Corporate Japan’s Last 100 Years for the Next 100 Years
Source: The Shrine
In our “Last 100 Years for the Next 100 Years” article published previously, we discussed how dramatically the world’s equity markets changed over the last 100 years. Even for long-term investors, it is important to understand that nothing is perpetual. Today, we want to discuss the last 100 years of Japanese corporation.
The Shrine – Old, but New
My hometown, Ise, is known for a shrine (a temple for Japan’s Shintoism). While there are approximately 80,000 big and small shrines in Japan, the shrine in Ise is so unique that it is called “The Shrine” because it is the home of the highest goddess and is considered the hometown of Yamato people. At its peak in the Edo period (1603-1868), Ise flourished, with millions of pilgrims travelling all the way from Tohoku and Kyushu every year. Today, Ise is one of many sleepy towns with an aging and declining population.
Over the thousands of years of its history, The Shrine established a unique system called Shikinen Sengu - every twenty years, all the buildings in The Shrine are destroyed and rebuilt in an adjacent space. The preparation to build the next shrine starts right after the new shrine has been built, and Ise people repeated this process again and again. There are only two shrines that have the tradition of Shikinen Sengu—Ise (every 20 years) and Izumo (every 60 years).
For the most recent Shikinen Sengu, The Shrine spent about JPY 55 billion (about $500 million), which is close to Ise City’s annual budget of JPY 48 billion. If you are a Keynesian economist, you can call it creating effective demand to boost the local economy, but The Shrine repeats this process every twenty years regardless of the cycle of the Ise economy. According to historians, the main reason for Shikinen Sengu is to preserve traditions. By repeating the process of rebuilding every twenty and sixty years, the technique of building a traditional shrine is transferred to the next generation. Considering Japanese people’s life span is 80 years (shorter in the past), the average Ise man or woman experiences Shikinen Sengu 3 or 4 times. As a result, The Shrine’s architecture is believed to be very similar to the design used for millenia.
There are a lot of old temples in Kyoto and Nara, the old capitals of Japan. For example, Horyuji is the oldest wooden architecture in the world, which still exist, and was built in 645 AD. Wooden buildings that are more than 1,000 years old are rare, but an engineer who knows how to repair a 1,000-year-old wooden building is even more rare. Many modern engineers found it extremely difficult to repair Horyuji because they did not know how to rebuild the temple once they had removed pillars and beams.
The Oldest Company in the World
Kongogumi in Osaka is one of a very few companies in Japan that have successfully preserved otherwise forgotten knowledge of ancient architectural design and construction methods. Established in 578 AD, Kongogumi is the oldest company in the world still in operation. Kongogumi’s founder was a Korean immigrant named Shigemitsu Kongo. He came to Japan to assist with the construction of one of the oldest Buddhist temples in Japan, Shitennoji, which is a 5 minute walk from my home in Osaka. As recently as 2004, temple building accounted for more than 80% of Kongogumi’s revenue (approximately, $60mm). Unfortunately, Kongogumi was acquired by a larger competitor in 2006 after the company was not able to manage its debt burden.
Kongogumi Headquarters today
According to Tokyo Shoko Research, a thinktank and database of Corporate Japan, there are still 33,069 companies with more than 100 years of operating history in Japan.
Source: Tokyo Shoko Research
The Manufacturing sector accounted for the largest number of 100-year-old companies with 8,751 (26.4%), followed by Retail (7,627 companies, 23%) and Wholesale (7,138 companies, 22%). The Sake brewing industry was the most represented industry (805 companies).
Source: Tokyo Shoko Research
The Aging Problem of Corporate Japan
While approximately 10% of Japanese-listed companies have more than 100 years of operating history, they are still a minority. Over 70% of centennial companies generate less than $5mm annual revenue. As their current management teams age, these small and medium-sized companies are facing serious succession problems. According to Nikkei, 50% of the management team will become 70 years or older, and over 1.27 million SMEs have no proper succession plan in place. In 2016, nearly 30,000 companies were liquidated for reasons other than bankruptcy (usually due to succession issues), even though over 50% of those companies generated positive profits. The problem is not foreign to us. My mother is still operating our family’s pharmacy business, but there is no successor. It will be liquidated when she retires, although she wants to keep running it for another 10 years. Gyokuseiya, our favourite Japanese sweet shop in Osaka—about which Itsuka wrote in 2016 (read)—has no successor either. The owner is now over 70 years old, and the traditional know-how will eventually be lost forever.
More and More Companies Are Liquidated…
Source: Tokyo Shoko Research
If the business owners open their doors to foreign investors, many of them should be able to find a home for the next 100 years. The obvious source of capital is China, which has huge and growing markets for many Japanese companies. Given the uncontrollable government debt, the best way to invest in Japan is to invest in Japanese companies without taking country risk—in other words, acquiring attractive, small Japanese businesses with Chinese partners. This is easier said than done as many investors have tried and failed when they ignored the most important factor: people. Money is not the critical requirement for buying Japanese companies; the key is having the right people whom Japanese business owners can trust as they pass their companies on to the next generation. We will continue this discussion in future articles.