Japan Must Let Zombie Companies Die
bloombergview.com
bloombergview.com
Every single sentence in this article can be picked apart, but doing a line-by-line critique would miss the larger problems with the article. The author assumes that more productivity is always good, even though Japan has been suffering a lack of economic demand for most of the last 26 years. Big gains in productivity would only make the lack of demand worse.
If the goal of Japanese policy makers is to boost demand, and that does seem like a wise goal, then keeping 50,000 workers employed at Sharp seems like a smart bet, compared to keeping 100 people employed at some nimble, fast-moving startup.
More so, Japanese electronics firms still hold great global market share, so there is reason to think that their productivity is more than adequate to compete in the global markets.
And this sentence can only be understood if your political beliefs align with the political beliefs of that author:
"If Japan’s bailouts remind you of the U.S.'s rescue of its auto companies, you’re not alone. There is a strong argument that the auto bailouts only delayed the day when General Motors and Chrysler lose out to nimbler competitors like Tesla Motors."
Right, but the USA bailout of the auto companies seems to have been a good bet. Hundreds of thousands of jobs were saved, and the companies bounced back and paid off their debts, and the USA was able to sell its stake in GM at a profit. So it was win-win-win all the way: the taxpayers won, the workers won, and the economy won.
That is unfair, because the government also collects the same taxes -- if not more -- from these small and medium sized companies and their employees, but it will only bail out large companies with that very tax money.
If you want to make sure people have money so that demand is increased then just give them money, don't keep useless jobs around.
the USA was able to sell its stake in GM at a profit
No: http://www.usatoday.com/story/money/cars/2013/12/09/governme...
So the bailout was probably _still_ a net positive for the US.
Ideally yes, but that's politically difficult.
When you fire a lot of people you're not just reducing costs - you're also hoping that you will never again need the skills and the knowledge of your internal processes that those people have.
Sometimes it's a good bet. Sometimes it isn't.
In Japan they'd mostly just put it in a savings account or use it to pay down debts which wouldn't contribute much to demand.
According to a link in the article the government lost over $9 Billion. I live in Metro-Detroit, saw plant closings, saw waves of dealerships close, watched whole car brands die, got my hours cut and watched delayed work hurt a lot of people around here.
Just because GM and Chrysler go into bankruptcy sans the gov doesn't mean all those jobs disappear. Yes, GM and Chrysler would take a cut (which happened anyway) but I think they'd also get reorganized better at the very least.
From what I've heard the reorganization that took place was not nearly enough. Chrysler has a mandate on the minimum number of workers needed for some contracts. This leads to situations where Chrysler is paying for 4 people so 1 person can put in half a day at a 3rd party supplier. I have stories for days.
The real tragedy in all this is a new better company could've started in Detroit. Instead, due to Zombie GM and Chrysler continuing to dominate the market, all the automotive engineering talent is slowly migrating to Silicon Valley.
http://www.youtube.com/watch?v=q7vJA9AVvdQ&t=6m22s
[1]
Detropia (Rental / Purchase link)
http://www.techinsider.io/we-now-know-when-teslas-cheaper-mo...
Two things are at play:
1. Tesla doesn't really give a crap about owning the entire market. If their competition causes the big 3 to build low cost zero-emissions vehicles, then Tesla has fulfilled their part of Elon's goals towards saving the world. Basically, putting a stake in the heart of the internal combustion engine and putting automotive economies of scale behind battery and energy storage development.
2. Cheap cars have awful margins, only worth playing in at scale. SUVs on the other hand are hideously profitable. The sport SUV has been the savior of BMW and Mercedes over the past decade, with high margins versus their cars. Porsche got in on this and built an SUV, now Lamborghini is too, margins are just too good to ignore.
Tesla's pursued an Intel-like tick-tock strategy, where they shoot at the high end to make money and get performance knowledge (Roadster, Model X) and with the cash reserves take their next model downmarket (Model S, Model 3).
Elon might not care, but as a publicly traded company Tesla is not going to say 'Mission Accomplished' and close up shop.
China owns GM about as much as they own Apple. Guess what, America imports Chinese-made Apple phones. It's no different.
https://en.wikipedia.org/wiki/Malinvestment
According to the Austrian school, market interventions like those in Japan are bad _regardless_ of the effect on productivity, because they represent malinvestment.
Austrian instincts are partly about building a defense against corruption and tyranny. If you let politicians spend money or introduce mechanisms that are difficult to measure, or which can be easily hand-waved away ("we did what we thought was right based on the information at the time"), then they are incentivised to spend. Instead, they form a line in the sand and say that you're not allowed to do anything which can't be clearly justified from a set of first principles. The back-story is not so much a faith in the inherent goodness of markets as in the inherent evilness of governments.
We can analyze different policy decisions, either by modeling human behavior (based on experiments which can be controlled and analyzed), or through natural experiments (e.g., What happens when a bunch of states and municipalities alter their minimum wage policies?)
> What happens when a bunch of states and
> municipalities alter their minimum wage policies
How can you be confident that there are not network effects in play that you don't know about. Immigration patterns, organised crime networks, political corruption, the subtleties of quality in supply chain companies, measurement variation, the culture of particular trade unions. What if someone else is running other economic experiments in parallel to you?
What if there's network effects created by the contrast between the areas you're changing? In municipality A you raise wages and not in muni B. Labour will feel pull to flow from one to the other while you're running the experiment.
You'll never come close to modeling all this.
Worse yet - these are fundamentally political issues that relate to practice of power and allocation of resources. Everyone has an agenda in how they play out, and this further muddies the water of the experiment and the analysis.
> I'm not sure if the response to difficulties in
> measurement is to build a system out of faith and
> assumptions.
You are right, economics can't model every potential variable that influences outcomes. Large scale studies of minimum wage admit that policy and economic differences between local municipalities can cause the effect of a minimum wage change to vary. But you can model for most major differences, such as "Did adjacent municipalities adjust their wages at the same time? Did this have an impact on employment".
Ultimately you can get much closer to an understanding of how minimum wage impacts an economy than you would from a purely faith based approach, and you can land at a recommendation like "In general small increases in the minimum wage do not raise prices or hurt employment, given the following conditions".
That's much more valuable than the Austrian position that purely bases itself on faith.
That's not what I'm posing. My claim is that both positions involve faith, but the Austrians are conservative in their assumptions and systematic in how they build from it. To me that is more trustworthy than non-systematic and statistically insignificant approaches.
Your minimum wage paragraph doesn't bring me closer. I think we've reached agree-to-disagree. Fortunately, this is only the internet. What we say doesn't matter, my opinions are of no consequence.
Am I the only one who finds the word "instincts" used in this context deeply disturbing? We've got many well-intentioned people in history who acted according to their instincts and beliefs. Some of these invented and practiced eugenics, others tried to create an "agrarian communist society" while killing off some 2 million people in 4 years (I read about Khmer Rouge regime recently) and there are many, many more examples.
My question is: what is the difference between modern economics and, for example, eugenics? What protective mechanism have we created to make sure no economist attempts to make as all into farmers, killing off all the people who can read and write? Isn't "democracy" alone a bit weak as a guarantee here?
In fact "unlikely to favour large scale social engineering backed by force" is about the only thing Austrian economics has in common with mainstream modern economics...
That's flat out wrong, I'm afraid. Proponents of modern economics are very, very willing to perform social engineering backed by force.
Khmer-Rouge style social engineering involved concluding the problem with modern economies is that people are choosing to work in industries not in the national interest, and a practical solution is to abolish all markets and use the military to relocate people and assign them new roles. Name one modern economist who has reached remotely similar conclusions.
I'm not saying that turnarounds are impossible (Apple) but what the government is in effect doing is to take resources (taxes) from viable entities and giving it to those that are simply not viable. (at least at the moment)
Or the government itself takes more debt to pay for it. Japans debt to GDP ratio is currently it 175% which is insanely high, this can't go on forever.
In my view the better solution would be to let these companies go bankrupt. The investors lose money, employees are let go but the resources will not vanish into thin air.
Someone else will buy it and hopefully build something more viable. Government can then reduce its expenditure and maybe even reduce taxes, which would also help in the long run.
But there are issues I think you would be foolish to ignore. First, the government largesse has to come from somewhere, taxing or borrowing. Taxing in the long term will become difficult, as the misallocation of capital contributes to shrinking that sector of the economy that can pay taxes. Borrowing kicks the can down the road, but with Japan's demographics a smaller less productive workforce will be saddled with that debt.
The Japanese unemployment rate is now at 3.1%, which is very low, even for Japan. In that kind of job market you need big gains in productivity because employers will have trouble filling job openings. There's no reason for the government to artificially stimulate job creation.
Where does the money to subsidize those jobs come from? Are you seriously suggesting that sucking subsidy money out of the productive economy to pay for those jobs is not depressing demand? All our economies could do with some of this magic money, it sounds like it would solve all our problems.
>...More so, Japanese electronics firms still hold great global market share...
Japan functionally has two economies, an export economy and a domestic economy (of course they're not completely decoupled, as Sharp shows). It's managed to maintain a fairly competitive export economy because those companies have to cope with foreign competition, but the domestic situation has festered for a whole generation. It seems like China is following the same pattern.
Which part of giving people money do you think would reduce their tendency to spend it?
The alternative is to borrow money by issuing bonds, but that's just a way of postponing the problem, eventually the government has to excise more taxes to pay the debt.
Money spent on wages gets spent and circulated within the economy at a higher rate than money that is diverted towards profits (which tends to bid up the value of fixed assets in a demand constrained environment).
>the inefficient one consumes money that could otherwise be invested in more demand producing factories, employing workers in demand producing activities.
Well, if you assume that opportunities for "demand producing activities" (i.e. products which will convince the Japanese to stop saving at such a high rate) are plentiful then yes. In the 80s perhaps.
But they're not. The Japanese really can't be convinced to spend.
If industry is more efficient, the Japanese people don't need to spend more. The same rate of spending will buy more goods and services, supporting more production by more businesses, generating more demand.
You can't get away from the fact that the same amount of money spent on production by a more efficient company generates more demand for the things that company needs in order to produce. Production by capital-consuming activities by its nature generates demand.
A business that fires half of its workers is likely be more profitable than one that doesn't, assuming it can get by without them.
>The same rate of spending will buy more goods and services
Wages will typically be spent on goods and services. Profits usually bid up the price of fixed assets (e.g. housing in San Francisco & New York, NASDAQ, bonds).
>You can't get away from the fact that the same amount of money spent on production by a more efficient company generates more demand for the things
Except that's not what happens.
There's also the fact that Toyota was initially perpetually bailed out by the Japanese and had their exports subsidized by suppressing the value of their currency. The Asian tigers and their auto companies didn't just appear out of nowhere.
In a way, the auto bailouts can be seen as just levelling the playing field somewhat.
Free market religion never did build a wealthy industrial economy. Judicious application of subsidies did though.
I know the point they were trying to make in the article, but the primary reason this doesn't happen in Japan is the cultural fear of failure rather than the system being broken. Once you're in, the nanny corporation will take care of you for the rest of your life. Once those corporations are in, the government will take care of them for the rest of their life. Risk mitigation is what's most highly valued; because of this fact, not all capitalistic logic can be applied, despite the system appearing fairly capitalist.
This is socialism -- social ownership of risk. The rising tide lifts us all.
There are fewer winners and fewer losers, and it's only sustainable when everybody buys into it and nobody gets greedy or envious. Such success is only seen in homogeneous societies, and Japan is largely homogeneous.
Conversely, this is the reason for Europe's clinging to socialism for the better part of the last century (homogeneous society), and it will most definitely change over the next one. Europe will start to look more like Canada and the US -- a melting pot of sorts -- and maintaining a Euro-centric identity will be far more difficult as many scramble to align themselves with a nation-centric identity. A strong EU that leans to the right is inevitable, and national identity will fall by the wayside as they come to the crushing realization that national identity doesn't put food on the table or keep the lights on when you have already given up so much.
Europe is a continent with 50ish countries and dozens of widely spoken languages. It is in no way a homogeneous landmass.
> a melting pot of sorts
Which it has been since folks started invading, warring and immigrating across the continent thousands of years ago.
> maintaining a Euro-centric identity will be far more difficult as many scramble to align themselves with a nation-centric identity.
There hasn't been a dominant Euro-centric identity across Europe, however. Current trends in politics favoring the messages from conservative (or very conservative) parties is interesting news for the pundits to discuss. Different countries in Europe have been quite conservative and quite liberal over the last century, but they all are nations first (as is evidenced by how difficult it can be to effect change through the European Council/Parliament.
> A strong EU that leans to the right is inevitable
Unfortunately I'm not sure this can be concluded from the preceding arguments.
Martin: Yes, [the Napolean prize] is a NATO award given once every
five years: gold medal, big ceremony in Brussels, £100 000. The
PM's the front runner this time. It's for the statesman who's
made the biggest contribution to European unity.
Sir Humphrey: Since Napoleon. That is if you don't count Hitler.
You know, every other nation in Europe has a period in history when they were persecuted and being deliberately destroyed, both physically and psychologically. Sometimes for hundreds of years. We've got "killing fields" and battlefields everywhere - please, do take into an account a legacy of more than 2000 years of non-stop, all-out wars - and more than one such a field was created specifically for people of one nationality. On the other hand, almost every single nation in Europe has a (mostly real! but sometimes imagined) "golden age" in their history they can cling to; a period where that nation was (possibly a part of) a global superpower.
Given that, I don't believe nationalism is going to die just because people are getting hungry. I mean, lots and lots of death, torture, persecution, as well as preaching, propaganda, and education didn't kill nationalism - why do you think lack of money would? Some European nations are practically built upon martyrdom and, if anything, it made European nationalism even harder to leave behind, change or even soften a little.
> Europe will start to look more like Canada and the US
I'm repeating myself here, but discarding more than 2k years of history is dangerous when making predictions about the future. Europe already was a melting pot of cultures for a while, back when nation-states were not fashionable yet. A few times, at that, in different ages. Never once did this make Europe a peaceful continent or made nationalism disappear.
US and Canada are unique in that, historically, it's a bunch of people getting together and promising to leave the past behind. That, of course, doesn't take into account American natives, but whatever: that's NOT happening in Europe. You'd have to demolish most of the cities to destroy thousands of buildings and sculptures still, remainding Europeans about just how heinous their neighbour is or just how just was their neighbours massacre. And that's the easiest part, because then you'd have to destroy and eradicate a good part of culture and art. And then, after a couple of generations under heavy propaganda, maybe you'd have a place roughly comparable with US.
The flip side of that is if you quit you will never be offered another salaryman job. By anyone. I wouldn't start a business in Japan unless I was already unemployed.
If you're interested in how large a fraction of the working age population is employed, see employment rate.
It's not like nobody ever gets laid off or quits. But that's the expectation.
The Japanese job for life is pretty much gone now:
http://www.businessweek.com/managing/content/sep2009/ca20090...
>That will keep the market flooded with artificially cheap Sharp products -- mobile phones, solar panels, air conditioners, printers, microwave ovens
Sharp doesn't dominate any of those markets. If it went bust people would buy them as cheap pretty much from other Asian manufacturers.
>The bank bailout does nothing to improve Sharp’s corporate strategy
Sharp seems about to be bought by Foxconn which is quite a change of strategy. It wouldn't have happened if the government had let it go bust years ago.
The main effect of letting Sharp go bust would be to throw 50000 people on the labour market who in efficient market fantasy land might all be snapped up by more efficient employers but who in reality would probably have been mostly unemployed.
Besides, as a domestic consumer, sharp products are not necessarily cheaper than competitor's offers. Nor do they seem less innovative. This is all from a consumer perspective, but while the bailouts are real, the "stop innovating and flood the market with cheap products" strategy the author describes just isn't there. Sharp is keeping the same Kaizen-style innovation, slightly improving their models every year. It's debatable whether these small improvement warrant buying a new model, but the same could be said for all of their competitors as well.
Meanwhile, in the Japan some of us actually live in:
1) Very few 26 year olds will be successfully able to convince their 26 year old co-workers to leave Sharp, because that is a once-in-a-lifetime mistake. I am literally related to a $ANONYMOUS_FOR_SAKE_OF_RELATIVE employee who is presently miserable and cannot leave because that means an end of economic stability for his family forever and his family makes no secret of how unhappy they would be in that situation.
2) If you are a 26 year old startup founder and you ask for a bank loan ^H^H^H^H business checking account, be prepared to get told "Oh hell no.", but very politely. The first variant of "Oh hell no" is "Hmm, well theoretically speaking we do have business checking accounts available as a product. Can we see your articles of incorporation, business plans, office rental contract, orders from customers, etc etc?" Upon which you say "Well we're making LCDs so we don't have orders yet because we need a bank account to e.g. purchase machinery" at which point "We regret to inform you that we cannot accept your business."
Not a theoretical concern: I'm presently 2 weeks into the fun with a large Japanese bank trying to get an account issued, which shakes fist at a personal bugbear is not exactly the easiest thing to accomplish for a Western tech entrepreneur in Tokyo at the moment. (I've been asked about Bitcoin three times already.) If I manage to get the account, it will because I rounded up 123 pages of documentation (not an exaggeration, that's a count) from previous work to convince the bank that I was not a ML nor fraud nor credit risk.
3) Venture capital: you will not successfully receive sufficient-to-create-a-physical-product venture capital as a 26 year old in Japan. It's difficult to raise what would be "trivial by Valley standards" just to build software products: prepare for 6 months of All The Fundraising Fun You Can Imagine to get an A round sized like a modest seed round in St. Louis. You need substantial industry connections here to convince a corporate VC to give you the corporation's money. The high-percentage way to "compete" with Sharp is to spend 30 years in it, get recognized internally as a very competent performer who is not management track, "quit" to "run a startup" which makes a product that Sharp definitely needs but would have difficulty making without you, receive money from Sharp's affiliated VC vehicles, and "exit" by taking the buyout order from your single customer, which will naturally be Sharp.
("What would incentivize Sharp to do that?" Because all salarymen at Sharp of a given age are equal but some are more equal than others. M&A is allowed to make decisions regarding compensation that HR is not. This incentivizes folks who are internally indispensable but not managers who show up in the Nikkei/WSJ by name to do a bit of revolving-door. Think like Google but amped to 11.)
It does not help matters that a large Tokyo startup was a) a money laundering operation for b) a large international drug network then c) experienced more than half a billion dollars in suspected embezzlement while d) the banking system was caught with it's collective pants down. This current puts a giant blinking Give This Application All Possible Scrutiny on anyone who says "tech company" and "international wire transfer", which is really %#(&)0$ing annoying when you're a tech company which needs to get and make international wire transfers and does not have $100 million of business lying around to justify the bank doing fairly costly due diligence work.
[+] Edited to add: You might not think this sounds like a very plausible fraud, since it requires a corporate officer to make a personal appearance at the bank branch and produce identification, but the corporate officer might be a victim of the scam, too. A "local businessman" who "already owns another corporation so I can't be director of this new venture" approaches them about a great new job as company director, no experience required, the lawyers will take care of everything. The lawyers ("lawyers") draft paperwork and the director stamps everything. On the first day of work the lawyer says "Great. OK, it's the 25th. First order of business: get $200k out of the account at the bank for payroll to the employees at the $FOO branch office. Also, print out a receipt for your own salary; here's the form. We'll meet you at the train station and walk you to the office." At the train station the lawyer looks at the form, notices a misprint, and says "Oh sorry, this is wrong. We don't want to make you look bad on the first day. Tell you what, I'll phone ahead to the company to let them know we're going to be a bit delayed. Wait here, I'll pop back to the office, print the form correctly this time, and we'll go in together then. That's the envelope? Great; give it to me and I'll put it in the safe; wouldn't want someone stealing it at the train station. Society is going to the dogs, you know?"
Later that month, when asked by the police officers, the corporate officer can produce an impressive collection of meaningless powerpoint slides, business cards listing fake names of fake lawyers tied to phones stolen/registered with stolen credit cards/etc, and a total lack of understanding of what went wrong.
Don't even get me started on the rental company that takes a 1 month rent cut... or 2-3 months rent for "key money"... or ...
1 month rent is the rental company's "finder fee", which is standard.
It's all the other fees they sting you with that really hurt. I ended up paying about and extra month of rent per year for dumb shit that they decided to charge me for. And you had better make sure your apartment is better-than-spotless when you move out.
Japanese law says that you don't have to pay for damage or wear and tear caused through everyday living, but they'll still try to keep your deposit or charge you for repairs.
Essentially there's a very close coupling between a bank, and it's corresponding major company. It's common knowledge which is which, f.ex. Bank of Tokyo-Mitsubishi, which extends to all the conglomerate's suppliers and the employees of those companies, who will all use the same bank. This gives the major conglomerates enormous economic information, through the bank, about the financial state of their suppliers, as well as a huge amount of power over the companies, through the bank lending system. And this is before you get to the problem of Bank's making very low interest loans to prevent companies going bankrupt - which in any case is common practice everywhere. Bank's are structurally not able to absorb very high amounts of losses, so the old saying about the bank having the problem applies to large loans.
The only viable way to compete with Sharp in this example (well, apart from leaving the country), would be to go to one of the other conglomerates and pitch to be taken under their wing.
Tokyo might not have the SV's startup "scene" but apart from funding, it has pretty much all infrastructure a software startup needs, just like any large city in a developed country does: fast, reliable internet connection, a functioning legal system, and enough qualified labor.
Generally speaking, Tokyo is considerably cheaper than San Francisco or NYC at the current exchange rate (rather, at the exchange rate of the past 2 years or so). Crucially, salaries are much lower, and compensation is often the bulk of expenses in software startups.
I was trying to pre-empt "San Francisco is just as expensive as Tokyo". Yes it is, but it has a lot of startup-specific infrastructure that may (or may not) be worth the excess cost. (Likewise NYC/London/Berlin). If you just want the things you list, you can go somewhere much cheaper than Tokyo (e.g. central US, northern/western Europe - as you say, any large city in a developed country will do).
Right, I'm not claiming Tokyo is the best place for startups. Just that there's an investment opportunity (I was going to say "arbitrage" but that's too strong as it implies risklessness).
North American VCs don't even want to fund startups in the "wrong" part of the United States and at least one thinks CEOs can't have "foreign-accented English". What on earth about that suggests they'd leap into the Japanese market?
Except Chrysler was bailed out before and has now been merged/bought by a foreign auto company for the second time in 20 years.
On the one hand it's interesting to see a society buck the trend towards working out inefficiencies, on the other hand, they are not a closed market so they can't just keep on going like this and hope things get better.
Does Japan want this?
There are no big banking zombies wandering around the US landscape now. Most were consumed, forced into mergers. Their balance sheets were cleaned up, via the Fed (Citi and Bank of America for example).
Maybe the Fed is now the zombie?
If your concern is about Japan's welfare, how about instead selling your startup to the large company?
It doesn't surprise me that Japan is mimicking the U.S. by bailing out failing local companies.
The real issue with Japan is their lack of entrepreneurship. They used to be fierce competitors but are now more of an afterthought.