MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | JOHN LEWIS
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | JOHN LEWIS
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Mr. John Lewis
Thank you. I'm also going to be speaking about Japan but I'm coming at it from a slightly different perspective than Kitao-san, given that I am a foreigner and I've just been in Japan for the last 6 months and also because we are focused more on later stage private equity investments, more on management buy-outs than early stage venture capital. I do think that the role of entrepreneurial activity and the role of venture capital is a particularly timely and important issue in Japan. I would argue that in addition to entrepreneurial activity being the lifeblood of the new economy as it says in the session synopsis, that in Japan entrepreneurial activity is also essential to the restructuring and renewal of the old economy sectors. I'm just going to touch on the current sort of anti-entrepreneurial system as it exists in many sectors in Japan, then talk a little bit the prospects for the development of entrepreneurial activity and then also just touch on the role that private equity investors and also policy makers can play in helping to nourish that entrepreneurial activity. The current business system as it exists in a lot of large Japanese companies actually stifles entrepreneurial activity. The people, the managers that run those businesses are very smart, well-educated, capable, experienced people but the whole environment, I believe, keeps them from taking the decisive entrepreneurial actions that are required in today's economic environment. The Board of Directors of these companies are generally too large which inhibits decisive decision making. The Directors are almost always insiders with very little representation from outside shareholders so the management team does not feel accountable to outside shareholders. Even if the company is unable to repay the banks, the affiliated banks of the group companies often will forgive the loans or simply lend new money. In addition, most of these management teams are not incentivized with large stock option plans or significant performance based bonuses so they don't have the incentive to take hard decisions and to take risks. I think the results of this type of environment are pretty clear, the stock market index, as everyone knows has just hit it's 16 year low, it's down from its peak of 39,000 in 1989 to a current level of 13,000. A return on equity for listed companies in Japan is below 2% and the economy has been stagnant for the last 10 years. Now I think that this system is beginning to change as a result of the difficult economic situation, this system is beginning to be dismantled. But I think that the relevant question is whether out of this environment there can emerge a group of visionary driven entrepreneurial leaders who are going to build successful new companies and who are going to transform many of the old companies. Now I think there are two viewpoints, two schools of thought. One group would point to the period after World War II when companies like Honda and Sony and many other entrepreneurial companies laid the groundwork for 40 years of spectacular economic performance in Japan. This group would argue that in the current distress state, that type of entrepreneurial activity will be renewed. The other school of thought argues that the traditional, very conservative culture of Japan is inevitably going to choke off such entrepreneurial activity and any surge in entrepreneurs is bound to die quickly. Now I'm certainly not in a position to resolve that debate today but like other private equity firms, JP Morgan Partners is in the business of identifying successful entrepreneurs and chief executives and then supporting them to build fantastic companies. That's our role in life. I have moved to Tokyo in the last 6 months to start our office here, we're building a great team of professionals here in Japan so clearly we think that there is an opportunity to make private equity investments and there is scope for entrepreneurial growth. Let me just point to a couple of examples; one from the new economy and one from the old economy as to why we think this is happening. Kitao-san already has covered a lot of the activity in the new economy but take for example the company Megachips that was founded several years ago by Shindo-san who was for over 20 years an engineer and a technician at a couple of large electronic companies. He got tired of the rigid organizational structure and bureaucracy of those electronic companies and decided to go out on his own and start Megachips, which is a fabulous IC design and manufacturing company. That company now has a market capitalization of around $1 billion and I think that his story is reminiscent of the story of Bob Noyce and the foundation of Intel over 30 years ago in Silicon Valley. In fact, I recently read an interesting article by Tom Wolf, the author, in which he argues that the whole development of the venture spirit and the development of Silicon Valley was in large part a reaction against the traditional hierarchical and bureaucratic structure of corporate America. So maybe some of the same forces that helped developed the venture spirit in Silicon Valley are now taking root in Shibuya and other places in Tokyo and maybe some years from now 20% of the venture capital investment won't be in Silicon Valley but it will be here in Tokyo. Turning to the old economy which is where I'm most active, there were zero management buy-outs of a value of over $50 million until last year. Last year, there were three and the first three months of this year, there have been six. And I know from my daily interaction with management teams that the whole concept of management teams, of division of companies going out on their own and leading independent new companies outside of the traditional bureaucracy is catching on and becoming much more popular. So we're encouraged by the future both in the new economy and the old economy for private equity investments. I would say that it is too early to say that the experience of Japan in the entrepreneurial or venture capital area is going to be the same as what it has been in the US or Europe. It's still very early days. I do think that there is a role for private equity firms, both Japanese firms and foreign firms to play in helping to cultivate that growth. In the case of JP Morgan Partners, we have over 16 years of experience, we've invested in over thousand companies and have been very successful over that period in helping entrepreneurs and supporting executives and helping those companies to grow. We can bring more than just financing, we can also bring from the partners in our firms that come from an operating background operating guidance, we can provide strategic guidance, we can help recruit professionals and maybe most beneficial to entrepreneurs who don't have access to the infrastructure in Japan that they might have in Silicon Valley or other markets, we can put them in touch with our global network of successful entrepreneurs and executives. And sometimes we ask these entrepreneurs that we've worked with before to co-invest with us and to sit on the boards of the companies in which we invest and to provide the benefit of their experience. I also think that there is a role for policy makers in helping to support an environment which gives rise to entrepreneurial activity and I really think that the key role of policy makers is to allow market forces to come into play in a very transparent manner. I think in Japan, some of the changes that have been made recently, for example deregulation in some industries including telecommunications and pharmaceuticals, improvements in the transparency of accounting standards, and a lot of different areas are making incremental steps in that direction. I think the big question is whether the government is going to have the resolve to really confront the key underlying issue which I think holds back entrepreneurs in Japan which is the problem in the financial sector. Obviously there is a new package of reforms that was announced and approved by the Cabinet on Friday but I think it's still very much an open question whether those reforms are really going to force banks to act in a market rational way and to stop forgiving loans to companies that are not financially viable. I think until that happens, you're going to see a lot of capital that could otherwise be flowing to entrepreneurial activities tied up in unproductive sectors of the economy. And also the managers of these old companies that are not so entrepreneurial are going to continue to not take risks and not take decisive action until they are forced to by the banks. So hopefully, we will continue to see improvements in that area going forward. |
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