Restructuring costs weigh down Japan Inc

©AFP

Sony has been in almost perpetual restructuring for the past decade

Japanese prime minister Shinzo Abe promised further economic stimulus measures after winning a new four-year term this month but for many of Japan’s biggest companies, the challenge is not so much finding new businesses in which to invest, as exiting old ones.

Reluctance to restructure boldly and speedily has long bedevilled Japan Inc. Over the past decade its companies have written five of the 10 biggest cheques for restructuring globally yet with some of the lowest impact on profitability, according to a Financial Times analysis of Capital IQ data.

Business leaders and analysts cite three obstacles to effective restructuring in Japan: cultural resistance, rigid labour laws, and a reluctance to prune sprawling portfolios of businesses that, in the words of one analyst, “make everything except aeroplanes”.

Firing staff is tough and expensive. “When you do a lot of restructuring, it takes a lot of money. Not like the US,” says Shigetaka Komori, chairman and chief executive of Fujifilm, where he has laid off or redeployed 10,000 employees after digital cameras killed its legacy film business.

“In the US, you need to pay two to three months’ salary; in Japan, by contrast, you must pay 24 to 36 months. That’s a great difference.”

In addition to the financial cost, the negotiations cause friction and eat up man-hours. “The reality is, it takes up so much time and resources that management spends five years without doing anything forward-looking, because they are anxious about being fired,” says one Tokyo-based banker.

This dictates how companies fire people — in a word, slowly — and also how they are altering hiring practices. Pointing to the similarities with France, one Japan-based businessman notes: “More than 60 per cent of job creation over the past year and a half has been on temporary staff. Everyone is avoiding hiring.”

Sony, the consumer electronics group, is the most prominent example of Japan Inc’s ineffectual restructuring process. It has spent $5.6bn, excluding goodwill impairments, on restructuring between 2003 and 2014, according to data from Capital IQ. Largely as a result, it has racked up a string of profit warnings and losses and is forecasting a Y230bn ($1.9bn) loss for the year to March 2015, its sixth in seven years.

Despite shedding 15,700 staff, or 9.7 per cent of its workforce since 2003 the continued string of warnings illustrates another of its weaknesses — a sprawling portfolio of underperforming businesses.

For Atul Goyal, an analyst at Jefferies in Singapore, restructuring “is about exit, exit, exit. That’s the only thing that matters”.

He points to the success of Apple, whose slimline product range does not stray far from a handful of variations on a handful of products. Japanese consumer electronics companies, in contrast, have continued to make fridges, air conditioners — and, in the case of Toshiba, even branched out into growing lettuce.

Panasonic is the second biggest spender on restructuring, but, unlike Sony, it is among those making the greatest progress at exiting businesses, according to Mr Goyal.

In some cases, he says, the company — under Kazuhiro Tsuga, who took up the reins in February 2012 after his predecessor presided over pre-tax losses of $9bn in fiscal 2011 — even succeeded in selling factories and entire business lines, which allowed jobs to be preserved and write-offs minimised.

Hitachi has also aggressively shed businesses, spinning off consumer-related mobile phones, computer parts and flat-panel TVs in recent years to concentrate on more profitable power plants, rail lines and water treatment facilities — although even today it boasts a proliferation of subsidiaries and affiliates.

Sony — from a slower start — is also beginning to retrench but remains hesitant: TVs were corralled into a separate unit rather than sold or ditched, and it is trimming the range and geographical scope of its mobile phones. It will, for example, no longer develop and sell China-specific handset models.

Analysts contrast Japan’s sprawling conglomerates with SoftBank, a younger company that is equally diverse — it has interests in 473 companies — but sticks to what one dubs the “Berkshire Hathaway approach”: minority investments that leave management in situ to run the companies.

SoftBank, however, was forced to slash Y100bn, or 11 per cent, off its operating profit forecast for the year to March as a result of one particularly big bet — its $22bn acquisition last year of struggling Sprint, the US telecoms group that tops the restructuring cost rankings.

The seemingly endless process of restructuring at some of Japan’s largest companies — and its associated write-offs — is one factor behind their woefully low return on equity, a longstanding lament among investors. They are hoping, not for the first time, that this may be at least partly addressed by proposed new rules that will nudge companies into paying higher dividends.

Another fillip could be provided by the slow but steady move towards paying staff on merit rather than according to seniority. As Nicholas Smith, an analyst at CLSA, notes: “In Japan you promote people based on age and tenure. You do that at Google or Apple and these companies would collapse within a year.”

Some companies, including Sony and Panasonic, are now moving towards merit-based pay scales and promotions.

Yet even with the new mood of change ushered in with Abenomics, incremental change to improve returns is more likely than radical action and the slow pace of Japanese restructuring will continue to frustrate both domestic and foreign investors.

.