A Tale of Two Companies in Asia: Shinsei Bank and Rohm & HaasPublished: January 22, 2004 in Knowledge@Wharton
If anything, those fundamentals may be even more important in Asia because economies there are either developing rapidly, as in China, or restructuring, as in Japan, leaving little room for mistakes. Yashiro and Gupta spoke in November at the Wharton Asia Business Conference whose theme was “Confronting Challenges and Breaking New Ground.” Yashiro helped guide Shinsei, one of Japan’s largest banks, through the transition from bankruptcy to profitability. Gupta has led chemical maker Rohm & Haas during a period of aggressive growth in Asia.
Yashiro’s bank – its name translates as “rebirth” – was initially the Long-Term Credit Bank of Japan. That entity failed in 1998 and was taken over by the Japanese government. In March 2000, a group of investors led by New York-based Ripplewood Holdings bought the bank and subsequently persuaded Yashiro, formerly head of Citigroup in Japan, to come out of retirement to rebuild and run it.
He wasted no time shaking things up. “In our fifth week, a senior person from a major department store came to see me and said, ‘Please forgive half of our loan.’ Forgiveness was quite common in Japan for many years. The banks saw it as a social responsibility to help the customers. But I said, ‘No, we cannot afford to forgive that amount.’ The government took a very serious look at our attitude. I was summoned to the Diet [Japan’s legislature] three times. But I continued to do what I thought was right for the bank.” Yashiro’s action made it clear that he didn’t intend to conform to the old ways of Japanese banking: No more back-scratching or currying favor with government officials. The department store, called Sogo, was forced into bankruptcy.
Similarly, he demanded that the government honor an agreement to assume bad loans from the bank – another politically unpopular move. In theory, regulators had disposed of all the nonperforming loans – loans that borrowers had stopped repaying – during the year they controlled the bank, thereby giving Ripplewood a clean start. “Despite what the government said, we found additional bad [loans],” Yashiro noted. “They ended up being nearly 40% of the total assets … We had to clean up the balance sheet. But after cleaning up the balance sheet, you may have a very clean bank and no business. So we set out to create a retail bank from scratch.”
Before its bankruptcy, the Long-Term Credit Bank had operated much like an American savings and loan. It collected deposits, doled out that money in the form of long-term loans and lived off the meager spread. Intent on creating new streams of income, Yashiro introduced a host of retail products and services. His bank even carved out space in some of its branches for Starbucks and Yahoo! Japan internet cafes. It has rolled out investment banking as well.
Perhaps the biggest change is one that’s invisible to customers – a revamped computer system. “IT is our driver,” Yashiro stated. “It’s the way we can create new business … When I got to the bank, there were 3,000 PCs lying around idle collecting dust. I asked, ‘What are these?’ “They said, ‘PCs.’ I said, ‘I know that, but what are they doing here?’ I learned they had been leased for five years from a big Japanese computer company. Five years – can you believe that? I said, ‘Replace them with the cheapest, fastest machines—Dells,’ and I’m not paid by Dell to say that.”
An outdated mainframe computer hobbled Shinsei as well. An American computer consultant claimed that the bank hadn’t spent enough on IT and that its problems would disappear if it simply muscled up by plowing money into the latest computers. “That’s absolutely wrong,” Yashiro said. “It’s not about money. It’s about design. My IT executive asked me, ‘How much money do I have to replace the old system?’ I said, ‘As little as you can think of.’ In one year, we completely changed the IT system, and it cost only $50 million.”
Yashiro’s changes have paid off. Shinsei expects to report earnings of $600 million for the fiscal year that ends in March and is planning an initial public stock offering in early 2004.
Gupta’s company, too, has restructured in Japan over the last several years. Rohm & Haas started in the country in the late 1940s with a joint venture because, at the time, that was the conventional approach. By 1990, it had three Japanese joint ventures as well as wholly owned plants in Australia, New Zealand and the Philippines. Sales in Asia accounted for 6% of the company’s total.
In the last decade, Rohm & Haas has acquired and restructured its joint ventures because it wasn’t satisfied with their performance, according to Gupta. Compare that with the company’s strategy in China. “In China, we decided to go with majority-owned subsidiaries, brand new sites, and people who were recruited and trained by us,” Gupta said. “In the last 10 years, we have grown from about 100 employees to 1,000 employees and from one site to seven.”
Partly as a result, Asian sales now account for about 20% of the company’s $5.5 billion in annual revenue. By 2010, Gupta expects at least 30% of its sales to come from Asia. Rohm & Haas currently has 22 Asian sites – seven in Japan, seven in China and eight elsewhere. The company, which employs about 17,000 people worldwide, lost $570 million, or $2.57 a share, in 2002, after a one-time accounting charge. Its stock, which trades on the NYSE, has gained about 25% this year.
Ultimately, Gupta said, Rohm & Haas’ challenges in Asia are the same challenges it faces in the rest of the world – recruiting and retaining local talent and growing profitably. “At the end of the day, our business, like most, is all about people. And my challenge is to recruit, retain and reward the very best. What we also must do every day is ensure that the highest standards of ethics and integrity are maintained. Reputations, once lost, are very hard to rebuild.”