Mitsubishi’s Long-Lived Success Points to Weakness in Japan’s Economy

Author: Eric Pfanner and Atsuko Fukase
Originally posted: The Wall Street Journal

TOKYO—They’re building Japan’s tallest skyscraper, manufacturing its first commercial jetliner and trying to sell stealth submarines to Australia for some $38 billion.

The companies of the Mitsubishi group are capitalizing on the big projects that Prime Minister Shinzo Abe hopes will restore national pride. The prominence of the nearly 150-year-old group points to the stability of Japan’s corporate titans and their ability to steer through wars, financial crises and technological change.

At the same time, the concentration of capital and talent in a single set of companies underscores the difficulty the premier faces in generating dynamic, modern businesses capable of getting Japan’s economy growing again. Two decades into the digital era, Japan is struggling to generate new champions that would create high-paying jobs in Internet services and health care.

Fewer than three in 10 of Japan’s top 300 companies have been created since the 1960s, a study last year by the Organization for Economic Cooperation and Development found, compared with nearly eight in 10 for the U.S. Mr. Abe recognized the problem on a visit to Stanford University last year, when he said his country needs to “capture the dynamism of Silicon Valley and bring it to Japan.” He added, “The companies that can’t adapt need to withdraw themselves from the market.”

Change has come slowly in part because of the nation’s labor market, in which many university graduates enter companies with lifetime-employment jobs that they are loathe to give up. Also, Japan’s long-sluggish economy tends to perpetuate its ills by discouraging risky ventures, prompting the Bank of Japan recently to introduce negative interest rates to spur more aggressive lending.

“It isn’t necessarily Mitsubishi’s fault, but it does sort of suck out the oxygen,” says William Saito, a U.S. entrepreneur who advises the Japanese government on tech policy.

In businesses ranging from banking to brewing, the two dozen or so core companies in the Mitsubishi group have combined annual sales of some $500 billion;—roughly twice the figure for Toyota Motor Corp., Japan’s biggest company by revenue.

The Mitsubishi firms are technically independent, and there is no single Mitsubishi holding company. Rather, the firms are linked more loosely by cross-shareholding and traditional ties. A committee representing group companies controls the use of the Mitsubishi name and its three-diamond logo.

Mitsubishi’s group structure and financial strength can ensure that lagging members survive and, in some cases, put off tough decisions. Several group companies stepped in with a $4 billion bailout in 2004 when Mitsubishi Motors Corp. ran into financial trouble after a series of safety scandals, a move that has helped keep Japan’s auto industry crowded with midsize manufacturers.

In general, Japan’s largest companies face little threat of being elbowed aside by local upstarts. Only three publicly traded companies went bankrupt in 2015, according to Teikoku Databank—less than 0.1% of the total compared to dozens every year in the U.S. While bankruptcies aren’t good in themselves, their near absence suggests that in Japan there are few emergent companies with new technologies driving out established players.

That makes it hard for Japan to keep up with nimbler economies, says Ulrike Schaede, professor of Japanese business at the University of California, San Diego. “In order to compete today, you don’t need insurance, you need innovation and profits,” she said.

Analysts and Mitsubishi employees say the group thrives in part because its company heads excel at reading the direction of the official winds. Under Prime Minister Abe, that has meant a stress on industries that can boost Japan’s exports of industrial goods. A group spokesman declined to comment.

The latest example is in Australia, where Mitsubishi Heavy Industries Ltd. is the lead company in a Japanese alliance that is vying with competitors from France and Germany to build submarines for the Australian navy. The sub deal would be Japan’s first big overseas arms sale since Mr. Abe eased postwar restrictions on military exports.

Shunichi Miyanaga, Mitsubishi Heavy’s chief executive, says that if Japan gets the deal, his company can channel investment to Australia from other Mitsubishi companies and business partners. “We can be a very efficient mediator,” he said in an interview.

Mitsubishi Heavy is also the majority investor in Japan’s first commercial jetliner, called the Mitsubishi Regional Jet. The 70-seat to 90-seat passenger plane is set to join U.S., Japanese and other airline fleets over the next few years after a series of delays.

After the plane’s first flight last autumn, Mr. Abe’s top lieutenant, Chief Cabinet Secretary Yoshihide Suga, spoke of a “new dawn for Japan’s aviation industry” and promised official support for Mitsubishi’s efforts to sell the plane globally.

Mitsubishi Estate Co., which bought New York’s Rockefeller Center in 1989 and later sold it at a loss, plans to build Japan’s tallest skyscraper at 390 meters (1,280 feet) in time for the 2020 Olympics.

Before World War II, Mitsubishi was one of Japan’s giant industrial conglomerates, called zaibatsu. Gen. Douglas MacArthur broke up Mitsubishi into dozens of companies during the U.S. occupation of Japan. The companies later re-established their group in looser fashion, taking stakes in each other of usually less than 5%.

Chief executives of Mitsubishi companies gather for a closed monthly meeting, called the Friday Club, in Tokyo’s Marunouchi business and finance district. Mitsubishi Estate owns more than 40 buildings in the area. Attendees say lunch is usually a simple bento box or Japanese curry and talk centers around general subjects, not specific business deals.

“They don’t have to deal with the nitty-gritty,” says UC San Diego’s Prof. Schaede. “Function No. 1 is, ‘Let’s see if anyone has cold sweat on their forehead.’”

Other ties bind Mitsubishi employees lower down the ranks, such as a matchmaking service to help Mitsubishi group employees find a partner without leaving the fold. At the weddings, beer from group member Kirin Holdings is de rigueur.

Mr. Miyanaga, the Mitsubishi Heavy CEO, said the links between Mitsubishi companies are sometimes overstated, citing his firm’s power generating equipment partnership with a company outside the group Hitachi Ltd.

Mitsubishi companies “share a kind of business ethics,” he said. “Of course, if we find a very good opportunity to cooperate or work together, in such cases the tie or the working manner is a little bit stronger because of this kind of shared business ethics and brand.”

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