Month: February 2017

Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn over the last 25 years

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I am putting together a piece on corporate governance in Japan and stumbled over some interesting charts. The one above shows the aggregate net income of Intel and 20 of Japan’s tech juggernauts over 25 years. Sadly, Intel on its own made 41% more net income (currency adjusted) than all of the Japanese 20 combined. Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn ($18bn) over the last 25 years.

I’ve been speaking to the Financial Services Agency (FSA) about how to improve corporate governance as they look to tweak the code.

Is it any surprise that companies tend to perform better when board members (insiders) have a higher proportion of their remuneration linked to stock performance? Shareholders have traditionally been well down the list of priorities of Japanese companies, much to the chagrin of foreign investors. Stock incentives, especially in larger corporations, are often a minuscule part of total compensation for leaders. So much so that there is little incentive to focus on chasing real returns through more aggressive strategy. Many leaders in Japan would prefer to see out their tenure as CEO without blemish or scandal to avoid the risk of failure and the shame it would inevitably bring.

In hindsight looking at Sharp’s (6753) desperate long term need for crisis management could we have honestly expected any substantial restructuring when the CEO had $33,000 in stock despite being at the company 36 years? Had Sharp’s board held more skin in the game they might have defended shareholders much better against Terry Gou’s constant renegotiations. Perhaps if Sharp had learnt from Carlos Ghosn style performance based compensation structures, they might have been able to defend their turf from Gou. As it stands now Sharp were mere whipping boys of Hon Hai.

When I looked at insider (executive) ownership of Japanese corporations over 10yrs mapped against total returns, surprise surprise, there was strong correlation.

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More to follow but there is actually a lot of longer term hope here. Japan licks the world in most areas of technology. If they managed to connect those dots to shareholder returns then this market would re-rate substantially. Looks as though a growing number of corporations are working more performance linked pay.

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I think that the authorities should encourage corporates to adopt English language financial materials. By doing so would invite more eyes from investors in markets where shareholder returns are prioritised. This would create an environment that would encourage Japanese corporates to unlock more value.

The JPX would accrue large upside. Not only would it gain more status as a proper global exchange, it would invite higher activity which would improve liquidity which is a virtuous circle for a financial exchange.  This is the number of Japanese corporates where CEO/Chairman engagement with foreign shareholders -a little over  10% of listed entities.

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So some interesting trends and maybe something to look forward to if Japan accelerates the pace of corporate governance application. They can start by hiring fewer lawyers, accountants and academics as independent directors too!

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Any idea how much military medical spending has grown?

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The news is out that President Trump is looking to spend $54bn more on defence On a $600bn odd military budget (China c. $250bn). I’m sure the press will be moaning about how this is about being bent on waging new wars. Looking at the most recent Quadrennial Defence Review (2014) medical related spending for the military has jumped from $19bn in 2001 to $49bn in 2014. The sad thing is most people do not understand defence budgets. Let’s start with some fast facts in no particular order in the US.

-The US defence budget has been slashed from over 4.2%~4.7% of GDP under previous administrations over the last 30 years to around 3.5%~3.7% under Obama. Trump’s plan would aim to get it back in the 4% range, nothing out of line with predecessors.

-80% of the defence budget is spent on wages, housing, education and maintenance of the war machines. The remaining 20% is spent on RDT&E (reseearch, development, testing and evaluation) and procurement.

-If a budget is cut and you want to maintain force numbers you can’t procure as much. Simple maths. If you cut force size you risk reducing it to levels that may impact capability.

-War is bad for defence budgets. Transporting 100,000 troops, feeding, housing, providing medical care, maintaining hardware on the ground takes huge wedges out of what can be left to “procure” new equipment. Bullets, bombs and missiles aren’t replaced 1 for 1. They have stockpiles which are calculated on likely usage projections.

-the US Navy is larger than the next 11 navies combined despite a surface fleet 1/20th of what it was 70 years ago and the smallest number for a century.

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-The US Forces are the single biggest consumer of oil period. Retiring the USS Kitty Hawk saved 2% of the gross fuel budget.

-War today is more about capability than raw numbers of equipment. Cyber warfare can switch off an enemy’s basic utilities and crush a country without dropping ordinance. Fighters that can see you before you can see them have the advantage but that costs a fortune to stay at the head of the pack. A US tank battalion in the first Iraq War took out 250 Iraqi tanks from a hidden position because satellite imagery pinpointed where they needed to fire. US losses were zero.

-To date most wars have been conventional. Now they are asymmetrical. Fighting terrorism does not require ballistic missile submarines (SSBNs). It needs agile fast reaction capability (i.e. V-22 Osprey) which can land a special unit in an inaccessible hot zone. However defence forces have to target what engagements they will face and what is required to defeat it. That requires a radical overhaul of defence forces – in equipment, development and training. Development can take 10-15 years to meet threats that may or may not exist in 25 years often with technology that doesn’t yet exist.

Just ask the Quadrennial Defence Review 2014‘s General Mark E. Dempsey:

“My greatest concern is that we will not innovate quickly enough or deeply enough to be
prepared for the future, for the world we will face 2 decades from now. I urge Congress—
again—to move quickly to implement difficult decisions and to remove limitations on our
ability to make hard choices within the Department of Defense. The changes required for
institutional reform are unpleasant and unpopular, but we need our elected leaders to work with  us to reduce excess infrastructure, slow the growth in military pay and compensation, and retire  equipment that we do not need. Savings from these and other reforms will help us modernize,  will add to research and development investments, and will provide needed funds to recover  readiness. The lack of will to do what is necessary may drain us of the will to pursue the more  far-reaching ideas promised in the QDR.

The true risk is that we will fail to achieve the far-reaching changes to our force, our plans, our  posture, our objectives, and our concepts of warfare. I believe that dramatic changes will be  needed in all of these by 2025. Some of these changes are well-known and outlined in the  QDR. Some of these changes are only dimly perceived today and need encouragement and  direction. Innovation is the military imperative and the leadership opportunity of this  generation. It’s a fleeting opportunity.

When we commit America’s sons and daughters into combat, we must ensure that they are the  best-trained, best-equipped, and best-led fighting force on the planet. That takes time, it takes  money, and it is perishable.”

Make no mistake. The increase in spending would have occurred under any GOP president. The sad thing is that because of the budget cuts, the military forces have relied more on operational leases from the defence contractors. In order to have a military capability the defence arms have had to “borrow” because the budget cuts have been too deep. So there we have it – not only is the private and public sector debt at record levels, we now have the military filling in credit forms…

Newspoll – “I can assure you parts of it are excellent”

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The latest Australian news poll reminds me of the famous Punch cartoon from 1895 between a bishop and the curate. Somehow it seems to me that there will be some within the Liberal Party who will be looking for the good in a terrible result. To be beating Shorten on preferred Prime Minister is hardly an accolade to bank for a win in the next election. The latest poll shows the worst reading for the Coalition on a preferred party basis at 34% a full 5 points lower than at the time Tiurnbull overthrew Abbott on the basis of his poor polling.  It also highlighted the rise and rise of One Nation (from 8% to 10%) as one of the few alternative parties (along with the Australian Conservatives and Lib Dems) core conservatives could conceivably back as a Liberal Party no longer represents them.

While the press thumps the table and criticizes Abbott for his supposed  treachery there can be no doubt that One Nation’s vote would fall were he to take the Prime Ministership back. The press are petrified of such an outcome so are working overtime to bury public opinion. True Liberal voters know better. Just like the silent majority that backed Brexit and Trump, these core Liberal voters would happily back a leader that provided a platform to represent them.

I am afraid we have a bad egg in Australian politics and no parts of it are good. The sooner the Liberal Party get rid of the PM the more chances they give themselves of recovering the droves that have deserted them.

Boozing with some bankers

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I spent an evening boozing with some bankers at a mate’s 50th birthday bash. Inevitably the subject of The Donald arose. One question that was thrown at me among the brokers assembled was Trump was one stage removed from a dictator by shutting out LA Times, NYT, Politico and CNN from press conferences. My response was threefold;

1) nothing is really gleaned from Sean Spicer in a presser anyway

2) President  Trump is a media whore. By shutting out three or four pathetically biased news agencies will change nothing given messages will be disseminated by a plethora of other (smaller) avenues

3) I disagree with Trump’s move much like I am of most #hashtagboycottxxxx movements. I think consumers/viewers/readers are already voting with their intentions and ratings for the majors have been sliding without DT’s help. Trump doesn’t need to do this because self inflicted stupidity is already caning the main stream outlets.

I did find brokers, in spite of their dislike for Trump, remain upbeat with markets.My response was simple, “markets are backing him so media outlet snubbing is irrelevant…be thankful he’s buying you time in your dead end careers!” To a person, they smirked in admission (submission).

Laura Tingle’s tangle with the truth over Tony Abbott

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I read Laura Tingle’s summary Tony Abbott and am only led to the conclusion that she is just another one of the long list of journalists who couldn’t find balance, context or perspective when letting her personal feelings get in the way of her profession. It isn’t even remotely solid in content. For all her praise of Turnbull’s achievements and the supposed failures of Abbott which would have lent so much more power to her argument she didn’t. Then again why would I be surprised when reading Fairfax?

First she likened Abbott (aka political debacles) to the Soviet Union,

“Politics is full of catastrophic debacles…The Soviet Union comes to mind. All that work. All that butchery. All those millions killed. And then pffft! It was gone…Similarly, Tony Abbott. Okay, not the millions dead, but what an utter destructive force, an utter waste of space this man has been on the Australian political landscape…Can you remember anything positive that he has contributed to our polity that has not involved tearing something down? “

The use of ‘utter waste of space’ for a leader who signed several important free trade deals, stopped the boats and formed relationships with powers like Japan with a level of cultural sensitivity that caused the land of the rising sun’s ministries to afford Australia the type of status befitting nations such as America, Tingle selectively chooses to ignore. I remember going to an Tokyo Aussie Embassy event the evening of Abbott’s ousting to hear the Aussies jeer while speaking to senior Japanese delegates who seemed far from impressed. I spoke with Japanese politicians afterwards and they were far from impressed. Many hold their opinions to themselves but not those I met.

The fallout from the Japanese subs deal soon after only highlighted how Turnbull’s personal ambition to be PM was all that mattered. Having been a defence analyst for almost two decades I have yet to see such a poorly thought out, woefully executed and incompetent deal outside of the Nimrod MRA4 deal which BAE Systems struck. Our subs deal is a $50bn disaster penned to buy votes in a failing state (which Tingle made no reference to her own climate change rhetoric loving Turnbull himself trash South Australia’s questionable recurring renewable energy debacle) to buy subs that don’t exist other than paper, that will be so late that they’ll be obsolete by delivery time and further weaken Australia’s defence capability. Shall I keep going?

“So firmly set on a path of destruction, he set about making everything in his prime ministership a negative and ended up destroying himself…You might think that at some point there might have been a moment of midnight reflection. But no…Tony Abbott has continued on his destructive path, not just trying to destroy the man who replaced him but being happily prepared to burn the government of which he is allegedly a part, and some of his closest colleagues at the same time…All in the truly deluded name of policies that he didn’t have the political ability to implement when he was prime minister but which he still thinks might win votes.”

Abbott is a Liberal Party loyalist. His love of party showed when he wrote about Bernardi before he split talking about why they need to unite, something Turnbull has failed to do. In fact those that he got to back his coup have been countlessly thrown under a bus – Morrison, Frydenberg and so on.

To talk of delusion. Turnbull’s call to give the states income tax power before the election lasted less than 48 hours. His call for a Royal Commission on juvenile detention centres in NT based on a short clip of a biased ABC report shows time and again his total lack of judgement. That he scraped home with an election victory won in part by himself funding $1.75m of the campaign. Doing deals with Obama on refugees on refugees after Trump won. Having to get Trump’s number from Greg Norman because he had done zero preparation because he presumed Clinton’s coronation.

“Abbott’s latest intervention has only had the effect of finally bringing out those who have been most admirably loyal to him – like Mathias Cormann – to call him on his disingenuous, hypocritical and dishonest policy critiques of the current government…the other own goal of this latest speech is that it has finally freed the prime minister to give an honest appraisal of what his predecessor didn’t achieve, and point out that he has, in fact, achieved things that eluded Abbott.”

OK, Ms. Tingle, please point exactly where Mr Abbott “didn’t achieve” during his time as PM? Once again in your rant you fail to spell out what he hasn’t done – simply because you can’t or like your journalism makes clear, too lazy.

“The shame of it is that, as is always the case, Abbott leaves a stinking pile of loopy policy ideas steaming on the footpath – ranging from cutting immigration to the renewable energy target – that others will have to go to some considerable trouble to avoid, or, worse, being the sort of populist nonsense they are, be adopted by those profferring simplistic solutions.”

Using potty humour to make a point once again won’t win you awards although I’m sure the group thinkers that follow you will giggle with delight. .

“Backed by the tailwind of a gushing and fawning conservative media, Abbott had every opportunity to set a new highwater mark for the right in Australia…But as his own conservative colleagues publicly abandon him, it is a sign of Abbott’s utter failure that he has even made this unfashionable.”

What Ms. Tingle chooses to forget is that Abbott had to fend of daily attacks from the mainstream media during most of his time as PM. Yes he had some bad moments – e.g. Knights and Dames but he always had his country first at heart which perhaps is why his party buried him for that fatal weakness. The SMH became an Abbott hate paper where you had to look hard to find things that weren’t connected to him. The polls sank him (let’s face it Turnbull’s are no better) and buried his party’s judgement and he is now wasted on the back bench.

I have met Mr Abbott in person and I can only say I see a genuine article. One who selfishly serves the fire brigade as a volunteer in his free time. One who apologised sincerely for making me the butt of one of his jokes at a Tokyo Australian Embassy event which celebrated a landmark beef deal with Japan. Of course he meant no harm and the joke went down extremely well. However he was above all sincere.

Ms. Tingle, if you want to follow best in class journalism you’d go pretty far to find someone with as much ‘integrity’ to model yourself on than the baseless tripe you published today. Then again I challenge you to list the achievements of PM Turnbull and at the same time please listen to the out of touch rhetoric of Minister Pyne, Senator Cormann et al and look at a party Abbott loves be turned into a mess no true conservative voter can objectively claim to be proud of. Or is One Nation just an anomaly. The LNP is toast, much like Fairfax.

Premium Friday – don’t discount other ways to change labour in Japan

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Premium Friday starts at 3pm today, an edict issued by the Ministry of Health, Labor & Welfare (MHLW) to encourage workers to go home at 3pm on the last Friday of every month to encourage better work-life balance. I am watching a TV program which has a camera on a company called USEN. A lot of the employees have been reluctant to leave the office as the bell tolled. Many seemed to sneak out hiding their faces as if being bundled into a police car on suspicion of committing a shocking crime.

Japan needs to invite flexible work practices period. Sadly, it took former Prime Minister Junichiro Koizumi to introduce ‘cool biz’ (wearing no necktie to work) to combat energy shortages and hot weather because companies wouldn’t be bold enough to make such common sensical steps for fear of the potential for backlash. Some companies like Calbee have already embraced working from home and other employee friendly policies, in part thanks to being a PepsiCo subsidiary. These are good examples.

I recall my first job in Sydney working for a Japanese company. As daylight savings dawned, the Japanese staff became somewhat despondent. To them, leaving before it got dark was somehow unfathomable. Sadly daylight savings in Sydney tended to mean it got dark around 8:30pm. So they’d twiddle thumbs and remain at their desk for little known effect. The gaijin staff used to encourage them to leave the office with them, whether a beer at the pub or a game of tennis to help them embrace better work-life balance but they wouldn’t have it, coming up with a litany of excuses to turn these gestures of goodwill down.

One Japanese company that I have huge respect for given it’s innovative thinking and unique business proposition is small, lean, pays its staff based on set formulas of success and has a very flat structure. Don’t kid yourself to think this is a cottage industry with a few mates. This is a serious TSE 1st section listed business which has posted stellar results and growth. I was drinking with two of them last night and one confessed working for this company is ‘heaven‘. This was a middle manager of a Japanese corporation who had just been handed a $250,000 (yes a quarter of a million US$) cheque for individual performance for hitting certain goals. Yet the MHLW had admonished the HR of this company for letting said individual work over a certain amount of hours (they have to check in and out everyday at work with an electronic pass). He said, “why should my company be given a ‘warning’ (no penalty mind you) when I alone choose to work hard to achieve my own goals. The company doesn’t care if I take long holidays or show up at 10am. As long as I bring results.”

Sadly, many Japanese companies are stuck in decades old work practices a where incentive pay is next to non existent. It is based on age, rank and tenure. Japanese are extremely well educated and committed but it is clear that many companies suffer from too many people not wanting to rock the boat. The idea is that by creating the least internal friction and managing one’s way to retirement is the risk free option.

I wondered at Toshiba’s recent plan to cut staff salaries and bonuses in a belt tightening strategy. Instead of trying to fix a problem, the idea is to hunker down and hold one’s breath. In some respects, I would imagine that proposals to improve inefficient business practices in the various divisions could save millions and be done simply by asking the underlings who usually keep quiet to speak of how they might improve process.

In my recent visit to the FSA I suggested that the next round of corporate governance code improvements be focused on staff incentivisation. To put that in perspective, C-level managers in a lot of Japanese firms have next to no skin in the game. Many look to steer their corporate supertanker in a relatively risk free way to ensure they leave with an unmarked (unremarkable?) period to get a healthy retirement package. Risk is rarely taken. The CEO of Sharp at the time of the Foxconn takeover had worked at Sharp for 36 years and accumulated $30,000 of stock. How could shareholders and staff benefit from a leader who had no big incentive to push for a bigger payout? If you were set to make an extra $1,000,000 on your shares or $10,000 which level would likely drive your decision to go into bat for shareholders? QED.

Premium Friday makes sense to help many old school corporates encourage work-life balance. It is vital. However the longer term solutions would be to encourage corporates to focus on motivational aspects. Working long hours is one thing but giving employees clear returns based pay formulae to make the long hours worth slogging then perhaps the psychological struggles of “death from over work” (Karoshi) would disappear.

Perhaps Premium Friday should focus on the old adage, “Love what you do and you’ll never work another day in your life!”

I’ve seen how amazing Japanese companies can be. Some investors used to take pot shots at Japanese exporter companies for sub-superior returns when the yen was super strong. I did a study looking at if exchange rates of a decade ago were applied that these companies aggressive dieting programmes meant that profiotability was 50% higher relative. To that end as much as Korean analysts were calling the demise of the Japanese industrial giant, I warned them that if the yen retreated that the Koreans were toast. If the Japanese could compete with Korean car makers at Y80/$ then they’d wipe the floor at Y100/$.

So the point is that the Japanese are highly intelligent, ingenious, inventive and flexible people but often the nudge that is needed has to come from the state. While I applaud the Premium Friday measure, might I suggest to the MHLW that encouraging ‘incetivisation’ could also be a wonderful way to drive the productivity that is much needed to offset a withering workforce. I have ample evidence that employees in many companies wants to drive Porsche Cayennes and Maserati Quattroportes like my mate who has just bagged a quarter mill for hard graft!

 

To even propose handing out voting rights like confetti suggests how little politicians respect their citizens

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Honestly how much longer can German politicians take their citizens for mugs? To have certain parties (SPD, Greens) suggest that non-citizens be given the right to vote is ridiculous. Is this all part of the bigger welcoming society they claim or a ploy to add to the ranks of dependents on government hand outs to build a voter base for life? Social Democrat (SPD) voters are 63.7% in favour and Greens voters 64.8% in favour of letting refugees vote. The voters for Alternative for Germany (AfD) showed 96.9% against the idea.

In total 57% rejected the proposal with 42.9% voting “absolutely no way”. 16.2% were definitely in favour. 55.6% of respondents between the ages of 18 and 29 support the proposal. However, at least one third (32.8%) in this age group also says “Absolutely no way”. The greatest rejection is among participants between the ages of 50 and 64 years. 68.1% of respondents to this age group reject the idea for the proposed right to vote.

Potential voters need not be an EU citizen nor do they need to pay taxes. The mere right to vote depends on being there at the time. Although Martin Schulz’s SPD is leading the polls the idea that voting rights are no more valuable confetti will give rise to further (current) voter discontent. Once again where is a nation’s pride and respect when long term law abiding taxpayers are told that one doesn’t even have to contribute to a society before given rights to determine the course of its destiny.

I’ve lived in Japan for 20 years and I’ve paid more tax than I care to remember the entire period yet I have no voting rights. They are for citizens. I am a permanent resident not a citizen. I accept it. We’re the Japanese to offer voting rights to me of course I would take them if legally offered but I can choose to leave Japan if I don’t like the fact I can’t vote. What Germany is doing is selling out citizens. No amount of ‘assimilation and integration’ rhetoric could convince me that this is a sensible strategy. Why not let Canadians and Mexicans vote in American elections and vice versa. Why not go a step further and have a global vote and dispense with countries. Sounds like the precursors to global government. That Schulz left his cozy presidency in the EU was not as a snub to Brussels but a plan to push EU federalism beyond that of what Merkel has been prepared to.

If Germans vote in Merkel or Schulz to power they have themselves to blame for self inflicted schadenfreude.