Interesting piece on Japan:
March 22, 1999
Nippon's Neros
Japanese companies are still fiddling while Rome burns
By Neil A. Martin
Every year about this time, Corporate Japan goes through the same ritual. Long-held shares of affiliates, suppliers and friends are sold off to bolster profits and give a lift to the Nikkei 225 Index (which indeed closed Friday at 16,378.78, up 5.4% on the week.) Hefty writeoffs are cobbled together. Product lines are shut down or moved offshore. Ringing commitments are announced to corporate restructuring. Ebullient earnings projections from earlier in the Japanese fiscal year are revised downward amid warnings of impending disaster and promises of massive belt-tightening.
Of course, the restructurings are usually little more than hiring freezes and campaigns for early retirement. And the warnings of gloom and doom are usually followed a few months later by a fresh set of rosy scenarios for the new fiscal year.
As Yogi Berra might say, it'd better not be the old deja vu all over again. For the fact is, the fiscal year that ends March 31 may be far worse than even Japan's most pessimistic critics have envisioned. And despite earnings-recovery scenarios that already are starting to be floated, next year doesn't look much better.
Six months ago, most companies and analysts were predicting a modest decline of 2.7% in pre-tax profits and a 45.2% increase in net profits for the fiscal year. Much of this optimism was rooted in the belief that $200 billion in new fiscal stimulus and a $500 billion bank-rescue scheme would pump new life into the economy and motivate consumers to start spending again.
But the hoped-for rebound never took place. Now it appears that big company after big company may be in the red for the year.
Among the hardest hit will be Japan's electronics giants, squeezed in the vise of falling demand at home and tougher competition abroad. Mitsubishi Electric, for example, expects a $330 million loss this fiscal year, competitors Toshiba and Hitachi, $160 million and $680 million, respectively. Hitachi and Mitsubishi Electric say they'll close some semiconductor production lines in the U.S., and Toshiba promises to slash its work force by 6,500 over the next two years.
Most of Japan's auto and truck makers are in similar straits. Mitsubishi Motors is eliminating jobs in both Japan and the U.S., and has sold a plant in Tokyo for $285 million, to be booked as extraordinary income in the current fiscal year and then used to repay debt. Nissan Motor, with more than $22 billion in interest-bearing loans, has unloaded its headquarters building in Tokyo to a Japanese building group and sold its Australian auto-financing subsidiary to GE Capital Services. The company says it will cut domestic capacity by 15% by 2003.
And across the economy, companies like camera maker Nikon, the toy group Bandai, Mitsubishi Chemical, oil distributor General Sekiyu and trader Nissho Iwai all have said they expect to fall into the red this year. And Nissho Iwai warns that it will cancel its dividend for the first time.
But have the Japanese finally recognized that stopgap measures aren't enough; that radical action is needed to keep them from sliding off the edge?
"There definitely seems to be a sense of urgency in the air this time around," says Kathy Matsui, equity strategist with Goldman Sachs in Tokyo. "But we've heard many of these distress warnings and restructuring promises before. It remains to be seen whether they will carry through on their promises."
Table: More Smoke Than Substance?
You'd think the Japanese would have learned by now. Their economy is expected to contract by 2.3% this year, and it may mark the millennium in March 2000 with its third straight year of negative growth. The 30%-plus strengthening of the yen against the dollar between August and December last year devastated the results of exporters. Domestic demand is forecast to fall by 2%-2.5% this year, while overall sales are expected to decline by 6%-7%. As a result, most corporate forecasts now call for an 18%-22% decline in pre-tax profits and a 20%-22% shrinkage in net income in the year ending March 31.
Forecasts by foreign economists and analysts are even more pessimistic. Nikko Salomon Smith Barney, for example, is predicting a 27% decline in pre-tax profits, a 63.9% drop in net income for manufacturers and service firms, excluding financials, and a 7.8% fall in sales in general. "Companies believed that people would start buying again based on the government's economic-stimulus package," says Craig Chudler, director of equity research at NSSB's Tokyo office. "That, in effect, was basically their restructuring strategy -- simply to wait for people to start walking back into the customer showrooms and retail stores. But it never happened."
Nevertheless, Japanese companies that regularly talk with analysts are again hopefully predicting a rebound for the economy and corporate profits in the new fiscal year. Foreign economists, meanwhile, see a continuing slide in sales of 4%-6%, accompanied by earnings declines of 4%-8%. Says one of those foreigners, NSSB's Chudler: "The overall trend in earnings revisions remains consistently downward. The value of next year's profits are 92% of what we were forecasting two months ago, and that continues to decline."
As for restructuring, even if the Japanese are serious about it, "people tend to forget that it is hard to make profits go up as your sales are going down, no matter how much you do," says Giles Ockenden, chief strategist with Jardine Fleming Securities Asia in Tokyo. "That's true in Japan, the U.S. or Europe. It is impossible to cost-cut your way to profitability in a declining sales environment."
Japanese companies still must be dragged, kicking and screaming, toward real restructuring. The prospect of firing people is simply unacceptable when unemployment is at its highest level in 50 years (it hit 4.4% in January and is being blamed in the press for a surge in suicides). Both business people and politicians fear the social instability and labor distress that plague neighboring South Korea.
All in all, however, Japanese companies have done pretty well, maintains Jardine Fleming's Ockenden. They've trimmed their payrolls by more than two million workers since 1991, mainly through attrition. "There is a very dramatic reduction of manufacturing employment going on in Japan like that which occurred in the U.S. in the early 1980s, but it is taking longer," he says.
Great -- if you can fully trust the figures. Unfortunately, some announcements have to be taken with a grain of salt. It's common practice for companies to transfer -- exile might be a more appropriate word -- unneeded employees to unconsolidated affiliates in Japan's incestuous business universe, allowing them to claim staff reductions while maintaining the illusion of "lifetime employment."
Some restructurings, though they sound dramatic, could be more sound and fury than real substance. Take Nippon Electric, which says it will have a $1.25 billion consolidated net loss this year. The company announced it will lay off 15,000 employees over the next three years and cut capital expenditures by 20% in the new fiscal year. But analyst Hiroshi Yoshihara of NSSB is underwhelmed.
"Most of these moves look like desperation plays, as opposed to the kind of comprehensive, detailed restructuring plans announced by Toshiba and Hitachi," Yoshihara says. "It's been hastily cobbled together and it does not go far enough."
Even worse, says Yoshihara's colleague Chudler, it's cynical: "When companies like NEC announce they expect to lose a staggering sum, while at the same time they're going to lay off thousands of employees, they are trying to offset the bad news with something upbeat, and hopefully divert the attention of investors and shareholders from their real problems."
Real problems? Check it out: Standard & Poor's last month lowered its credit ratings on nine major Japanese companies, including Matsushita Electric, which had just reported a 49% plunge in third-quarter pre-tax profits and a 16% cut in its previous earnings forecasts for the current year. The other eight: Asahi Glass, Japan Airlines, Komatsu, Mitsubishi Electric, Mitsubishi Estate, Mitsui Real Estate, NEC and Victor Co. of Japan. And Standard & Poor's is considering downgrading Nissan Motor, Hitachi and Dentsu.
Restructuring is a definite buzzword, no matter the real depth of it. A recent survey by HBSC Securities Japan showed more companies are looking to sell or close divisions. Eight of 61 recent restructuring announcements, the report says, involved pulling out of non-core businesses. Related to that, Japanese companies are stepping up the search for merger partners, both at home and overseas.
That's a boon to the country's fledgling merger and acquisition business, as well as to the economy as a whole. For example, the recent news that Sony and Toshiba will create a joint venture to produce microprocessor chips for a new version of Sony's popular PlayStation videogame machine energized the entire Nikkei, not just the two companies' shares.
Overall, mergers and acquisitions of Japanese firms by foreign companies rose sharply last year, according to the KPMG Group -- up roughly 50% from the year before.
About a third of the transactions took place in the financial sector, sparked by the failure of two major Japanese financial institutions at the end of 1997 -- Hokkaido Takushoku Bank and Yamaichi Securities -- which prompted many financial institutions to look for stable foreign partners. The value of the top 10 Japanese deals last year was $11.8 billion, more than double the cumulative total for the previous five years, the report says.
Japanese companies also have been trying tentatively to increase their commitment to corporate governance, long an alien concept in Japan.
A number of corporations in recent weeks have announced changes in the size and composition of their boards of directors. Hitachi, Sapporo Breweries and Bandai all announced they are splitting or otherwise reforming their boards, in some cases bringing in outside directors and removing officers with line operating responsibilities. Such measures would help a company like Toyota, whose board has 65 members.
"Such changes sound rather superficial, but we believe they are a key to forcing companies to come up with radical restructuring plans," says Garry Evans, a strategist with HBSC. "When the heads of operating divisions sit on the main board, it is much harder for the company to vote to close down or sell their divisions. Limiting the board to directors without line responsibilities should make it easier to take such hard decisions."
Perhaps, but old habits die hard.
Consider Tomomitsu Oba, president of the Japan Center for International Finance. He told foreign journalists recently that most Japanese companies consider unsolicited rating reports by agencies like S&P and Moody's "extremely bothersome," hated, in fact. At best, he said, such ratings should "not be taken too seriously ... and considered just as reference materials."
Not exactly the kind of thing to inspire confidence in anyone who is considering investing in Japan.
|
