East buys West. A rumor last week that a Japanese bank would invest capital in troubled Bank of America followed by a few days the news that Japan's Sumitomo Bank would invest $500 million in the investment banking firm Goldman, Sachs & Co. American business people now talk easily of the Japanese having $60 billion--even $80 billion--to invest over here.
Whether rumors of Japanese billions are any more accurate than stories about Arab billions a decade ago is unknown. (B of A flatly denies any talks with Japanese investors.) But Japan's companies do possess huge amounts of capital these days. And their willingness and ability to put capital to work successfully in major world industries is not doubted. Indeed, it is feared.
Meanwhile, U.S. companies seem to be busy keeping their spare capital away from stock market raiders by purchasing their own shares or borrowing to make acquisitions that render their balance sheets unattractive--rather like the war-weary soldier who shoots himself in the foot to escape further combat.
Why do Japanese companies seem so much better able than ours to commit their capital to long-term goals? American business people are quick with answers:
- Japanese managers have a freer hand because they do not need to keep carping shareholders happy by making high profits.
- Japanese companies have plenty of money because their banks allow them to carry more debt than U.S. banks allow American companies.
Unfortunately those are shibboleths for losers, half-truths that serve Americans who want to make excuses. The facts are:
- Japanese companies do have shareholders and must pay them an annual dividend. In his excellent book, "Kaisha, the Japanese Corporation," James Abegglen--an American management consultant in Japan--reports that companies would borrow the necessary funds rather than omit the dividend. It is a badge of soundness for their shareholders, who include suppliers, bankers and customers as well as individuals.
The Japanese dividend is a fixed amount, based on the par value of the stock, and tends to be lower than the American variety. But that doesn't mean lesser returns for Japanese shareholders.
High Total Returns
When the dividend is coupled with appreciation in the stock price, Japanese shareholders do quite well compared to their U.S. counterparts. To wit: Fortune magazine's list of the 500 largest foreign companies shows that Matsushita Electric (Panasonic) gave its shareholders an average return of 29.9% over the last five years, at least as good as General Electric's. Toyota Motor's return beat that of General Motors.
- Debt in Japan is sometimes high, sometimes not. Toyota has no debt, while NEC has a lot of debt. Japan's companies financed their growth with debt but now have built up equity. That is what they are investing here--while U.S. companies, paradoxically, are borrowing themselves silly.
Those are the narrow financial facts. But beyond them, the overriding reason for the success of Japanese companies is that they act at all times with the single purpose of growing the business and gaining market share.
Japanese managers don't ask about the financial return when they contemplate going after a market. They ask what resources--in products and people and finance--they will need to capture the market.
Yet they make high profits. Japanese returns on investment are often better than American. Fuji Photo Film, for example, earns a higher return on investment than Eastman Kodak while giving the old film leader fits in every world market.
And when Japanese companies want to diversify, they develop from within. They do not make acquisitions; mergers in Japan are few and far between.
Why is that? Because Japanese companies are run by their managers and directors who do not relish merging themselves, or the employees and suppliers they represent, out of jobs. The shareholders get their return as the business grows, but they do not get a say in how it should grow.
Ah, you say, East is East. But could American business learn from this Japanese system? Well, yes, because it used to be pretty much our system.
When U.S. business was growing to world dominance, in the 1930s and '40s, one product led to the development of others; Du Pont went from rayon to nylon to Dacron. Managements worked with a purpose to grow the business, and those who bought shares got returns from that growth--returns that were certainly not lower than today's.
The best of our companies retain that tradition. But who doesn't feel that too many U.S. companies seem confused and timorous today, engaging in financial manipulation while Japanese companies go all-out for world markets?
Perhaps we need to look again at the corporate system that brought success to U.S. business and prosperity to us all. It seems to be working fine in Japan.