T O UNDERSTAND WHY it was a shock last month when Berkshire Hathaway invested $6.5 bn in 5 Japanese trading houses that have actually been around for far longer even than its 90- year-old chairman, go back to a talk Warren Buffett offered to business trainees in Florida in1998 As a sprightly sexagenarian with his sleeves rolled up, the Sage of Omaha was at his amusing– and wicked– finest.
The first concern he fielded had to do with purchasing Japan. He responded that the country’s 1%interest rates made it look appealing. Nevertheless, he thought about Japanese firms poor bets since of their poor returns. Low-profit businesses could be worth buying based on what he called the “cigar-butt” method. “You stroll down the street and you browse for a cigar butt someplace. You see one and it is soggy and kind of repulsive, but there is one puff left in it. So you choose it up and the puff is free.” Not even this theory would draw him to Japan Inc, the pride of the nation’s post-war revival, he described. It is tough to think about an analogy more distasteful in a spick-and-span nation like Japan.
Some 22 years of rock-bottom rates of interest later, Mr Buffett has lastly overcome his stogy-phobia. Berkshire’s financial investment in 5?ch of Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, though small relative to his financial investment company’s $140 bn mound of money, was its greatest outside America. It said its stakes might increase to as much as 9.9%over time. The acquisitions were a head-scratcher. What, if anything, had changed over the past few decades to make the trading houses appealing suddenly? Or had Mr Buffett simply succumbed to the temptation of a few cheap puffs due to the fact that cash was burning a hole in his pocket?
In the beginning look, the acquisitions make it look like he has actually lost the plot. The trading homes, or sogo shosha, travesty a number of the investment principles he has actually stuck to all his life. He states he likes easy-to-understand organizations like Coca-Cola and Apple. He argues that companies need to not just be inexpensive but have dependable returns– and, preferably, “moats” to keep competitors at a safe range. On each count the trading homes stop working dismally.
Start with simpleness. In Western eyes no Japanese company is a model of Anglo-American investor industrialism. However few seem as far-removed from it as the trading houses. They are shaped by history, which dates back to the 19 th-century zaibatsu and post-war keiretsu system of corporate loyalties and cross-shareholdings. In the contemporary era their business designs have twisted and turned. From the 1950 s to the 1980 s they served as go-betweens, searching the world for energy, metals and minerals, helping to underpin Japan’s economic wonder. They invested in mines and hydrocarbons to feed the China-led commodities boom before shifting “downstream”, buying whatever from benefit shops to cable television business. At the same time they accumulated possessions much faster than they sold them. The results are unwieldy. Mitsubishi peddles everything from coking coal to Kentucky Fried Chicken. Itochu, the most lucrative, calls its customer division the 8th Business, indicating it has actually lacked names after seven other systems.
What about returns and value? Undoubtedly, the trading companies are low-cost. Of the five, just Itochu trades at a market price greater than the book worth of the net assets on its balance-sheet. That is not to state they are a deal, however. Kikkawa Tatsuya of JPMorgan Chase, a bank, states their low-return tradition assets, which in some cases suffer huge write-downs, increase investors’ understanding of threat. Their complexity raises their expense of equity, which is higher than for more focused products producers, such as ExxonMobil or Rio Tinto.
And After That there is the traders’ competitive position. Perhaps Mr Buffett is wagering that as a venerated business species in Japan, the sogo shosha‘s survival is safe. But as individual companies, their returns recommend they have absolutely nothing like the moats of other Berkshire stalwarts. They are each other’s bitterest competitors.
Look below the surface, however, and there might be an approach in Mr Buffett’s madness. As he admitted in 1998, his view on Japan could alter if supervisors ended up being “more shareholder responsive”. In recent years they have, even in the trading homes, which when viewed business governance with contempt. Zuhair Khan of Union Bancaire Privée, a Swiss bank, states views began to change as a result of shareholder-friendly reforms promoted from about 2014 by Abe Shinzo, who stepped down as prime minister previously this month. In some trading houses, executives purchased big amounts of shares to align their interests with those of other investors. Pay ended up being more performance-based. The focus moved from investing to generating cash and intensifying dividends. The pandemic is expected to slow however not hinder the trend. Suga Yoshihide, Mr Abe’s follower, looks crazy about more procedures to empower investors, Mr Khan states.
Mr Buffett may see other attractions. He likes energy companies, and all the trading houses, particularly Mitsui and Mitsubishi, have big energy businesses. They stand to benefit from a post-pandemic economic rebound that boosts demand for power. The companies are likewise wellsprings of talent. Jeremy White of Baker McKenzie, a law practice, says they keep a tradition of hiring from the very best Japanese universities, and competing financial investment banks and tech firms as the most prestigious companies to work for. And if anybody can find their method around bewildering corporate organigrams and balance-sheets, it should be the people behind Berkshire Hathaway, America’s most significant financial conglomerate.
Stogy? Or just stodgy?
It is no sure thing. History is cluttered with fortunes lost to the belief that Japanese firms can end up being more Anglo-Saxon. If that is the case, Berkshire’s shareholders will rue Mr Buffett’s nonagenarian experience. If, by contrast, his financial investments strengthen a view taking root in Japan that shareholders, domestic and foreign, are a constituency worth defending, he will deserve a fat Cohiba. ■
This article appeared in business section of the print edition under the heading “Lighting up Japan Inc”