Japanese M&A has risen significantly in the last three years, increasing from 37% to 67 % of all Japanese corporations’ foreign direct investment. 2015 was also a banner year for Japan, logging in over USD 85 billion in outbound investment.
Softbank’s recent acquisition of ARM for USD 32 billion in 2016; Suntory Holdings’ 2014 purchase of U.S. beverage maker Beam for USD 16 billion; Tokyo Marine’s acquisition of HCC Insurance in US for USD 7.5 billion; Japan Tobacco’s acquisition of Natural American Spirit for USD 5 billion; and Daiichi-Sankyo’s USD 4.2 billion takeover of Ranbaxy in India are some acquisitions that made waves in the last few years.
History shows there was a similar wave of Japanese companies acquiring global assets from late 1980s to early 1990s. An era now infamously known as the ‘bubble era’, it was marked by several spectacular financial and management failures. Among these were the 1995 scrapping of its USD 2 billion stake in the Rockefeller Center by Mitsubishi Estate; and the winding up, also in 1995, of Matsushita’s purchase of MCA (owner of Universal Pictures) which it had bought in 1990 for USD 6.6 billion. In 2014, Daiichi-Sankyo sold its stake in Ranbaxy, six years after its acquisition, at a 37% discount.
Given a lacklustre record, this raises pertinent questions about this current wave of acquisitions: What is so unique about Japanese culture that makes it difficult for them to adapt in foreign territories? Have they learnt from past failures? Will Japanese companies now be more able to successfully manage outbound M&A? What are successful Japanese companies like Toyota doing right?
We suggest the answer lies in the ability of the Japanese to acquire cultural intelligence, that is, the capability to relate to and work effectively across cultures. We also suggest that there are unique elements within the Japanese culture that make it difficult for them to adapt in non-Japanese markets.
One, Japan is a highly collectivist society with a strong sense of nationalism and pride in its own achievements and capabilities. This has been heightened due to their immense success in the post-1960s global expansion. Many acquiring Japanese firms in the bubble era appointed Japanese expatriates to the top management level of the new firms. This led to internal conflicts between Japanese management and the senior staff of the acquired firm.
For example, Jim Beam staff, proud keepers of an old and respected tradition of making bourbon, felt insulted by the suggestion from the Japanese acquirer, Suntory, that they had to improve their processes and by implication, product. The Japanese had failed to communicate that the process of continuous improvement, known as kaizen, was a business philosophy adopted by all Japanese companies and implemented in their enterprises worldwide.
Second, Japan is inherently a highly contextual culture which relies heavily on non-verbal cues and practices non-confrontational communication. It can be extremely challenging for Japanese companies to cope with “assertive” employees from low context cultures like America or Germany, who are more vocal about problems and disagreements.
For example, if a Japanese manager says “maybe it is difficult”, what he is really saying is that it cannot be done. This is an avoidance strategy used by high context cultures which find it difficult to communicate negative decisions. However, managers in low context cultures would not understand that the Japanese manager was in effect saying no, thus leading to misunderstanding and frustration in the implementation process.
Third, the Japanese rank very high on the uncertainty avoidance index. Research shows that this aspect is inversely related to risk taking which means that Japanese managers would analyse a problem or a situation from all possible angles to avoid any negative outcomes. Hence, Japanese executives will be slow in decision making, and also aim to achieve consensus in decision-making. When a Japanese company acquires a non-Japanese company, this has serious implications for the success of the new company due to differences in decision-making styles.
For example, during the trying times of the Global Financial Crisis, Pilkington, a UK glass company acquired by Nippon Sheet Glass, was losing money, and needed quick and decisive action. NSG expected Pilkington to do the needful while Pilkington expected their ownership to take charge. With the ensuing confusion, it has taken NSG more years than expected to get back on the acquisition project timeline.
Finally, Japanese firms’ value loyalty and personal relationships; often, promotions are based on seniority or contribution towards group performance. This works well for Japanese firms operating within Japan since all the employees share the value of “achieving together”. However, such a HR practice would cause a lot of unhappiness in the west, where employees are more used to being rewarded for individual performance. The imposition of a Japanese performance appraisal system upon the non-Japanese employees of the acquired firms can result in corporate dissatisfaction and demotivation.
Some Japanese companies have understood that they have to globalise and have even resorted to hiring non-Japanese to lead their organisations. However, this has not always resulted in success. Two CEOs, Craig Naylor and Stuart Chambers, resigned from their jobs at Nippon Sheet Glass; Howard Stringer from Sony and Michael Woodford from Olympus also did so, recently.
In conclusion, before Japanese companies pursue M&A, they should look beyond the financials to the intangibles of cultural intelligence.
To be successful, Japanese firms need to learn to trust non-Japanese employees but at the same time instill them with the most important aspects of Japanese corporate culture. Japanese companies need to tune into the business language of the multi-cultural globalised world to have effective communication and better business outcomes. Japanese managers should be trained to be culturally sensitive when operating in diverse cultural contexts. Japanese companies need to change their performance evaluation system to one that rewards individual performance as well as group or seniority
It is also useful for companies embarking on such ventures to study Japanese companies like Toyota, Honda, NTT, Softbank, and Mitsubishi Financial Group– ranked among the world’s most successful companies – to understand how, despite maintaining the cultural characteristics of a typical Japanese company, they have been able to use their culture to their advantage as employee-friendly companies.
Only then can Japanese companies hope to avoid the mistakes of past M&A.
About the author
Prof. K. Ravi Kumar is the Shaw Chair Professor and Associate Provost (Special Projects) at Nanyang Business School (NBS), NTU Singapore. Dr. Divya Bhutiani is a Postdoctoral Research Fellow at NBS’ Centre for Business of Culture.
This commentary was published in The Business Times on 3 March 2017.