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Japan's failed business model

February 21, 2002

IN 1989, we sold the Edinburgh software company which I had founded to the Japanese consumer electronics giant, Matsushita, better known as Panasonic. For the next few years I traveled regularly to its Osaka headquarters - a fascinating but frequently puzzling experience for a Scottish businessman. Until then, my international business experience had been mostly gained by working with firms in the technology hothouses of Silicon Valley and Seattle.

 

The post-war Japanese economy was a fantastic success story. Companies such as Sony and Panasonic dominated consumer electronics worldwide. The Japanese auto industry looked all-powerful. Clearly the Japanese had a form of business which was highly successful internationally; they had found the secret of success in the modern global economy. I was looking forward to learning how they were managing it.

 

What I saw there was very puzzling. Everywhere I looked there were huge inefficiencies and barriers to innovation. In Silicon Valley everything had been highly open and competitive, the most talented people job-hopped from company to company, making it possible to assemble high quality teams quickly; their personal lives were comfortable and they were very well rewarded. The surrounding economy was highly competitive, with the full supply chain engaged in cut-throat competition to win business. As a result, goods and services were available from a wide range of high quality sources on attractive terms.

 

In Japan the opposite seemed to be true. Japanese employees expected to be with the same company for their entire working life, and the companies encouraged this. They didn’t hire from each other, and they didn’t make people redundant. Most companies seemed to have a massive number of employees in their forties and fifties who had not made it up the promotion chain to senior management and were paid just to show up each day. There is even a name for these jobs, madogiwazoku - “window gazers”.

 

Japanese staff typically have relatively uncomfortable lives. Houses are so expensive that most people, even senior managers, live in very small flats, often a long way away from the office. 

 

Women are not expected to develop a career, certainly not after marriage, taking half of the population out of economic activity.

 

Competition in the supply chain is crippled by the Japanese tendency to work closely together as interdependent groups of companies, known as keiretsu. Companies are expected to buy from members of the keiretsu, whether or not they are competitive. A high proportion of the shareholdings in these companies are cross-held by fellow members of the same keiretsu, creating artificially inflated company valuations.

The more I looked at these practices, and many others that I observed, the more I couldn’t understand how on earth Japan was being so effective economically. It seemed to me that there were so many structural inefficiencies that it just couldn’t last.

 

And it didn’t.

 

Japan has been dipping in and out of recession for the last decade. The capitalization of Japanese companies has plummeted from being over 40% of the world’s total in 1990 to less than 10% today. Unemployment has doubled to 5.5% as companies have reluctantly shed unproductive staff.

 

Because many of the Japanese banks hold much of their reserves as shareholdings in Japanese companies this has created a crisis of confidence in the banking system. New rules from April this year will force banks to value these holdings more realistically. In anticipation of some banking failures the government has announced that it is limiting the insurance protection for depositors.

 

This week, George Bush visits Tokyo to tell the Japanese to reform their economy and make it much more open and competitive. But it will need much more than persuasion; in Japan, traditional ways of doing business are heavily embedded in their culture.

 

It doesn’t look good, and it just serves to reinforce the announcements made last week by Wendy Alexander, the Enterprise minister. We can no longer depend on inward investments from countries like Japan to create new Scottish employment. 

 

We have to find ways to create more of our own.

 

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