Title: A driving force for change in Japan Inc. By: Butler, Steven, U.S.

News & World Report, 00415537, 11/01/99, Vol. 127, Issue 17 Database: Business Source Complete HTML Full Text

A DRIVING FORCE FOR CHANGE IN JAPAN INC.

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Section: Business & technology Nissan's drastic makeover could restructuring Dateline: TOKYO

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After a decade of seemingly hopeless drift, Japan Inc. is getting into gear with surprising speed. Who is leading the charge? Would you believe a 45-year-old, Brazilian- born executive from the French car company Renault? Last week, before a stunned audience of 500 journalists, Carlos Ghosn delivered a 45minute rapid-fire presentation of brutally frank facts and detailed plans aimed at jolting one of Japan's biggest and sickest manufacturing companies, Nissan Motors, back to life. Ghosn (pronounced goan) became Nissan'schief operating officer after Renault agreed to invest $5.4 billion in the car maker last March. And he isn't treading lightly. Indeed, Japan has not seen corporate demolition on this scale since the end of World War II, when U.S. occupation forces broke up the huge zaibatsu business conglomerates accused of complicity in the war effort. In a move that could set off a wave of corporate restructuring across the land, Ghosn announced that Nissan was closing five factories, including three assembly plants. All told, 21,000 jobs, or 14 percent of the company's global work force, will be slashed. Roughly half of Nissan's 1,145 parts suppliers also will lose their contracts, forcing a round of consolidation and job losses outside the company as well. Showrooms will be closed down, model offerings trimmed back. Unsentimental. Equally significant, Nissan plans to dispose of the great majority of its investments in 1,394 affiliated companies. In doing so, it will rip apart much of the interlocking web of corporate relations that often made doing business in Japan seem so impenetrable to outsiders. Ghosn is unsentimental."With the exception of four companies, none is considered to be indispensable for the future," he said last week. The converse, of course, is often not true, and many companies that Nissan cuts off will die. That harsh reality inspired a predictable moan from Japanese political leaders. "We believe that it is necessary for [Nissan executives] to cope as much as they can with the plan's effects on the company's employment situation and subcontractors," cautioned Prime Minister Keizo Obuchi, while admitting the government could not interfere. Ghosn had simply run out of options. "It is a well-known fact that if Nissan does not do this, then rather quickly Nissan will just disappear," says Koji Endo, auto analyst at Shroder Securities. Despite previous attempts at restructuring, Japan's No. 2 car maker has lost money for seven out of the past eight years; it has surrendered about a quarter of its global market share, which now stands at 4.9 percent; and even after Renault's cash infusion, Nissan has run up debt of $12.6 billion.

Robert Feldman, an economist at Morgan Stanley Dean Witter, believes that Nissan's radical moves have broken a taboo that could encourage other companies in trouble to follow suit. As a result, Feldman expects Japan's unemployment rate to rise to 9 percent in the next two years, up from just under 5 percent today. It's not just Nissan that is tossing out the traditions of Japan Inc. In recent months, other business leaders, especially in finance, have begun rejecting such time-honored Japanese practices as lifetime employment, stable business relations, and expanding market share at any cost. They are instead thinking about profits and the interests of shareholders. Two weeks ago, for example, Sumitomo Bank and Sakura Bank agreed to join forces in a merger that will create the world's second-largest bank, with $922 billion in assets. Like other recent bank mergers in Japan, this one was driven in part by the need for scale in order to pay for the huge investments in information technology, where Japan is way behind its American and European counterparts. In merging, the two banks will save costs by, among other things, eliminating 9,000 jobs. But by traditional logic it was a terrible fit, because each bank stood at the pinnacle of competing keiretsu business groups: Sumitomo and Mitsui, which used to go to great lengths to protect group companies. "The merger means greater scrutiny of customers," says Jim McGinnis, bank analyst at Commerz Securities. Foreign investors also are playing a big role in Japan's corporate makeover. Despite fierce political resistance, Japan's Financial Reconstruction Commission last month turned to a relatively new U.S. investment group, Ripplewood Holdings, to salvage the remains of the nation's biggest bank failure, the Long-Term Credit Bank. The Ripplewood deal may do more than just save Japanese taxpayers money. It could also help introduce new, competitive banking methods to the badly battered finance industry. Ripplewood plans to inject over $1 billion into the failed bank. The group will be barred from cutting off weak borrowers for three years but sees opportunities to earn fees by doling out advice and offering restructuring deals to a long list of mainstream customers. Even Japan's central bank is getting into the act. The Bank of Japan has hired McKinsey & Co., the international management consultancy, to suggest ways to consolidate its branch structure and improve efficiency. Of course, it is possible to overestimate the degree of change. Despite his bold plan, Nissan's Ghosn may find he has overplayed his hand. He could encounter stiff resistance from unions, local government officials, or even from Nissan's own management. And huge bank mergers that look great on paper can be difficult to pull off. So far, grand plans for merging departments, closing branches, and cutting back staff remain just that: plans and promises. No pain, no gain. There's also the risk that all these corporate makeovers could dampen the nation's economic outlook-at least in the short term. "If you are bullish on the economy, then you have to be bearish about restructuring and vice versa," says Ronald Bevaqua, an economist at Commerz Securities. Although wages are falling and spending is generally sluggish, consumers have recently opened up their wallets to buy personal computers and other new high-tech products, like cell phones that can tap into the Internet or other information systems. If other Japanese companies follow Nissan's lead, this spending and Japan's nascent economic recovery could be stillborn. Yet in its place could be the foundation of an eventually far healthier period of growth. PHOTO (COLOR): Nissan boss Carlos Ghosn announced major plant closings--and the loss of 21,000 jobs--last week. ~~~~~~~~ By Steven Butler