In February, after Nissan Motor took the radical step of putting itself up for sale, chief executive Yoshikazu Hanawa was asked whether he would consider breaking Japan Inc.'s long-standing taboo and fire workers to cut costs. His answer to Time: We'll handle the employment issue carefully. Last week, the country's second-largest carmaker announced that it would shut five plants, cut ties to hundreds of suppliers and--gasp!--let go of 21,000 workers. Hanawa's explanation: We don't have other alternatives. To survive, we must do this.Hanawa isn't the only Japanese business leader to have seen the light. In recent weeks, a number of high-profile corporations have said they will sack staff, shed suppliers and sell subsidiaries. Two large banks, Sakura and Sumitomo, will merge after decades of fierce rivalry: they have already announced the axing of 9,300 jobs. Another bank merger, involving Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan, is expected to occur within the next few years, at the cost of perhaps 6,000 jobs. Sony and telecommunications giant NTT have begun major downsizing, and Toshiba is abandoning many unprofitable subsidiaries. Each announcement chips away at the foundations of Japan Inc., striking at traditions that many Japanese hold sacred, like lifetime employment for all workers and the cozy networks of interlocking businesses and banks known as keiretsu.
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It's too early to call this a full-scale revolution: there are still plenty of adherents and champions of the old ways. Last week, Prime Minister Keizo Obuchi warned Nissan that it should think hard about the impact of its drastic cost-cutting program on workers and subcontractors. And investors, skeptical that Nissan can actually implement its restructuring strategy, drove the company's stock down 12%. Indeed, some suggest Hanawa himself is a reluctant reformer, that his hand has been forced by Nissan's new partner, Renault. Many credit Carlos Ghosn, the executive seconded to Nissan by the French carmaker, with masterminding the bold revamp. Only a foreigner could make such changes, says Yukio Noguchi, an economist at the University of Tokyo. No Japanese could solve the problem because of the keiretsu and its employees. The chairman of rival automaker Toyota, Hiroshi Okuda, predicts Nissan's far-reaching plans will be difficult to carry off. Companies that fire employees simply because of an economic downturn will lose the trust of workers and eventually lose the competitive edge, he told the Japanese press.
One can forgive the doubters. Promises of reform have been made repeatedly before. Scripts for a new Japan have been written and re-written. In Japan, everything continues for as long as it can continue, says Akio Mikuni, president of a credit-rating company. Most people don't get excited when they see 'changes' taking place, because usually we end up disappointed. Indeed, there are still structural impediments to a dramatic overhaul of Japan's corporations. Accounting systems aren't transparent, bankruptcy laws are inadequate, the judicial process is slow. And, astonishing as it may sound, Japan simply doesn't have enough accountants or lawyers to cope with massive corporate restructuring.
Cautiously, then, analysts are watching to see if the recent flurry of corporate remodeling is the real thing. The pace is picking up, says Brian Rose, senior economist at Warburg Dillon Read in Tokyo. He expects the mergers to trigger something of a domino effect. As banks consolidate, the keiretsu will disintegrate. Stronger companies will no longer need to rely on allied banks for capital; weaker firms will find themselves without banks to depend on.
If that scenario pans out, it will mean an end to ways of doing business that date back to the early part of this century, when Japanese companies were grouped as zaibatsu (the precursors of today's keiretsu) and backed by the government. These powerful business alliances supplied Japan's war machine, and they survived attempts to dismantle them during the post-World War II U.S. occupation. We used it to our advantage then, with every worker cooperating and getting together for a single-minded purpose, says economist Noguchi. The problem is, the technology changed but our system didn't. The keiretsu face their biggest threat yet, the Internet, as manufacturers worldwide are starting to click directly on to supply routes that are fast, cheap and eliminate middlemen.
In recent years, Japanese companies have repeatedly opted to shield one another from the need to change. The keiretsu tend to protect their money-losing businesses. Nissan is a good example. It has been using barely half of its manufacturing capacity and yet supporting a large network of suppliers that have little incentive to offer competitive prices. Despite declining market share and sales, nobody dared tinker with the system, despite its stunning inefficiencies. Keiretsu ties are extensive and touch every part of the lives of a group's employees. At Sumitomo Bank, for example, staff are encouraged to drink only Asahi beer because the brewery is in its keiretsu. Some business groups even have marriage counselors who help young employees find mates from within the keiretsu.
The decline of these groups is being hastened by powerful new forces. Foreigners are now allowed to invest in long-shielded sectors of the Japanese economy, like brokerages, banks and insurance companies. An invasion of the financial sector is also under way. A Western consortium, Ripplewood Holdings, is buying the Long-Term Credit Bank of Japan. On a visit to Japan earlier this month, General Electric Co. chairman Jack Welch, whose GE Capital is one of the Ripplewood investors, gave a clue as to what he has in mind: It's an abuse of management rights to try to keep a weak business going in the name of lifetime employment. It's better for the employees to leave the weak business and have it merged with a stronger company.
Japan's workers are growing familiar with that sort of warning. Unemployment has reached a post-war high of 5%, and large-scale layoffs have just begun. I meant to work here until my retirement, says Masahiro Yoshino, 48, riding a bus from the Nissan plant that makes hatchbacks in the Tokyo suburb of Murayama, one of the factories Nissan plans to shutter. He has put in 28 years at the automaker but says he will quit rather than accept an expected transfer to another plant that would be a two-and-a-half hour commute from his home.
Some company men aren't waiting for the inevitable. Yasufumi Takahashi, a trader in precious metals at Nissho Iwai, has enrolled in a class to study financial planning. The trading house suffered huge losses last year, slashed salaries and announced it would cut at least 1,000 employees--nearly a fourth of its workforce--by March 2002. Takahashi, 31, saw his income fall 20%. He fears it might drop further and that he may even lose his job--hence the financial-planning course. I thought I'd work here a long time, he says. But there have been a lot of bankruptcies, mergers and acquisitions, foreign investors coming in. The situation in Japan has to change. At Nissan, it already has.
With reporting by Donald Macintyre, Sachiko Sakamaki and Hiroko Tashiro/Tokyo