Structural Changes. Class 11. Copyright 2007 Keio University

This Lecture Structural Changes in the Japanese Business Environment Reforms needed Effects of structural changes Current attempts of structural changes Case Study Renault/Nissan Copyright 2007 Keio University 3

Development Problems of the Japanese Economy in the 1990s Recession Increasing unemployment Increasing national debt Financial crisis Weak banking sector credit crunch Price differences between Japan and other countries Import pressure and hollowing out Aging population Expensive social systems (Waldenberger 2001) Copyright 2007 Keio University 4

Financial Crisis The Japanese banking system (ancient regime) was already in trouble in the 1970s The profit situation was really bad and should have led to a strong consolidation of the banking sector Also globalization did only have the effect of internationalization and could avoid domestic problems for a while They also started to give a high number of real estate loans After the bubble burst the banking sector realized that strong changes and consolidation activities are needed Copyright 2007 Keio University 5

Financial Crisis Even though consolidation was needed, nothing happened, even if legal regulations were allowing it (e.g. the government did not influence the interest rate any more in the 1990s) However the banks were a strong community and did not want to let down a member (gosô sendan = 護送船団 naval unit) They tried not to lose any of their members and therefore prefered to save them with the help of profitable members Copyright 2007 Keio University 6

Financial Crisis The public and the government were very convinced of this system and expected the banks to solve their problems on their own. However, there were not enough profitable banks to do so This became evident when Hokkaido Takushoku Bank went bankrupt in 1997 So the ancient regime collapsed after 20 years and showed that structural reforms alone are not enough to change the Japanese economy Copyright 2007 Keio University 7

Price Differences between Japan and Other Countries From 1985 to 1998 the yen increased about 100% in value This put enormous pressure on Japanese companies It made production in Japan extremely expensive = production moved abroad It made imports a lot cheaper = Import wave The yen so forced Japanese corporations to internationalize Copyright 2007 Keio University 8

Imbalance in Production Considering its purchasing power the yen is overvalued (in comparison to other currencies one has to pay more for a yen and gets less value when buying something in Japan for it) Considering Japan`s export and its rentability the yen is undervalued How does this work? Japan has a very profitable export industry, but an extremely unproductive domestic industry = strong price differences in comparison to foreign markets Copyright 2007 Keio University 9

Big Bang The financial Big Bang was initiated in November 1996 and formulated into a formal agenda in June 1997 Foreign exchange law was revised to liberalize cross-border transactions in 1998 The Financial System Reform Law (a revision of laws including the Banking Law, the Securities and Exchange Law, and the Insurance Business Law) came into effect in December 1998 (MOF, 2000) Deregulation and liberalization program in the financial system by the Japanese governement Is supposed to lead to deregulation but in fact led to a stronger influence of the government and not to a higher degree of independence Copyright 2007 Keio University 11

Other Big Bang Reforms Efforts were made to increase competition Promotion of entry of banks, securities companies to enter each other`s business New markets and channels for fund raising have been created by abolishing the requirements to trade equities only through stock exchanges and by introducing electronic trading systems MOTHERS (Market of High Growth and Emerging Stocks) in November 1999 NASDAQ-Japan market at the Osaka Stock Exchange in 2000 The disclosure system was improved, setting up fair trading rules (e.g. stricter insider trading controls and protecting customers in times of failure of financial institutions) (Kwan 2000) Copyright 2007 Keio University 12

Post-Crisis Trends in Japanese Management: M&A Mergers and acquisitions have become more widely used in corporate reorganization and restructuring to achieve economies of scale and economies of scope The trend was led by the banking sector Mitsubishi Bank and Tokyo Bank (1996) and Dai-ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan (Mizuho Bank 2002) Foreign partners were eager to cash on the Big Bang (e.g. Merrill Lynch took over Yamaichi Securities in 1988) Japan also became a part of global M&A activities (Renault-Nissan, DaimlerChryslerFusô) Copyright 2007 Keio University 13

Governmental Reforms Ministries were restructured Decentralization (from Tokyo) Income tax was lowered to its current rate at 37% Capital gains tax on sales of stocks was lowered from 20 percent to 10 percent in 2003 Inheritance laws were changed Health and pension benefits were decreased Copyright 2007 Keio University 14

Other Reforms The governement tries to facilitate corporate restructuring by reducing restrictions that hinder M&A, cross-border investments, alliances and financial transactions both within and across national borders (JETRO 1999 in Kwan 200) Permanent corporate tax cut from 46% to 40% Supporting the creation of new industries and business start-ups by private entrepreneurs (clusters) Japan s anti-monopoly law has been revised to facilitate M&As (e.g. only mergers with transactions higher than a certain amount need to be reported, not all mergers any more) Corporate acquisitions by stock transfer rather than cash purchased have been approved Copyright 2007 Keio University 15

Other Reforms The large-scale Retail Store Law was finally abolished in June 2000 (this was a measure to protect small retailers and a huge entry barrier for retail chains) The number of large retail stores increased by 41.1% between 1991 and 1997 (large stores will no longer be based on supply/demand considerations but on the degree to which a large store opening affects the local environment) Keener competition led to lower prices In the telecommunications sector deregulation has allowed businesses and consumers to access a far wider range of services (this was in the 1990s) The postal savings system was meant to be privatized for many years already, hopefully this plan will be realized soon. Copyright 2007 Keio University 16

Effects For years the Bank of Japan took a passive approach before aggressively boosting the money supply in February 2003 to keep the yen weak Combined with cost-cutting by Japanese exporters let to a rise in business profits and investors Now unemployment is the lowest in 8 years In July 2006 the Bank of Japan raised interest rates above zero for the first time in almost 5 years Copyright 2007 Keio University 17

Effects Japanese GDP growth was over 5% in the first quarter of 2005 Japanese consumer confidence increased nearly 36 percent from the start of 2003 to the start of 2005 (Consumer Confidence Survey Summary) Japanese unemployment fell to a six-year low in April 2005 (Fuller and Beck 2006) Even though the egalitarian way of thinking remains deep-rooted, the importance of competition has been greatly emphasized (Kwan 2000) Copyright 2007 Keio University 18

The Merger In 1999 Renault invested $ 5.4 billion in Nissan for 36.8% of the company at a time when Nissan was a struggling automaker rumored to be days away from bankruptcy In 2002 a cross-shareholding agreement was executed, wherein Renault raised its stake in Nissan to 44.4% and Nissan acquired a 15% stake in Renault for roughly $ 2.2 billion This is the largest ever investment by foreigners in a Japanese industrial company Copyright 2007 Keio University 20

New CEOs Louis Schweitzer became Renault s chairman and CEO, held the position of president of the BNVB board Nissan CEO Claros Ghosn holds the position of the vice president Copyright 2007 Keio University 21

The First 3 Years Nissan, under Ghosn`s leadership, had improved its finances dramatically and was rapidly reemerging as a major player in the global auto industry Nissan`s profit accounted for 47% of Renault`s profit for the fiscal year 2001 The alliance share of the world market is 9.2% (4.4% for Renault and 4.8% for Nissan) positioning the alliance among the world`s top five automakers Copyright 2007 Keio University 22

History of the Alliance Renault, France`s oldest automaker was profitable until the late 1990s when its` financial performance had been buoyed by a strong European car market, several popular models and extensive cost-cutting Renault was strong on the European market (85% of its cars and one third of this in France) selling mostly small to medium sized cars but no premium cars or light trucks They were looking for partners, but an attempt with Volvo failed Copyright 2007 Keio University 23

The Asian Financial Crisis as Opportunity Finding a partner became a matter of survival for Renault Nissan emerged as a favorite for cooperation Nissan was a company on the verge of collapse and under pressure from its bank Analysts blamed Nissan`s pooer performance on bland styling, infrequent model changes, high manufacturing and parts costs, and bureaucratic decision making Copyright 2007 Keio University 24

Due Diligence Schweitzer dispatched his second-in-command Carlos Ghosn, who had joined Renault as executive vice president in October 1996 after 18 years at Michelin Tire Company On paper, the deal made sense for both sides: Nissan`s strenght in North America filled an important gap for Renault, while Renault`s cash reduced Nissan`s mountain of debt. The capabilities of the two companies were also complementary: Renault is known for innovative design and Nissan for the quality of its engineering (Carlos Ghosn) Copyright 2007 Keio University 25

The Alliance in Practice 11 cross-company teams (CCTs) were formed (in power trains, vehicle engineering, purchasing, manufacturing, logistics, product planning, and sales and marketing) Each CCT consists of 10 members from the ranks of middle managers and there was a number of sub-teams Altogether about 500 people worked in CCTs, which had clear goals Copyright 2007 Keio University 27

Joint Purchasing Joint purchasing efforts were impacting both companies, resulting in significant savings Renault adopted Nissan`s quality management and Nissan was following Renault`s use of modules in vehicle design RNPO was formed (a 50/750 joint venture) to purchase parts, materials and services for the two companies (mirror effects) Copyright 2007 Keio University 28

R&D The two companies intended to work together in basic research and development As a first step, in March 2001 the companies launched a joint program for basic fuel-cell technologies that was expected to cost about 85 million yen In manufacturing there were strong influences for both companies (Nissan has a very productive manufacturing system and high reliability) Kaizen was introduced to Renault, Renault introduces cost management and factory ergonomics to Nissan Japanese like details. French like a macro, general idea and abstract concepts. Copyright 2007 Keio University 29

Sharing Factories and Joint Distribution and Information System In Mexico the joint manufacturing allowed Renault access to the market In Brazil Nissan got access to the market During 2000 back-office operations were merged Renault-Nissan Information System (RNIS) was established Copyright 2007 Keio University 30

Managing Two Cultures English was the second language for both partners In 2000 about 4000 employees from each company wer surveyed to gauge their view on the alliance (Commitment Renault 83% and Nissan 68%) Renault employees are less worried about losing their corporate identity Stress because of additional work Copyright 2007 Keio University 31