#nissan

When the supervisor can’t follow the rules

Japan Exchange Group’s (owner of the Tokyo Stock Exchange) CEO Akira Kiyota has agreed to take a 30% pay cut for 3 months after admitting he’d broken internal rules on prohibited investment.

Surely as the supervisor of one of the largest stock exchanges in the world there would be sufficient systems in place to prevent such embarrassing events. A bit hypocritical to come down hard on listed corporates when the headmaster can’t follow his own rules.

As a former stockbroker, it was a sackable offense to make stock and bond investments without sign off from compliance and a manager to mitigate any risk of insider trading. It is a bit rich to suggest the JPX boss wasn’t aware of his internal rules and had he any doubt whatsoever it would have been an easy discussion had with the relevant department.

Corporate governance in Japan remains woefully inadequate. The JPX board has approved the ¥20mn (US$180k) profit made by the CEO on the initial ¥150mn (US$1.3mn) investment be given to the Japanese Red Cross. Will that be pre or post any capital gains tax? Why isn’t the board calling for him to resign? Why isn’t Kiyota resigning on principle to save the organization’s stained reputation as the vanguard of best practice?

Then again we should not be surprised. It took months for the JPX to remove/suspend Toshiba from the best in class corporate governance index (JPX Nikkei 400) after its accounting scandal became outed and there has been no investigation of Kobe Steel when blatant insider trading was visible to a novice. It leaked information about its fraudulent product specifications to customers three weeks before announcing to the market. All the tell-tale signs of heavy short selling positions on many multiples of average daily volume traded on the day of informing clients was evident. Yet nothing was even suspected, investigated or referred to the regulator.

Then take a look at the saga of Nissan. Documents have revealed former CEO Carlos Ghosn supposedly washed his multi-million dollar personal investment losses through the company as well as using Nissan money to buy several private properties in his name. That would still require the board to be willfully blind to sign off on such big ticket items or point to woeful internal controls. What governance structures could be in place when there is no board accountability over Ghosn’s actions? Being bullied by a dominant CEO is no excuse. The board should have tendered their resignations en masse.

Indeed there have been countless corporate governance lapses overseas – Parmalat, GSK, Stanford, Enron, Tyco etc- but in Japan there is little or no punishment for most executives who break laws (internal or external). Throwing the book at Ghosn will be an exception. Most C-level managers in Japan escape with little more than wounded pride.

Cutting salary for misdemeanors is woeful governance too. The biggest way to force compliance is to threaten a Japanese boss’ company car privileges. The highest status for a CEO is to be whisked around in a personal Toyota Century. Stripping it would literally force corporate leaders to do the walk of shame.

Carlos Ghosn facing arrest

The Asahi Shimbun says Nissan group President Carlos Ghosn is expected to face arrest by prosecutors for underreporting salary. Noone should be above the law but to think of the number of jobs at Nissan he saved plus the return to record profitability makes CM think the tax man is well ahead on the trade.

Will financial planners bring out a Naomi Osaka ETF?

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Japanese investors can get star-struck with investments. In 2015, popular pop-idol band AKB-48 saw the stocks of companies it was sponsored by surge 136% relative to the market. Aggregate sales of those companies surged 46% and 30% over the following two years. Such is the ‘hayari‘ (boom) culture in Japan. Corporates know this.

Since the US Open win by tennis star Naomi Osaka, sponsors are lining up to sign her. Prior to the win, Nissin Foods, WOWOW & Yonex were already sponsors. Nissan has just signed her. Since the win, the Topix has risen a tad over 6% while Nissan, Nissan & WOWOW have risen 7.5% in aggregate. Yonex has jumped 12.2% Early days to be sure, but the likelihood is that if she is sponsored by some smaller less liquid stock names these stocks could well fly.

Forget fancy models and esoteric investment strategies. Find whatever Osaka will be sponsored by in Japan and outperform through popularity over underlying earnings performance.

Any financial firm that launched a Naomi Osaka basket would likely see massive inflows and be able to charge higher fees on the back of it. Will the marketing departments wake up?

More love for Naomi Osaka

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20yo Naomi Osaka deserves every success she gets. She is without doubt the hottest marketing prospect globally. There is no media spin or polish with her on any level. She is authentic in the extreme. No prima donna antics or bragging. If anything her press conferences since returning have defined her as ‘what you see is what you get.’ Humility and grace. Pray we get more millennials like her. She shows one doesn’t have to beat their chest in ridiculous ways to get attention.

No wonder Adidas want to throw $11.9m per year to sponsor her. As a Nissan ambassador, despite her media appearance in front of the Leaf electric vehicle, when asked Naomi just let her inner petrol head scream her favorite car – the GT-R. Lucky for her she will get one in white.

The world of tennis couldn’t have a better ambassador for the game. Let’s hope that the media don’t pry too deeply into her private life (good luck with that) and her sports manager doesn’t put her on a multi-year roadshow from hell to please sponsors which would put any star to the test.

Is Musk losing it?

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Is Tesla CEO Elon Musk losing it? More senior resignations from accounting and HR this week  reveal more cracks in the automaker. He emailed a journalist, calling him a “mother f*cker”. He went further to say he hoped the cave rescuer he called a “”pedo” sued him because a UK man who is single and spent so much time in Thailand must be a child rapist.

He rattled off he had “secured” funding of $420/share to go private and then all of a sudden he didn’t, prompting the SEC to investigate. He was then on radio with comedian Joe Rogan toking what is reportedly a mixture of tobacco and marijuana. Are these the actions of a man running a $50bn market cap company?

Clearly his board can’t control him.  With the shares collapsing and bond prices falling, refinancing will become problematic. Chief  Accounting Officer Dave Morton quit the company after revealing his concerns about the various obstacles Tesla faces.

Tesla’s Chief People Officer, Gabrielle Toledano, took leave in August and said she wouldn’t be returning to Tesla.

Musk has been a genius and visionary to get Tesla where it is today. Yet he is a direct victim of his own hubris. Sleeping under boxes with Tesla bankrupt written on them to living on the factory roof to rattling off about production hell while accusing families of drivers dead due to over reliance in a system he aggressively promoted.Tesla was technically asking for suppliers to refund a portion of the monies they were paid since 2016 to the EV maker so it could post a profit which is borderline accounting manipulation in an attempt to give the impression of an ongoing concern.

He also complained at the lack of support in the media despite being called out on this nonsense.

Musk’s compensation is also linked to a $650bn market cap, which is effectively saying to the market that his company will be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler, Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

The Tesla story is on the ropes. Expect more mega-releases on new products to try to keep the dream alive and the disciples faithful. I guess ‘Lucy in the sky with diamonds’ worked for The Beatles…

The repeated folly of the 外人 boss in Japan

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Several weeks back a foreign private equity firm asked what was CM’s opinion on gaijin (foreign) bosses in Japan. The answer was along the lines that an overwhelming majority end up failing for two main reasons:

1) failure to speak the language/understand the culture to a sufficient level and

2) thinking what has worked overseas will automatically apply in the domestic market.

Carlos Ghosn of Nissan-Renault fame could probably go down as one of the few that got it right. In his case Nissan was out of ideas, options and was prepared to listen to its new masters. Michael Woodford of Olympus fame was the other stand out gaijin CEO whose fate was cut short by a board coup after the Englishman uncovered massive fraud.

Sony under Sir Howard Stringer was different. Sony was not a cash strapped basket case on life support like Nissan was so the internal feudal structures could comfortably survive. The urgency to implement drastic change was not deemed an imperative. Stringer had no real command of culture or language and as such the machine below him functioned more or less as it wished. It is no surprise to see the man under Stringer is now the CEO and one can be sure almost all of the staff hitched their trailers to Hirai.

A chat with one of the Japanese dealers of a European auto marque last week highlighted the problems of gaijin bosses without sufficient cultural cut through. The company is struggling to compete with rivals who are simply leaving it for dust. The OEM has had 4 sales heads in the space of 2 years, For a country that prides itself on long term service, promotions based on tenure and stability, it was not a surprise to see the local staff keep their heads down. Why bother engaging with the new boss on what problems exist. Best stay silent. With any luck he’ll be gone and the next person will arrive and we can restart the game.

Yet these foreign bosses ask, “why don’t the local staff engage?” To the locals it is a simple matter of surviving til the next gaijin boss lands. Many gaijin bosses wonder why the Japanese staff spend a lot of time in glass rooms without them. They’re formulating the group responses which they think the boss wants to hear. Many seek to buy time. It is collective rationing on a life-raft.

The Japanese staff invariably prefer security over risk taking, So there is little incentive to be risk takers, even if some staff are bilingual. It isn’t a criticism but an acknowledgment that they don’t trust gaijin bosses. It isn’t even a reflection on the gaijin boss per se. Culture matters. If a gaijin boss can’t converse in a tongue that shows a commitment to understand cultural norms the likelihood of the message being conveyed (not withstanding another layer of translation) is almost pointless.

Another dealer mentioned that it has had the dealer margins recently slashed in favour of volumetric targets before bigger incentives kick in. While such strategies may excite the hungry salespeople outside Japan, the local sales teams here openly admitted the strategy change has had the opposite impact in terms of motivation. One sales member said, “dame, dame, dame!” (Dame = bad). He said it will more than likely mean that they push for selling cheap, low-end, low-margin product just to eat.

The irony is that if the OEM raised the initial margins for the dealers they would feel a margin of safety which would be seen as a way to sell even more bikes because they like the idea of predictability. The added pressure sedates not seduces. The dealer will likely struggle to the point of bankruptcy before trying radical maneuvers. The problem for the OEM is that reversing the strategy will create even less trust between dealer and OEM because it will highlight the lack of understanding. Gaijin strategies don’t apply.

The CEO of one American auto brand here has been crushing it for almost a decade. A gaijin with a mastery of language, culture and an understanding of the marketplace. In a decade, sales have quintupled and likely go up another 20% this year. Why? The dealer relationships are rock solid. They are treated as family. There is dialogue and communication and there is a shared sense of responsibility. If times get a little tight, the HQ makes accommodations so both end up in a win-win situation. In short – Trust!

The aforementioned European make effectively says that “you better make space for all the new cars coming your way next month” The dealers feel there is no relationship. The OEM seems totally dismissive of dealer issues. No matter how tough the market the OEM has no sense of loyalty to the dealers. That makes them feel uncomfortable about leveraging up or taking risk. They balk at buying too much stock because there is little to no flexibility.

Many gaijin CEOs need to know that when in Rome, do as the Romans do. Yet too many foreign bosses come in with the mentality they can swing the locals to their way of thinking. Usually that learning process occurs after realizing that hiring natives who speak their language doesn’t necessarily buy the skills they thought would help ram home the strategies that have worked in other countries.

While all the efficiency, profitability and success metrics make sense from a shareholders perspective, the local staff want security, longevity and shared accountability. The gaijin bosses that try to force Western norms before addressing the concerns of staff will find that both parties will have less of both desired outcomes.

A wise fund manager once said about Japan – “it isn’t capitalism with warts, but communism with beauty spots!” The sooner gaijin bosses understand that they will benefit from the collective strengths of the land of the rising sun.

Tale of the gold coin chocolate & a warning for Tesla Disciples

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It hadn’t really hit until going back to read the conditions of Musk’s new executive compensation package but the first thing that struck me was the risk of the old adage of paying too much attention to the share price. The collection of all 12 tranches for CEO Elon Musk only kicks in when his company hits $650bn in market cap. The first thing to pop in the head was that of Japanese mobile phone retailer Hikari Tsushin back during the tech bubble. The rather eccentric CEO Yasumitsu Shigeta had gold coin chocolates made embossed with “Hikari Tsushin: Target Market Cap Y100 trillion.” One could only conclude he believed in his own BS.

It was at that moment where the only thing that crossed the mind was ‘this spells trouble’. There were magazines like Forbes touting how Shigeta was one of the richest men in the world and analysts fell hook, line and sinker for this unrealistic dream forecasting he’d be #1 before long. The only rational conclusion for the Contrarian Marketplace was to tell them that “bet he won’t be in the top 100 next year.”  Low and behold the tech bubble collapsed and Hikari Tsushin – that believed it was worth 2x the market cap of then highest valued corporation in the world, General Electric – fell over 95%.

While Musk may not yet have printed target market cap $650bn gold coin chocolates, what the incentives are saying to the market is that his company needs to be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

Once again, this compensation package screams of gold coin chocolates in mentality. Instead of running the business and letting the share price do the talking, the mindset is focused on launching convertibles into space and distracting investors from increasingly dreadful financial results which eventually must come full circle if the results continue to miss. Broader Tesla report here.