Japanese Firms to Benefit from Strong Airbag Sales

One area of the auto industry that may grow faster than actual vehicles is airbags. Two recent developments brighten the outlook for this industry segment. First, Toyota announced in July that all of its models sold in Japan will be equipped with side and curtain airbags. Second, the US NHTSA will gradually mandate side/curtain airbags beginning September 2009. This will triple the cost of airbags for each car compared with current levels with just the requirement of front seat bags.

There are essentially three airbag providers for the Japanese auto industry: Takata (7312), Toyota Gosei (7282), and Nihon Plast (7291). Among them, Takata may benefit most since 47% of its sales come from outside Japan. Because vehicles of the U.S. Big Three are less likely to be equipped with side/curtain airbags compared with Japanese cars, the NHTSA mandate should have a relatively strong impact on Takata.

The Problems of Japanese M&A
FinanceAsia has published a long, excellent aritcle on Japanese M&A. Among its many salient points:

(1) Equity capital markets in Japan are contracting while debt markets stay steady. The reason is that companies don't want to increase their freefloat and thereby allow potential acquirers get their hands on any ownership.

(2) At the same time, M&A in Japan is not doing badly, up about 10% year over year in the April-September period to about $400 billion.

(3) Still, the numbers for calendar year to date are flat, and any recent increase is from a relatively small base. Japan doesn't like the mass firings that often accompany M&A, and managements don't think mergers are good for company or staff. Japanese managements feel less obliged to reward shareholders with high stock prices.

(4) Partly because of the lack of emphasis on share price, Japanese firms see themselves as targets rather than equal players. They point out that their market caps are relatively low, which makes them vulnerable to takeover; correspondingly, they also lack the muscle to be acquirers.

(5) The somewhat-heralded new triangular mergers law has for now turned out to be mostly a bust. Although the big takeover of Nikko Cordial by Citi was indeed such a merger, the code regulating domestic M&A is actually far more convenient.

(6) The article's conclusion is that, while Japanese M&A will continue, there won't be a big spike of large, international deals. "...It will be successful Japanese companies offloading their subsidiaries or buying profitable new ones (“Domestic, friendly, inter-and-intra group” as the EIU puts it)."

The big problem I see in Japanese M&A is that, as the article states, M&A has traditionally meant lopping off a whole bunch of people to produce efficiencies and cost savings. In the US we accept that, more or less, for a variety of reasons -- we believe no job lasts forever, our unions aren't strong, job markets are fluid, etc. In Japan, people who get laid off don't believe they are soon going to get comparable work, and they are right.

Add to that the sense of Japanese managers (and apparently domestic shareholders) that stock price isn't the be-all and end-all; that foreign firms like Steel are predators taking advantage of the mispricing of Japanese companies; and that acquirers should add something more to the mix than just boosting shareholder value, and it's little wonder that M&A sits uncomfortably with many Japanese.

Overseas acquirers will need to devise new strategies if they want to allay these misgivings. These methods could include promises to keep staff on or finding them new jobs, investing cost savings in communities and environmental enhancement, or putting new money into the business. One way or the other, overseas acquirers will need to recast their current image of invading capitalists if they are to enjoy success in Japan.

Privatization of Japan's Post Office Begins
On October 1, the privatization of Japan's postal services was officially inaugurated. Under the umbrella of the new Japan Postal Holdings there will be four separate companies for mail delivery, banking, life insurance, and over-the-counter services. Japan Post Holdings is currently 100%-owned by the Government, but its interest in the bank and insurance companies will decline, with the aim of stock listings by 2009 at the earliest.

The Japanese post office is a colossus with 250,000 employees, 24,000 post offices, 400 million accounts, and $3 trillion in savings and insurance policies, more than half of that in deposits. Its 26,000 ATMs is three times the number of Mitsubishi UFJ, Japan's biggest bank.
During the four months ending July, the post office sold Y1.1-trillion worth of Japanese stock, apparently in an effort to show a profit in its last reporting period before privatization began.

The sales are considered one reason why Japanese equity markets stayed low this summer. However, under privatization, investments in equities are likely to increase to achieve higher returns. Even if the vast majority of assets under management remain invested in low-risk government bonds, the small portion allotted to equity investments may help to move the market higher.

Questions remain, however, about the ultimate path and effect of privatization, including:

Will the Japanese government actually relinquish control of the postal system? If the government keeps a one-third ownership in Japan Holdings, as it is likely to do, and if Japan Holdings maintains its investments in the banking and insurance divisions, Tokyo will continue to exert de facto control over how the country's savings and insurance contracts are invested.

Will the new entity entice more Japanese to invest in equities? Although buying mutual funds may be made easier and more convenient, middle-aged Japanese remember well the collapse of the stock market in the early 1990s and remain reluctant to put their money in stocks. Privatization may not do much to alter their conservative investment stance. On the other hand, if the new entities decide to invest more of their assets under management in stock, that will be a bull factor for the equity markets, just because of the huge amounts of money involved.

What will be the impact on other financial institutions? Japan Post has already announced plans to team up with Suruga Bank to offer mortgages in the Tokyo area. The banking and insurance companies will gradually enter other financial businesses, increasing pressure on Japanese banks. Private companies are worried that Japan Post entities will be able to offer de facto assurances on which they can't compete and will enjoy unfair tax and regulatory treatment.

On the other hand, commercial banks are improving their services and extending their hours, exactly the kind of steps that proponents of privatization anticipated. As the Economist notes, "a little competition goes a long way."