Buffett’s advice to the ‘barbarians’ on Japan’s doorstep

By Gearoid Reidy

If the “barbarians” are at Japan’s gates, Japan itself is opening the door for them. The country is becoming more and more tolerant of foreign private equity funds and activist investors, a development that gives the “intrepid” boards of Japanese companies the opportunity to apply the incomparable “wisdom” of the Western way of management. In reality, however, the reverse can just as easily be done.

At the start of the latest round of annual general meetings, a record number of 77 companies were faced with various proposals from shareholders, many of whom are foreign. A case in point is Toshiba Corp.’s years-long privatization effort, which made progress last week with the addition of the long-suffering motley group of representatives of two activist hedge funds to its board of directors. Some see this potential deal as the “litmus test” for the future of private equity in Japan.

But Western management is not blameless: the case of Calsonic Kansei, now known as Marelli Holdings Co., which makes auto parts for Nissan Motor Co., is illustrative. Just a few years after it was privatized by KKR & Co. and having merged with Magnetti Marelli in 2019, which soared its debt to $8 billion, is in receivership.

While the coronavirus pandemic and the supply chain crisis are partly to blame for this development, rival Denso Corp., which supplies auto parts to Toyota Motor Corp., does not appear to be facing similar problems, having doubled its profits last year. almost to 2 billion dollars. Like many Japanese companies, Denso during the pandemic has further improved its already significant liquidity, securing a critical “cushion” of cash at a time when vehicle sales are being rocked by the supply chain crisis.

Foreign investors often label Japanese companies’ large cash hoards as “irrational” – seeing them as a resource that can be “unlocked” under the leadership of the right management team. This often leads to highly experienced production executives being replaced by lawyers, finance executives and business executives.

But there is another approach to investing in Japan: that of Warren Buffett. The founder of Berkshire Hathaway Inc., who is well-respected in Japan, is widely known to have poured $6 billion into the country’s top five conglomerates in 2020. But his approach is completely passive.

“We are only investors, we did not commit our funds to Japan with the intention of telling the government, investors, people or CEOs of our investment choices what to do,” Buffett wrote in an exchange with Mission’s Andrew McDermott Value Partners, a view the latter shared with the audience during the recent American Chamber of Commerce Japan Shareholder Forum held in Tokyo.The Nashville, Tennessee-based investment fund has been investing in Japan for years.

Westerners tend to approach Japan with the perspective that “we have nothing to learn from Japan, but it has a lot to learn from us—Japan is the student, and we are the teacher,” McDermott explained to me. But he added that this narrative “is not only wrong, but also destructive because it blocks the possibility of learning from some of Japan’s positive practices”.

McDermott argues that Japan should be wary of “sacrificing” the manufacturing-level experience of its corporate boards on the “altar” of Western management. He points to the recent problems of once-powerful US industries such as Boeing Co., General Electric Co. and Intel Corp., as evidence of the dangers of management that favors profit and undervalues ​​manufacturing expertise.

McDermott’s argument has merit, and Toshiba itself is a case in point. While Toshiba has wasted a lot of time over the past decade trying to satisfy its growing number of activist investors—first through shareholder returns, then through a failed breakup plan, and now through privatization, which Japan’s trade ministry after all, it may not even approve – rival company Hitachi Ltd. has largely “avoided” both activist investors and the headlines and methodically achieved record profitability.

And most investors would be hard-pressed to name the relatively low-profile former chief executive and ex-railway systems engineer Toshiaki Higashihara, who helped transform the loss-making group into a profitable behemoth without outside interference before taking over as chairman this year.

Analogous examples of Japanese prudence are many, from the classic cases of change of course of the once similar companies Fujifilm Holdings Corp. (worth another $30 billion) and Eastman Kodak Co. (now in meme stocks), to the reluctance of Japanese automakers to commit to the development of electric vehicles, which may soon have trouble finding batteries.

Of course, not all Japanese companies are good – and not all activist investors are bad. The management of Olympus Corp., which has become a “role model” of Japanese management, has praised the help of ValueAct Capital Management in its attempt to chart a new course. A more recent example is Seth Fisher of Oasis who is to be congratulated because it revealed some remarkable features of the elevator manufacturer Fujitec Co.

But if you think that the way of administration in Japan has not changed, you need to think again. The general assembly period alone is revelatory as it reveals that the days of profiteering “extortionists” who threatened to disrupt assemblies are long gone. Asashi announced this week that there has been a 97% reduction in extortion since its peak. .It’s time for foreign investors in Japan to follow Buffett’s lead and see what they can learn from him.