.)
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