Friday, 13 May 2011

Macro Level Trends - Re-Building Japan - Reading New Age Consumer Complexity

The earthquake, its resultant tsunami and consequential nuclear disaster shocked not only Japan but the world at large. TV pictures beamed around the world displayed a disorientated north-eastern region of the main island, yet unlike probable outcomes in other supposedly developed countries, chaos did not reign for even seemingly a moment, the idea of social anarchy and the notion of looting an anathema to the civic pride of Japan.

What we saw instead was devastation met by heroic levels of humanitarian concern and stoic spirit - a lesson to many of the world.

The flattening of villages and towns also economically flattened certain prefectures, and those close-by areas not so obviously physically effected had to mentally deflect the concern of nuclear fall-out 'cloud'. As recently reported, the outcome of that event ultimately changed Japan's government policy toward the use of nuclear energy for decades to come.

Whilst it was somewhat insensitive of economists to discuss the positive re-generative effects created by the re-building challenge, at this point in time these few months on, it is perhaps a useful exercise to try and gauge just how the Japanese consumer has been shaped by events with the arguable existence of a new national psychology that may either stall or propel the economic re-bound.

To us foreign outsiders, Japan seems an almost mystical place. Its culture so unique that a mystery prevails perhaps even more so if one has visited for a short while. Such uniqueness was of course created from a policy of isolation across much of the 2nd millennium AD from China after wars, and later international isolation through the 18th & first half of the 19th century. Then aware of the internal problems that had blighted China after trade and political dealings with the Dutch, French and British.

The often foreign-serviced opium dens of Shanghai and other coastal towns which had undermined the morality and productivity of the masses had managed to wriggled through the statute-book prohibitions. This and other concerns had been noted by Japan, such observation and experiences then affecting late 19th century relations with America and other 'new colonials'.

Hence, up until the turn of the 20th century Japan had stayed resolutely Japanese, unchanged in method of rule under the Emperor and his Ministers, in the method of social structure pertaining to familial and individuals roles and of course resolute in the traditional teachings, crafts and ceremonies, in the daily, monthly and annual time-frame, that maintained the 'Japanese Way'.

However, the 20th and 21st centuries have seen massive societal change, arriving more as revolutionary shifts (than perhaps the typical evolution the West understands) each generated by foreign influence. Most notably of course that of the USA through its economic might via 'hard' and 'soft' power, which spans everything from the MacArthur Plan to McDonalds. Critically Japan incurred greater social shifts than perhaps the likes of S.Korea or China in recent decades, given their faster yet intrinsically less socially complex re-shapings.

Very simplistically, investment-auto-motives believes those Japanese socio-economic shifts can be described as containing 7 distinct phases

until 1868: rural-based feudal system of tribal peoples led by Shogun leaders.
1855-8: Western influx through treaty signings with US, UK, Russia & France
1869 – 1912: revived imperialistic & expansionist policy using western technology to win wars against China and Russia
1912 – 1936: continuation of industrial modernisation era, licensing and adapting western-sourced technologies to create an indigenous heavy engineering spanning machine tools, plant, auto & aero.
1945 – 1980: post-WW2 economic ascent, combination of low cost base with increasingly sophisticated engineering & electronics hi-value capabilities for export & domestic consumption, so living standards raised, creation of conglomerate empires give 'job for life' stability.
1980 – 1992: economic peak, able to export to re-buoyed western nations, able to create high-priced lifestyle orientated products for domestic market, and heyday of advanced electronics.
1992 – 2011 early period seeks to satiate fantasy-driven consumption reflective of social ease, but global recession of 1990-1993 and Asian Tiger crash in 1998 hits hard, highlighting the major cost-base differential disadvantages Japan suffers. In answer, the national tech-advantage seen as its foundation-stone relative to the 1992 Kyoto Protocol. Domestic consumption initially targeted to retain Yen strength, this used for international (typically USA) M&A. The national R&D toward the 'bio-mechanics' & 'technology interfaces'. But Japan 'stuck' between the high costs of its domestic 'social obligation' and so a necessary international deflationary stance for over a decade. These disjoints still proving highly problematic to today.
2011: The Fukushima disaster in March appears to 're-set' the nation's psychological outlook, instigating an economic re-build “on 1945 scale” (though in reality not so), such social messages to relay the task in hand and the requisite 'social perspective and attitude re-alignment' necessary.

Whilst now the 3rd largest global economy, when in the previous 2nd place unlike the US it remained a manufacturing power-house having built its international reputation for vehicles, white goods and brown goods since the 1960s. But it has been far later than its international peers to 'off-shore' manufacturing activity that had been undertaken domestically. In the automotive arena, whilst Toyota created alliance JVs and later green-field trans-plant factories to gain ever greater market-share in the US in the 1980s & 90s – a model latterly replicated across the world - domestic manufacturing and its large chunks of the vertical and horizontal value-chains were seen as sacrosanct, and so effectively untouched.

This arguably value-destructive attitude resulted from the domestic industry's highly inter-connected conglomerate structure, which whilst providing a highly stable foundation for growth, self-reliance and workforce CSR over preceding decades, meant that since the late 1980s until mid 2000s it lacked the ability to effectively re-structure low and mid-value sections. The increasing costs at the lower end of the value-ladder borne by the higher tier divisions. The structure undoubtedly allowed for trusting working relationships to evolve which bore fruit in the manner of benchmark R&D planning and execution, aswell as most visibly world-class product quality levels which in turn drove demand; all to the good.

But it also created internal commercial conditions where investor capital was not being deployed in a wholly efficient manner, executives caught in an ever more pressured position between the demands of global capital markets wishing to see good ROI & ROE figures, and the sense of good corporate responsibility to its workers and the nation at large, a sentiment bred into the psyche of senior executives commanding Japan's largest companies.

In autos, perhaps the first to suffer in this manner was Nissan, its late 1990s demise necessitating the buy-in and guidance of Renault SA since 1999. That take-over was whilst in reality a welcome relief for Nissan shareholders and workforce, was also somewhat distasteful embarrassment for Japan, however it did provide a much needed 'wake-up' call for the likes of Toyota / Daihatsu, Honda, Suzuki and Subaru; Mazda already partially under the wing of Ford.

The holy-grail of the 'in-house' secure control of corporate R&D has been relaxed, at least regards the post concept engineering development project stage (ie post product approval by the BoD). So Japanese corporations have recognised the need to become less rigid in orchestrational manner, utilising the best available from outside. This seen by Toyota's relationship with Subaru in developing a new performance coupe.

The competitive pressures of global industry across many sectors has also seen Japan latterly 'off-shore' what had been the national obsession of domestic production for domestic consumption, an integral part of its hard-learned attitude of self-reliance. And whilst done to suit prevailing conditions, it cannot be assumed that this more flexible attitude toward Japan's 'industrial social security' will remain, the internal reaction to events such a Fukushima could see Japan once again 'pull-up the drawbridge'.

Thus whilst the 'Keiretsu' system has indeed been slowly dismantled, the philosophy that created it is still very much integral to the Japanese psyche, for it set within the context of the international playing field, under-pinned the creation of modern Japan. After all, it was that unity which prevailed even after the Post-WW2 MacArthur Plan sought to see the the old 'Zaibatsu' system – under the control of aristocratic old families – demolished. Those families seemingly well understood that sizable portions of Japan's industry would have otherwise been sold-off in favour of the interests of the Alliance powers that won the war.

It can be argued that Japan today may well once again look inward to sustain its future., presently feeling marginalised between the undermining economic might and coersive political expectations of the USA and China relative to foreign policy, aswell as the internal challenges of the Fukushima aftermath set within its long-term economic stagnancy (reporting -3.7% in Q1 2011 and continuation of 0% inflation and interest rates).

Having been so 'Trans-Pacific' over the last 50 years with powerful new discourse with EM regions – beyond China – and with Kyoto credence and advanced eco-technologies, Japan could possibly see itself in a new role, one of its own making, as opposed to playing as a co-partner to the geo-political and technology imperatives deigned by the US and China. Beyond keeping cordial relations with the super-powers, Japan may try to define itself as a more independent advanced technology provider to not only the West & China, but critically to EM nations, thus becoming a kind of eco-tech & human-tech provider to the world.

Having seen virtual 'ownership' of the capital markets by the US, and weary of a similar re-run by China, it may wish to leveraging its own IPR and industrial capabilities for itself, as opposed to having its scientific and technical advances quickly assimilated by others and commercially exploited.

The Toyota Prius and Honda Insight are examples of such a policy of 'soft-power' application, both VMs rightly pursuing the more tenable 'real-world' Hybrid solution, so as to be attractive to private, commercial and state consumers all over the globe, from Los Angeles to Chile's Los Alamos.

However for the most part, beyond the obvious car-makers' nameplates and the logos of eponymous IT hardware manufacturers, Japanese companies' identities are for the most part visibly nation-bound – unlike GM, American Express or Starbucks. The bank Nomura gained greater European visibility – temporarily in the news at least - when it acquired Lehman Bros' regional business, as did Mitsubishi UFJ (MUFG) with 20.1% purchase of Morgan Stanley. A consequence of Japan's export success with high-tech products, but misadventures with department-stores, fashion clothing, and indeed foodstuffs – the foreign trend for sushi over the last decade mostly created and served by US and European companies.

Indeed, it was surprising that Japan did not make more cultural headway when Sony bought the Hollywood film studio Columbia-Tristar in 1989 to form Sony Pictures Entertainment, and bought Columbia-CBS to form Sony Music; the all-American management and attitude left in place so as to not upset the 'golden geese'.

More recently, as a 'halfway house' as a part of its own identity stamping, Nissan's expansion of its up-scale Infiniti brand tries to coalesce Japanese product personality and culture, its marketing material in on-line and hard-copy formats centred upon the influence of historic Japanese artforms.

However, as seen, to date although there have been periodic 'cultural expansions', the marriage of Japanese commerce and cultural consumption has been unsurprisingly predominately with the Japanese consumer.

For B2C companies 'reading the consumer' and 'prompting the consumer' sits at the heart of success.

Hence from the late 1950s onward, the realm of marketing grew to include a myriad of new elements that better understood the market-base. Deconstructions to identify specific consumer groups expanding from the initial idiom of age and ABC class demographics, toward the personal psychologies of current & potential users. Research now spans demographic, product/service usage and psychographic areas, and the use of 'customer clinics' watched behind one-way glass and 'vox-pop' user diaries common-place.

But the GenX, GenY and 'New Millenials' have grown-up in the marketing age and are typically very tuned-in to the methods and manners used by corporations, especially regards advertising and marketing, so have grown increasingly disenchanted, disenfranchised and disagreeable. In answer we see the evolution of TV advertising in the UK which both goes 'back to basics' providing either a parody of 'sexy' adverts to then give a simple message (Tesco), uses simple humour (VW) or provides 'knowing humour' to highlight their understanding of their clients' dissatisfaction with manipulative tactics (DirectLine).

Whilst the UK, US and Europe obviously have their own marketing cultures, perhaps nowhere has been as commercially bombarded as Japan, itself the foremost information-driven society (with S.Korea close behind). It has been formed by a virtual 'informational pressure-pot' within a competitive environment, first experienced when young, at school, through educational career and later the corporate career. Until recently the Japanese 'salary-man' (& woman) in major cities read 3 daily newspapers – morning, afternoon and evening – a sign of the relentless pace of daily change. That informational pace seen clearly in 'above-the-line'' but especially in 'below-the -line' advertising, newspaper and magazine pages crammed with colourful (supposedly) eye-catching words and phrases.

In reaction to this oversell, especially Japan's ongoing stagnant era, the younger generation has become increasingly dis-illusioned with 'being sold to', and instead have in ever greater numbers sought their own less commercially sourced identities, creating individualistically created counter-cultures which themselves become the basis of a new trend and so commercially served. The apotheosis of this almost a decade ago was the creation of those no-name shops that would 'pop-up' and then just as quickly disappear.

Having watched youth fascination with western culture, girls reconstructing the Audrey Hepburn look, and boys reconstructing the Elvis Presley look, in the late 1990s Toyota and its multi-sector strategic partners tried to engage the Japanese youth with its WiLL brand.

Created as a singular lifestyle identifier targeted at the 15-35 year old age-range, so spanning differing disposable incomes. All WiLL products could be accessed immediately by the 30-something with high disposable income, or built-up year after year by the 15 year old. That 15 year old could immediately purchase a WiLL deodorant and other small items, but later when moving through life-stages could purchase the WiLL refrigerator (akin to the iconic SMEG) and as a couple purchases the WiLL car (itself supposedly inspired by Cinderella's carriage reflecting the couple's romance),

The exercise, whilst not wholly unsuccessful, and improved units sales for all participants, did not create the unitary tribal identity sought, nor the new 'commercial hold' over next generation consumers ultimately wanted.

The mind of the Japanese youth (or at least the 'fashionista intelligentsia' that leads youth trends), for all its impression of child-like naivety with a penchant for Disney characters, anime, manga picture novels, virtual pets and fluorescent rag-doll dresses, was not going to be so easily and overtly 'sold'.

[NB In direct contrast, compare WiLL to the later seemingly comparable cross-sector branding exercise undertaken in China. Here, the social messaging website QQ and automaker Chery created a co-lensing deal, 'QQ' used as a model name for its small car, itself a copy of the Daewoo Matiz. (This a good example of what investment-auto-motives calls “Matrix Manufactoring”©). Importantly, this wholly fabricated exercise was knowingly directed at a far less sophisticated youth consumer market, one 'pent-up' with aspiration in an economically strong environment, unlike the Japanese effort directed at a satiated and arguably near exasperated sophisticated target market].

The Japanese 'problem' then for some years has been the bad marriage of economic stagnancy so undermining consumer confidence, a psychologically mature consumer-base across the age range, and products which having surpassed basic quality expectations some years ago must be increasingly sold relative to the less tangible aspects of their personality and social association. Creating that critical human connection has been the focus of corporations from over a decade, instilling products with ever greater 'Shinto' (soul), the realms of IT and emotionally derived human interface designs examples of this seen annually at the Tokyo Motor Show.

The Japanese consumer, especially the savvy young, then appears somewhat oxymoronic, a veneer of the 'kidult' yet insightful of sophisticated marketing ploys.

That “Matrix Manufactoring” has been played out time after time, so no surprise then that younger members of Japanese society both at home and whilst abroad have become jaded by obvious commercialism, and though still cling to designer European brands if they have the means, many have sought instead to re-invent their personal worlds of dress, language, general consumption patterns and 'being', often closer in appearance to an on-screen game-play character or personal avatar than the standard 'clone-like' human.

That modern raconteur and globe-trotter Tyler Brûlé (who himself evokes an almost cartoon-esque image of the man-about-town) conveyed a good snapshot of Japanese tribal dress in his FT Weekend column. His May holiday observations were that domestic fashions were becoming more utilitarian, the stylistic 'uniforms' being displayed as he described them seemed to draw greater inspirational bias from the outfits worn by predecessors from the agricultural fields and early industries of a century ago.

Whilst this could be a mimicking of the UK's recent youth interest in 1940's Austerity Fashion reflecting the recession (itself generating a reaction of far more upmarket Lawn Tennis. Boating & Golfing Edwardian dress) the sharp difference between West and East was that the British re-interpretation was more of an affectation, whilst the Japanese take (as described) is a more modest, less-affected simplicity. As such possibly far closer to Japan's social history, with thus with greater meaning as a mirror for the current zeitgeist.

As Brûlé highlights, there are commercial concerns from analysts and socio-economic observers about what direction the Japanese consumer takes next, given the additional social 'weight' the Fukushima disaster place upon the social consciousness.

After the 50 year rule of the more conservative Liberal Democratic Party, the (ironically more socially liberal) Democratic Party of Japan took office in 2009, led initially by Yukio Hatoyama and since 2010 by Naoto Kan, the men as youthful leaders seen to be more in step with modern times and global outlook than previous older generation. The cabinet then have the task of re-vitalising Japan on the home-front, an achievement that has been a long time coming, though Fukushima adds a very powerful new dimension.

So as foreign observers wait & watch to view the fortunes of the imported luxury goods market (ie German cars, Italian clothing, French accessories & grooming) so Kan and colleagues must try and orchestrate a lift in the domestic economy. As is obvious, these two actions have corollaries, given that Ministers would rather see local consumption of luxury goods directed at Japanese made items rather than foreign goods which negatively effects the Balance of Payments, something which has become increasingly sensitive because Japan historically ran a soundly surplus BoP account.

The Bank of Japan presently reports that as of Q4 2010-end, the country ran a gross national debt position of ¥211,555bn, this the highest since Q1 2008 in the aftermath of the Triad financial crisis when ¥211,015bn. Critically at that time Inter-company Investment Lending sat at ¥3,417bn whilst in Q4 2010 it sat lower at ¥3,085bn. Also to be noted is the near parallel lending levels in these two periods to Public Sector and General Government in a ¥68,020bn to ¥68,099bn range, showing the desire to maintain a constant, effectively deflationary, control of public spending.

Thus whilst the BoJ obviously acts in the capacity of a notional Central Bank – as seen by its maintaining 0% rates - and clearly not in the role of a national investment bank, the large difference between public sector expenditure and inter-company investment lending is noticeable.

[NB That illustrated 11 quarter time-line, also shows that Japan has sought to maximise its use of the low interest levels available on spot-rate international markets, and so has extended it short-term exposure whilst contracting its long-term].

Yet the question that still stands like the proverbial elephant in the room is how to get the economy moving again, beyond the reconstruction projects in and around the North East.

It has been a long-time public ambition by the state to regenerate domestic private spending, even if privately the BoJ hopes it not too great given the deflationary trend-line Japan still needs to maintain.

Of greatest hope are the large sums of savings that the older generation have secured as what they see as a necessary cash-cushion during these insecure times. The old theme is that these Japanese housewives by virtue of their number and level of savings were central to the foundations of the Yen carry-trade by foreign investors using borrowed no/low interest Yen to invest in other currencies and EM markets. The National Treasury believed that this money which had been either locked into nil-interest bearing savings accounts or 'stuffed under the mattress' by a concerned public, could be put to better use by spending on high-value goods made by Japanese factories.

This impetus was part of Toyota's decision to introduce its Lexus brand into Japan in 2005, some 16 years after its birth and international success story. Interestingly, America's firm import favourite - the Lexus LS400 and siblings - had never been badged as Lexus on home ground, the upscale models used to defend the standing of Toyota's own label on home turf. But the action was taken to both stop defection by Toyota loyalists to Mercedes, BMW, Audi & Range-Rover aswell as to try and attract those domestic consumers that had to date been loyal to the German car-makers. It is believed that the move did indeed stop defection and attracted others, but to what exact degree is not known, more a case of general sector discussion and hearsay. But it is unquestionable that the introduction of the smaller Lexus vehicles, its lead in Hybrid propulsion, and the marriage of these two elements in cars such as the Prius based CT200h has played a role in maintaining Toyota's standing domestically.

In the bigger context, this then could be viewed as part of Japan's own effort to highlight its credibility as a luxury brand and goods provider to its own people.

But the greatest dilemma Japan faces is how it can exploit the obvious creative and increasingly individualistic talents its young people demonstrate whilst simultaneously convincing the economically astute 50 & 60-somethings to part with their savings. However, the older generation infact looks upon today's youth as the spoilt generation living in what seems an ongoing childhood supported by family and state typically into their 30s; so a world-away from their own hard-working, self-denying past that helped build Japan.

The Fukushima aftermath will undoubtedly close the generation gap in the North East where old and young can be part of the re-build in one form or another. Yet the generational chasm that exists throughout the rest of the country and especially so in major cities is the one that attention must be drawn to.

The Japanese government must ironically educate the grey generation as to how its underlings are both very different to themselves yet simultaneously far more fluent in the realities of consume culture and re-inventing it for their own use, aswell as that of their peers and even foreign consumers via a new generation of Japanese luxury brands that have global meaning.

Whilst new bridges are physically build in the Fukushima region, new sociological bridges must be created between old and young across the country, from Hokkaido island in the North to the reaches of Kagoshima on the south island.

That is perhaps the central pillar of Japan's additional economic re-build task.

Post Script

A very brief part PESTEL view provides additional insight of Japan:

It was only in the post-WW2 era that constitutional change devolved power from Emperor and his Advisors to the newly created Diet government. Though infact old 'fuedal' Japan was far more collaborative than generally understood, given that the Emperor's lofty standing as a diety (human god) meant that he typically ratified policy decisions already concluded by his court.

Having moved from a rural-based economy to that of a hi-tech one, the country (in western terms) morphed from an 18th century condition to that of a 21st century persona within a period of 70 years. Such change and growth primarily created by ever higher value manufactured goods and electronics leadership. But this stalled in the early/mid 1990s as a consequence of national 'over-inflation', becoming essentially economically and competitively dislocated from new Asian challengers such as S.Korea, Malaysia, Taiwan etc. The innate over-inflation of the cost-base and value-base created by wage-rate spiralling, parallel cost of living increases, the weakening of foreign currencies whilst the Yen comparatively sored, and perhaps most visible the bubble in Tokyo property prices. These and the whole nation have since the late 1990s been in a process of de-leveraging; trying to continually re-balance the innate cost gap between itself and the world, initially the West, then ASEAN, now China and up-coming N11 (Next 11) EMs.

Social – the once prevelant wholly 'community' directed mentality which stemmed from village life and then transferred into conglomerate corporate life has increasingly wained as family, social and corporate fractures grew, thus instilling a more individualistic attitude amongst the more 'dislocated' young. This also undermined the previously innate deference between young and old. Additionally the necessary deflationary environment and increase in IT-based jobs encouraged greater participation of the female workforce, so changing the systemic roles of both sexes and thus the framework of society.

The following provide a list of recognised Japanese company names to non-Japanese eyes, though these reflect a large proportion of the national GDP output, they only reflect about 20% of the nation's large but effectively unknown corporate names:

Automotive -
Toyota, Toyota Boshuko, Toyota Industry, Honda, Mazda, MazdaSpeed, Nissan, Nagisa Auto, Isuzu, Ralliart, Suzuki, Subaru, Yamaha, Yamaha Motor, Denso, Bridgestone, Autobacs, NGK, Kabuta, Yanmar,

Consumer & Industrial Electronics -
Sony, Matsushita-Panasonic, Brother, Canon, Casio, Hitachi, JVC Kenwood, Konoca Minolta, Makita, Mitsubishi Electric, Mitsui, NEC, Nikon, Nintendo, Olympus, Pentax, Pentel, Pioneer, Sanyo, Sega, Sharp, Sony / Sony Music, Toshiba,

Large Scale Engineering -
Fuji Heavy Industry, Fujitsu, Kawasaki Heavy Industry, Mitsubishi Heavy Industry, Nippon Steel, NSK, Sumitomo Group

Retail -

Food & Beverage -
Sapporo Beer, Asahi Beer, Kirin Beer.

Finance -
Bank of Tokyo Mitsubishi UFJ, Daiwa Securities, Nomura Holdings,

The large Japanese conglomerates which still hold influential control are:

Keiretsu -
(Mitsubishi [Motor, HI, Electric], Kirin Brewery, Nippon Yusen Shipping, etc)
(Sony Corp, Toshiba, Japan Steel, Fuji Photo, Nippon Flour Mills, etc)
(Mazda, NEC, Asahi Breweries, Hanshin & other Railways, etc)
(Nissan, Yamaha, Canon, Ricoh, Asahi Kasei Chemical, Tobu Railway, Matsua Retail)
Dai-Ichi Kangyo:
(Isuzu, Kawasaki, Fujitsu, Hitachi, TEPco, Showa Shell, Japan Metals)
(Suntory Foods, Hankyu & Keisei Railways, Kobe Steel, Cosmo Oil, Hitachi, Ube Ind)
(Toyota, Suzuki, Daido Steel, Ricoh Machinary, IK Petroleum etc)
(Fuji HI [Subaru Cars], Riken Machinery, Nippon Soda Chemicals etc)