NEW YORK – Japan's bureaucracy doesn't like foreign ownership or capital investment in domestic corporations. In the last few months, this aversion has grown more pronounced under the guise of national interest.
The word in Tokyo while I was there last week was that the private equity firm KKR, which appeared to be targeting Japanese chip maker Renesas, initially had its eye on Hitachi. KKR wanted to break up Hitachi and spin out several smaller but profitable companies, which it hoped to "harvest" for big returns.
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However, as a veteran Japan observer and technology consultant put it recently, “Hitachi is like the Emperor in Japan.” No one dares to touch Hitachi. So, KKR switched its focus to struggling Renesas as its investment target.
But KKR’s low-ball effort to acquire Renesas also fell through. The reason is Japanese bureaucrats quickly put together a government fund along with partnerships with about 10 companies – mostly the company's own customers – in a bid to buy Renesas for 200 billion yen ($2.55 billion).
While Japan’s MCU giant has many problems, a key issue was the slow decision-making process at Renesas. Blame squarely rest with Renesas management. The problem was exacerbated by shareholders like Hitachi, NEC and Mitsubishi Electric, who demanded a say in nearly every Renesas decision over the past two years.
The government's bailout plan calls for piling on more “major” shareholders like Toyota, a customer, potentially hanging an even bigger albatross around Renesas’ neck.
More important is the question of whether its customers should also be among it largest shareholders. Automotive customers like Toyota tend to throw their weight around in negotiating prices with chip companies. That throws at least one big customer into direct conflict with Renesas’ need to maximize its margins.
Renesas is merely the latest example of Japan’s aversion to foreign investment. When Olympus was looking for help earlier this year, two foreign companies, not Sony, sought to invest, according to a source in the financial community. Two potential saviors were Samsung and General Electric. Such an investment by Samsung or GE actually makes sense since each company has experience and a significant presence in the medical electronics market.
This doesn't really come as a surprise, and strikes me as a side-effect of Japanese culture. The motive - to preserve Japan for the Japanese and keep it pure and uncontaminated by outsiders - is understandable and even admirable. The issue is whether that's *possible* in the emerging world, which is increasingly interconnected.
There's an underlying issue that is poised to bite as well: demographics. Japan has a very *low* birth rate, and Japanese simply aren't replacing themselves. Hidenori Sakanaka, a former bureaucrat in Japan's Justice Ministry, is stating that Japan's future requires large scale immigration to provide the people needed: http://www.japantimes.co.jp/text/fl20121021x3.html
There will be enormously strong pressure *against* this idea, and it if happens at all I can see a nasty class division occurring, with foreign immigrants being at best second-class citizens, tolerated because they are necessary, but expected to know their place and not seek to move beyond it.
I can understand Japan blocking KKR's investment in Renesas, since the motives of KKR and others like them tend to be short-term payoffs with less concern for the long-term health of the company invested in. But blocking foreign investment period does seem suicidal. Just as Japan is looking at simply not having enough people, it will also confront not having sufficient capital to fund all its investment needs, and will have no choice but to allow outside investment. The question is how bad things will have to get, and how much damage will be done to Japan in the process, before the hard-line nationalists are forced to accept reality.
Businesses have to change, sometimes radically, to survive in changing economies. It's evident Japan as a nation will have to change dramatically, too, with the Japan of 50 or 100 years from now bearing little relationship to what it is today. The questions are whether it can, and what will happen if it doesn't.
We may all have different opinions as to whether having KKR take over a company is a good thing. (It's a good thing for KKR if they can get a short-term gain, but probably not so much for others, as you pointed out.)
The issue is not just about KKR, though. I am finding it difficult to understand Japanese stubborn refusal to get any foreign capital investment at a time whe it badly needs it.
Tatsuo, I do remember your comments predicting good chances for KKR's deal to fall through.
So you called it.
The thing that bothers me is not so much about the government bailout part, but more to do with the lack of clarity when one of Renesas' biggest customers becomes the company's major shareholder...or as you suggest, someone from Toyota becoming Renesas President.
To me, it's not only the conflict of interest, but it's a sure way to confuse Renesas' business model in the future.
I had predicted almost 1.5 months back that there is a good probability of KKR bid not succeeding. With Innovation Network of Japan (INJ) coming in, Renesas will now become a government company. Someone from Toyota or Nissan will become Renesas president. INJ will break Renesas in 2-3 parts. SoC business of Renesas will be merged with the SoC businesses of Fujitsu and Panasonic. However, that new SoC company will not survive for very long because a large part of SoC business has become non-viable for Japan. Renesas will focus on Microcontrollers and Analog products. It will have a revenue of 4-5 billion USD and it will mainly cater to Japanese customers. Renesas employees will be a happy lot as they can continue working in the lethargic manner without having to fear for KKR WHIP and harsh measures anymore. Ultimately tax payers money will be wasted to satisfy the ego of few bureaucrats.
Amen. Maybe Japan inc. has a few problems, but allowing KKR and its ilk to get involved doesn't benefit anybody (outside of KKR). They won't introduce any desirable reforms, but they will attempt to get rich by plundering a company needing help.
The Japanese bureaucrats are smart to keep KKR out of Japan.