Voices are growing louder in Japan that advocate an injection of foreign investment to rejuvenate ailing Japan Inc. The world is watching with bated breath how Taiwan’s Foxconn fares with its proposed takeover of Japan’s Sharp. Will Foxconn be able to open a new chapter in bilateral corporate cooperation?
In 1853, Commodore Matthew Perry of the United States Navy led his four ships into Tokyo Bay demanding that the Tokugawa Shogunate, which had followed a closed-door policy, open up Japan for trade with the United States. Perry was initially turned away, but on his second visit with a bigger fleet the following year, the Japanese eventually agreed to trade, ending 200 years of isolation.
This humiliating experience, known in Japanese history as the ‘arrival of the black ships’, galvanized Japan into radical domestic reforms during the Meiji period, from which the country emerged as a great power in East Asia.
In 2016, Sharp's agreement to a proposed acquisition by Hon Hai Precision Industry (known internationally by the name Foxconn) could very likely become Japan’s “black ship incident” in this century. Taiwanese companies’ response to the takeover deal hinges on whether Taiwan will get anything out of it.
Japanese corporate giants such as Sony, Sharp, Toshiba and Matsushita used to dominate the global electronics industry and seemed unstoppable. Sharp, for its part, remains a world leader in LCD technologies.
However, Japan’s once-nimble corporate giants have meanwhile become slow, encumbered by rigid organizational structures and corporate governance systems. Many large conglomerates that failed to correctly read rapidly changing market trends have plunged into a severe management crises and are fighting for survival. On top of that, the global reputation of Japan Inc. has suffered recently due to accounting and data fabrication scandals involving top Japanese companies such as Toshiba and the Asahi-Kasei Corp.
Kyoto University economics professor Chihiro Suematsu, an expert on Japan’s hidden champions, says the problem lies with traditional Japanese corporate culture. Suematsu believes that the focus on group consensus in big Japanese corporations that proved very useful in the past is no longer practicable as the fast-paced ever-changing global market calls for quick decision-making.
A Nikkei Business cover story in January echos Suematsu’s point with even harsher voice : “From top management down to entry-level employees, there is a rampant lack of responsibility. It is the bad habit of the Japanese 'salaryman' not to look squarely at imminent crises,” the report says.
Favoring Foreign Investment
Another problem is that the treatment Japan prescribed for its troubled companies at home only brought more of them to the brink of collapse.
Faced with a stagnant economy, the Japanese government founded the Innovation Network Corporation of Japan (INCJ) as a public-private partnership in 2009 to boost corporate competitiveness. The INCJ draws on funding from the Ministry of Economy, Trade and Industry (METI) and the private sector, including several banks, to provide capital to troubled companies and encourage mergers and acquisitions.
However, in a recent article, Japan's influential Nikkei newspaper denounced this approach as a quasi-nationalization of uncompetitive private companies that could lead to the further decline of the nation and its industry. “If we continue down this road, Japan will get into a precarious situation. Now is the time to break this vicious cycle,” warned Nikkei.
The INCJ’s lack of success has also caused a shift in public opinion. While foreign buyouts have long been anathema in Japanese eyes, there is now growing support for reviving Japan’s debt-saddled struggling giants with an injection of fresh foreign capital. Sharp’s decision to accept a financial shot in the arm from Foxconn has therefore become a test case closely watched around the world. For Taiwanese entrepreneurs, the deal is opening a window for the acquisition of good Japanese companies.
However, a reality check of Taiwanese investment in Japan or Taiwanese companies taking a stake in or acquiring Japanese enterprises over the past five years yields only a handful of examples involving major companies. (See Table)
In 2012, Foxconn founder and Chairman Terry Gou bought a stake in Sharp Display Products (Sakai factory) in his own name, and Sino-American Silicon Products Inc. bought the silicon wafer business of its Japanese peer, Covalent Materials Corporation. In 2014, CTBC Bank bought Tokyo Star Bank.
Hiwin Technologies founder and Chairman Eric Chuo, who has ample experience with overseas acquisitions, warns of the psychological obstacles to Taiwanese takeovers in Japan. “If a company from an industrialized nation buys a company in a developing nation, you will get a great result with half the effort. If it is the other way round, you will get only half the result for twice the effort,” Chuo said in an interview with CommonWealth Magazine editor Sheree Chuang.
Chuo said that people in industrialized countries tend to have a sense of superiority, which often makes things more difficult. “The employees (of the acquired company) will be struggling to deal with the situation; these are things western textbooks on merger and acquisitions will not teach you,“ Chuo said.
In 2005, Taiwanese smartphone manufacturer BenQ bought the struggling Siemens Mobile group, but eventually had to close the company down.
Now Foxconn is buying Sharp. Chuo believes that Foxconn’s ability to effectively deal with the “psychological distance” resulting from different corporate cultures, both in strategic business decisions and day-to-day interaction at the workplace, will be crucial for the success of the envisaged marriage.
The Next Step in Taiwan-Japan Cooperation
The impending Foxconn-Sharp marriage could open up new opportunities for cooperation between businesses from Taiwan and Japan. How can Taiwanese companies seize this opportunity? Which mistakes should they avoid?
Following are excerpts from our interview with Jack Huang, partner-in-charge, at the Taipei Office of international law firm Jones Day.
CW: Is now a good time for cooperation between Taiwan and Japan?
Jack Huang: They (Japan) are having great difficulties now making a breakthrough relying on their own strength. Therefore, they need to look for new blood to revitalize their assets.
When the trend of Taiwan-Japan cooperation began a decade ago, I suggested that Taiwanese enterprises look for the major suppliers to large trading houses such as Sharp. Their technologies and products were very good, but they were kind of conservative, and they lacked an international outlook and foreign language skills. The Taiwanese are not really able to bond with them because their spoken Japanese is not good enough. That’s why there are only very few successful cases.
CW: Why do negotiations fail?
Huang: It has to do with the people involved. When, at the very end (of negotiations), it comes down to ‘big shot versus big shot’, do you use his language to make him give in? If not, he will give you the cold shoulder because he doesn’t know or care how big you are in Taiwan.
When you negotiate with the boss of an electric engineering company, would you ever ask him through an interpreter: “Hey buddy, lets cut a deal!” Of course not! You still have to follow the rule of “When in Rome, do as the Romans”: Drink some Japanese sake, speak some Japanese, and give people some room to save the situation. If you want to become a world-class company, you need to adjust your behavior to local circumstances.
CW: What is most important in merger and acquisition talks with the Japanese?
Huang: The Japanese have a certain arrogance, they do not want to give credit to others.
Over the past five or six years, there have been many cases of Chinese enterprises buying Japanese companies. At least several dozen Japanese parts manufacturers were merged. Why is China able to buy them up but we aren’t? It’s because they have a lot of people who speak Japanese, people who speak it as well as the Japanese. These talented people who studied in Japan are now slowly rising up the ladder to vice president positions. We are still fooling ourselves thinking that because of the hatred [between China and Japan] from the Sino-Japanese War, cooperation between them will be difficult. If things are so difficult, how come they have bought several dozen companies, while we have only bought a handful?
CW: Are there any good examples for Taiwanese acquisitions of Japanese companies before the Foxconn deal?
Huang: Sino-American Silicon Products (SAS). In 2011, SAS bought Japanese semiconductor company Covalent [Materials Corp’s silicon wafer business]. It wasn’t a small deal, and the merger partner had very good technology too. SAS Chairman M.K. Lu had the decency and patience to slowly wear down resistance; he would not push anyone into a corner, so he was eventually able to cut a deal after successfully negotiating the price down.
Moreover, SAS President Doris Hsu originally couldn’t speak Japanese, but she immediately hired a private tutor to learn the language. Soon she began to hold meetings in Japanese, and her behavior, which was neither servile nor overbearing, made the Japanese forget her gender. She blended in very well, which yielded immediate results. You think this is easy? Not at all!
CW: As far as you know, are there many Taiwan-Japan mergers under way?
Huang: Virtually none. I'm sad to say I feel that Taiwanese enterprises lack the ambition it takes to take risks. We have many large corporations, but they are all only taking small steps forward. If you take small steps, you are not very likely to commit mistakes, but you are also not very likely to open up great opportunities. The question is whether the world as it is will adjust its speed to match your slow pace forward.
Assuming that in five years the world will be very different from now, standing still means falling behind.
I am optimistic that the Foxconn-Sharp love match will blossom. While the success of a single case does not mean that other cases will be successful, at least someone has taken the initiative.
CW: During the first wave of Taiwan-Japan cooperation the focus was on entering the Chinese market as partners. It this still a realistic scenario?
Huang: The incentives for cooperation between the Japanese and the Taiwanese are not that strong anymore. Ten years ago they were, but that ship has since sailed. It's good enough if the Chinese talk with the Japanese themselves. A whole bunch of Chinese nationals who studied in Japan have already returned to China to contribute to society. Their Japanese is better than ours, they are good at separating politics from business, they know where the line is that they better not cross. Our niche is slowly disappearing. But the Taiwanese and the Japanese can still team up to enter Southeast Asia.
CW: The Japanese trading houses have a very strong presence in Southeast Asia. Why would they need Taiwan?
Huang: It’s not that all Japanese companies have already set up shop in Southeast Asia. I believe that our niche is these small and medium sized Japanese enterprises that find themselves with their backs against the wall. Why don’t we go and get them? Pull them up from the current basis, that much we can do. (Interviewed and compiled by Liang-rong Chen and Echo Chu)
By Shu-ren Koo
Translated from the Chinese by Susanne Ganz