Since the golden age of the late 1980s, Japanese financial institutions have not lacked ambition, but they also have never become true global players. Now, just as in the 1980s and 1990s, Japanese banks, insurers and securities companies are expanding overseas, following their domestic clients and seeking more profitable business than can be found in their shrinking home markets.
The earlier international ventures largely ended with financial companies selling most of what they had bought in the 1990s. Even the handful of globally successful financial services companies like Tokio Marine Group and Mitsubishi UFJ Financial Group are still not truly global players, never having put a foreigner on their boards of directors or in senior management at their Tokyo headquarters.
Industry experts attribute the difficulties Japanese financial institutions have in globalizing to various factors, including a lack of foreign language ability and a very closed culture that is reluctant to accept or deal with things different or foreign. The huge gap between salary levels in Japanese and Western financial institutions also makes it hard for Japanese companies to attract and keep foreign talent. “Many failures of Japanese M&A are due to a lack of ability of Japanese executives to handle local management well,” says Ryuji Yasuda, a professor at the Graduate School of International Corporate Strategy at Hitotsubashi University in Tokyo.
This lack of facility with the ways of the world may surprise some. After all, as one of the top two global automakers, Toyota exports first-rate vehicles and production processes. The Japanese services sector is second to none in many respects, especially when it comes to meticulously anticipating the demands of finicky customers.
But that attention to quality and detail appears not to apply in the financial sector. Nomura Securities, Japan’s giant brokerage and investment bank, and Japanese insurer Nippon Life Insurance, for example, have failed to market effectively overseas. Now that Japanese financial institutions, including small and medium-size regional banks, are expanding in Asia and overseas, is there any hope for them to succeed this time around and become real global players?
Tokio Marine Group is one of a handful of Japanese financial institutions that have made significant headway in expanding overseas. One key factor in that success was the insurer’s decision to localize its management in the U.S., Europe and Asia. Mitsubishi UFJ Financial Group likewise has been running UnionBankCal in the U.S. for more than two decades. But when Nomura tried to localize its Asian and European businesses after buying Lehman Brothers’ Asian and European units in 2008, it failed. “Nomura acquired Lehman Brothers’ Asian business and European business and had to integrate them into Nomura,” says David Threadgold, managing director of Keefe, Bryuette & Wood in Tokyo and veteran financial industry analyst.
Tokio Marine Holdings, a major non-life and life insurance company, bought Philadelphia Consolidated Holding, a U.S.-based property and casualty group, in 2008 and made it the company’s U.S. holding company. “We put the top management team in Philadelphia in charge of the holding company, which also manages Tokio Marine’s own operations and another unit in Hawaii,” said a senior executive of Tokio Marine Holdings. Tokio Marine also bought Kiln, a U.K.-listed Lloyd’s insurance group member, in 2008 and Delphi Financial Group, a U.S.-based life insurance and casualty group, in May 2012.
“Tokio Marine is the most successful company among life and non-life insurers in terms of globalization,” says Teruki Morinaga, a director and insurance analyst at Fitch Ratings in Tokyo. “They bought good companies in the U.S. and the U.K. and were able to motivate their local management very well. The overseas revenue contribution to Tokio Marine group is fairly big because they bought companies in a big market like America or England, and were able to run them well.”
Although the company had some failures in the 1980s and 1990s, it learned from them, Morinaga adds. “I think Tokio Marine is a model for other insurance companies to follow for overseas M&A.”
Nippon Life Insurance, Japan’s biggest life insurer, also got burned during its earlier foray into international markets. The insurer became a major market mover after buying huge amounts of foreign bonds and stocks in the 1980s and snapping up pricey Western art and real estate. But Japan’s life insurance industry began to crumble as the country’s financial bubble burst, and seven Japanese life insurance companies have gone bankrupt since 1997. These days, Japanese insurers like Nippon Life are not interested in expanding overseas because they enjoy the privilege of earning the highest margins in the global industry, thanks to premiums two or three times higher than in the U.S. or UK.
Tokio Marine’s strategy was to be a supportive partner of its overseas affiliates, allowing the U.S. and British management to run the companies, Threadgold notes. This may stem partly from the company’s long history of operating in overseas markets due to its involvement in marine and cargo insurance, Morinaga adds. Just a year after it was set up in 1879, Tokio Marine Insurance was already operating in Britain, France and the U.S.
Tokio Marine Group began buying non-life and life insurance companies in Asia in 2000, and in the U.S. and Europe from 2008. Today, about 22% of its net insurance premium income comes from overseas. All of Tokio Marine’s five life and 10 non-life insurance companies managed by Tokio Marine Asia, except one, are run by local management with local CEOs.
This contrasts with the tendency among most Japanese companies to send top executives from Japan to manage their foreign operations, because even their overseas operations are focused mainly on serving their Japanese clients and because they have a tendency not to trust local management.
At the same time, Mitsubishi UFJ Financial chose to send top Japanese executives with strong management and international experience, and strong communication skills, to Union BankCal, which it acquired over many years beginning with then-Mitsubishi Bank’s purchase of the Bank of California in 1984. Four years later, Mitsubishi Bank merged with the Bank of California, which later merged with Union Bank to form the Union Bank of California. The merger of Mitsubishi Bank and the Bank of Tokyo in 1996 created the world’s largest bank, Bank of Tokyo-Mitsubishi UFJ, a wholly owned subsidiary of Mitsubishi UFJ Financial Group, which acquired the still outstanding 35% of Union BankCal, completing the acquisition.
The senior vice president that Mitsubishi UFJ appointed to be president of UnionBank had strong management skills, says Yasuda. “It did not matter even if he did not understand retail banking because all he had to do is to manage the local management team.”
The degree of Japanese managerial involvement can vary, though, depending on the types of companies involved. “Mitsubishi UFJ’s main purpose in buying Union BankCal was to use it as an acquisition platform to buy other banks in the U.S.,” Threadgold says. One such purchase was the Santa Barbara-based Pacific Capital Bancorp, acquired in March 2012. A Mitsubishi UFJ senior executive said the bank would like to expand its U.S. business further by acquiring some U.S. regional banks.
Other Japanese banks, such as Sumitomo Mitsui Financial Group and Mizuho Financial Group, also are keen to buy out U.S. and Asian banks to expand their overseas business as they increase their international lending. “Recent moves into overseas markets represent the second push by Japanese banks, which stepped up overseas strategies during the bubble economy from the second half of the 1980s until the start of the 1990s,” Ken Takamiya, a Japan bank analyst at Nomura Securities Co. Ltd., wrote in a report titled, “Overseas Strategies of Japanese Financial Institutions.” He said that Japanese banks and other financial companies appeared to have learned lessons from previous failures to gain a foothold overseas either geographically or in operational terms. “In this re-exploration or re-entry phase … we think that risk management is much better this time around,” he wrote.
So why did Nomura fail? Nomura’s purchase of failed Lehman Brothers’ businesses in Europe and Asia during the 2008 financial crisis was viewed as something of a coup. Nomura hoped the acquisition would win its entry into the elite group that competes with global investment banks. But the Japanese company has struggled, with nine consecutive quarterly losses at its operations outside Japan, in part due to the tough business conditions prevailing thanks to the European debt crisis. Hefty fixed expenses — mainly huge pay packages for Lehman bankers — have also eroded the company’s bottom line.
Eventually, after the departures of top foreign Lehman veterans, former Nomura chief executive Kenichi Watanabe, who had sought to turn Nomura into a global investment bank, resigned. Nomura announced US$1 billion in cost cuts in August 2012 as it retreated from its plan to become a global financial player.
Both financially and culturally, Nomura may have bitten off more than it could chew. The staunchly Japanese company likely found integrating Lehman’s Asian and European businesses into its own difficult, if not impossible, Threadgold notes. “Investment banking is a global business. The problem with that is you have to change your culture at the center. That is terribly difficult.”
Other experts note that Nomura was unable to succeed because it could not buy the most important Lehman units, namely those in the U.S. “New York is the most important global business center for investment banks, but Nomura only was able to buy Lehman’s units in Europe and Asia,” says an expert on the Japanese financial industry.
More generally, another big problem in these situations is the huge difference in salaries and other employment policies between Japanese and global financial institutions. Unlike the highly disciplined, relatively modest players in the Japanese financial sector, international investment bankers are highly mobile, strong-willed individuals with very high expectations. “Often, you depend on a small number of sometimes extremely difficult people, who expect to be paid enormous amounts of money, or they are prima donnas who might take their business elsewhere,” Threadgold said.
Nomura’s thoroughly Japanese human resources approach is more akin to Toyota’s. That works in manufacturing but not in global investment banking, says Franklin Allen, a Wharton finance professor. In manufacturing, “you do not need to have high-powered incentives. You can have a fairly egalitarian, flat compensation structure.” Finance is an entirely different ball game. “In many places, successful financial companies have very high-powered financial incentives, so top traders can earn hundreds of millions of dollars. Top investment bankers can make sums which are inconceivable in Japan in most industries and financial services,” Allen points out.
Nomura’s chief problem with the Lehman units was the disparity in pay. The Lehman employees had guaranteed bonuses for the first year or two, but once they ran out and Nomura cut high compensation packages paid to the Lehman employees, they left. Says Allen: “How much do top Nomura people make, as much as US$2 million or US$3 million? In Japan, that would be a lot of money, but it is not big money in the rest of the world. If you look at the heads of financial services companies in the U.S., they are making much more than Nomura people. They make US$50 million to US$60 million a year.”
Ultimately, the fundamentally conservative approach of Japanese financial institutions and their different corporate objectives have hindered their expansion overseas. “U.S. financial institutions are very global in the sense that they allow a lot of nationalities to be their CEOs. Citigroup had an Indian CEO until recently. I could not imagine a Japanese firm having an Indian CEO,” Allen notes.
Yasuda agrees, and adds that, likewise, the Japanese have not excelled in overseas banks and other financial institutions. “There is no Japanese top executive at any global financial institution in the world. Why is it that there are so many Chinese and Indian executives?” he asks.
Part of the problem is the general Japanese lack of facility in foreign languages, though given the number of urbane, English speaking Japanese diplomats and business figures, that cannot entirely explain the situation. “Financial services are very much a global business, done in English, with all different nationalities. We have CEOs of all different nationalities. Japan has not got into that mode yet,” Allen says.
Masamichi Adachi, a senior economist at JP Morgan in Tokyo, says the reluctance stems from a lack of confidence. “Japanese financial institutions think that they will have problems if they have foreigners as board members or senior executives…. If they had real ability and confidence, they would not be afraid of those with different opinions or those from different cultures.”
So far, Japanese universities have failed in their efforts to cultivate truly international executives, despite setting up new special schools that teach only in English at Tokyo University and other top private universities like Waseda University.
“They are not successful because many teachers are not really good at teaching in English and tend to read from notebooks,” said a finance professor at Waseda University, who declined to be named. “In Europe now, many colleges teach undergraduate courses in English. But Japan is a long way from that, too,” Allen notes.
Yasuo Kofuji, a finance professor at Sent University, says the issues extend well beyond language ability to an inability to socialize comfortably with non-Japanese. “Even if they are good managers in Japan, they are not able to communicate well with local staffs,” he points out. “We may have to let local management run the businesses rather than trying to control local people.”
From a foreign perspective, the list of the World’s Most Attractive Employers 2012’s Global Top 50, by Universe, a Sweden-based consulting company, includes Sony (ranked 15th) and Toyota (45th) but does not list any Japanese financial institutions. However, many Western financial institutions are included, such as J.P. Morgan, Goldman Sachs and Morgan Stanley.
In a paper titled, “Can Japanese Financial Institutions Take on the Challenge of Globalization 3.0?” Yasuda suggests that Japanese financial institutions must hire more senior foreign executives, as well as more Japanese with experience at foreign financial institutions overseas, to help make their management more global minded. Those Japanese know Japan but have succeeded in global financial institutions.
An apt role model would be Deutsche Bank, Yasuda says. “They have foreign board members and conduct meetings in English. Japanese financial institutions may want to become more like Deutsche Bank in the future.”