Terrie's Take: Invest Tokyo Looking Under the Wrong Rock, Whaling, Novartis, Apple, Loans, and Weapons!
Terrie’s Take is a selection of Japan-centric news collected and collated by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:
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Terrie’s Take on March April 7, 2014
- Invest Tokyo Looking Under the Wrong Rock?
- Government-sponsored whaling to disappear
- Novartis swaps out its senior management team
- Apple to buy Renesas?
- Plenty of cash, fewer lenders
- Rules change to permit weapons exports
Invest Tokyo Looking Under the Wrong Rock?
On Friday morning we received a large envelope bearing the Tokyo Metropolitan Government (TMG) seal. Puzzled as to what it might be, we opened it to discover a packet of information from Accenture, the consulting firm, covering the latest push by both parties to get the foreign community interested in investing in Tokyo. In case you're not aware of the Invest Tokyo program, it is TMG's attempt to restore the population of foreign firms lost to the Lehman Shock and subsequently the 3/11 earthquake. The program was started last year (2013) and has been strengthened by the confirmation by the national government that Tokyo is now a Special Zone for deregulation and economic improvement. Tokyo's Special Zone purpose is to serve as the headquarters for multinationals active in Asia.
The packet included equal amounts of Japanese and English-language documentation, but surprisingly not other languages. We suppose that most senior managers in multinationals of a meaningful size (except possibly Japanese ones) can understand English pretty well. But still, if you're a native of some other country, we think it is smart marketing to put some form of address in those peoples' languages as well.
The Invest Tokyo value proposition essentially comes in three parts: subsidies and tax incentives, market entry support, and some expat lifestyle services and rule changes.
From a foreign multinational's point of view, there are probably five factors that most determine where they will set up their regional office. They are, in what we think is relevant descending order: taxes, quality of living conditions for senior management and their families, availability of trained manpower, quality of infrastructure, and cost of living. Of course it also helps if you are close to your target market, but given that Asia has so many markets and generally good transportation, it is not as important a factor as it once was -- except maybe if you're in a high-tech market, where being close means better R&D.
OK, let's start with the tax incentives. Well, these are always going to be a challenge for equality-minded Japan, where the public (and of course the government) believes that everyone should pay their fair share of taxes, equally. When you have locations like HK and Singapore, which are both livable and yet have taxes as low as 15%, it will be extremely hard for Tokyo to compete. Invest Tokyo is going to try, however, and is essentially eliminating the local tax portion of your firm's income tax, and thus bringing tax costs down effectively from around 39% to around 26.9%. While that is still above the rate in HK, combining this with the life style component may mean that some senior managers decide they prefer Tokyo over either of the other two cities. There are also investment tax credits and accelerated depreciation on offer.
We thought this tax break was pretty impressive and started wondering if it is for real. Not like Japan to give away tax -- which seems to be going a bit against the grain. So we decided to call the phone number on the brochure, which was for the front office at Accenture. A lady quickly answered and when we popped the question about how long the tax break would last, she said she didn't know. We asked her to find out and she put us on hold, or so we thought, because after a few seconds we realized that she'd inadvertently hung up on us...! Uh-oh, how much is the TMG paying Accenture for this contract? Our mailing must be one of thousands they sent out this week, and this IS the second year of their TMG contract -- so you'd think they have a well oiled machine by now... But sadly, no.
Frustrated, we called the TMG's own Invest Japan office, and there we were greeted by someone more confident-sounding. And yet, amazingly, after putting us on hold to check the answer, she ALSO hung up on us...! Fortunately her PBX was modern enough to show the Caller ID number, and she quickly called back and apologized. She later told us that the tax break would be for five years, but the investment tax credits were only one year.
Hmmm, one year? You have to be kidding, right? So if I buy a building, I have to turn a profit in the first year to use that credit? Is there a company in existence that is new to Japan that can turn a profit in its first year? We suppose that someone in the TMG back office was thinking, "What can we offer that sounds great, but doesn't actually cost us anything?" It's just this kind of small-minded thinking that is hobbling Japan's transition to an open international economy. Unfortunately for Invest Tokyo, it won't take long for companies to find this out. OK, to be fair, the main incentive of reducing income tax for 5 years isn't too bad (but not great, because most companies take 3 years to turn a profit after start-up), but why not extend the credits for the biggest initial expenditures? That sort of snatching-back is just going to turn people off.
The other incentives are as equally uninspiring. There is an expedited visa processing service -- which might be useful, given how slow Immigration is in processing visa applications recently (3-4 months instead of the 4-6 weeks that was normal for years until mid-2013, what's up with that?). There is also an expedited patent service, which might be useful if your R&D is deep enough to produce patents. Then there are loans and financing available if you have a traditional R&D center or factory, but these financing incentives have been around for ages and are not new.
We think that TMG needs to rethink its entire value proposition for attracting foreign companies to headquarter in Tokyo. Looking at our earlier suggested order of priorities, certainly taxes are a top consideration, and probably there isn't much that Tokyo can do about this. But with a bit of creative thinking, why doesn't Tokyo just let multinationals stay headquartered in Singapore while instead encouraging them to have the bulk of their workforce here? Smart multinationals don't yield that much profits tax anyway, so it's better for TMG to focus on levels of employment and tax the employees instead.
This could be done with long-term employment subsidies. TMG should get serious and offer a 50% wage subsidy for up to 100 people for, say, 5 years. This would cut the effective cost of staffing in Tokyo to less than salary levels in Singapore, and given foreign firms are faced with so many other challenges entering the tough Japanese market, this would be a huge selling point to their senior management. A salary subsidy is still taxable locally, from the employees themselves, and such a program could force up wages for that sector thus creating a ripple effect. Five years is not that long, TMG can borrow the money at almost zero percent, and once employees are thoroughly embedded it would take a very determined company to turn around and fire them and move out again.
While we're at it, the TMG needs to understand what personally motivates the senior management of multinationals, the second item on our proposed priority list. Many of these people have families and it's super-expensive for the company to keep them in Asia. Why doesn't the TMG offer a subsidy to send every newly-arrived company expat kid to an international school effectively for free (after all, Japanese-speaking Japanese kids go to school for free), then this would be like a massive pay raise for those senior managers (or a cost saving on company "scholarships"). Heck, offer them a 50% subsidy on their expat apartments as well, and do the real estate sector a favor, too. Coupled with the quality of life in Japan, these moves would be huge incentives to get execs and their families to settle here for a while.
As mentioned previously, Invest Tokyo is being marketed by Accenture, and this is their second one year contract. Both they and the TMG released an announcement earlier in the year stating that Accenture won the contract for a second time on the basis that it managed to get 10 companies to set up in Tokyo. Now, given that the program has a goal of 50 multinationals using Tokyo as their regional headquarters, and 500 new foreign firms overall, by 2016, this is not a particularly auspicious start. Indeed, with incentives like the ones that are being offered at the moment, we're guessing that these ten companies were coming to Tokyo anyway. The press release indicates that they are mostly software, medical, and Internet companies, and if so, they're here not for the incentives but because Japan is their biggest market in Asia.
So, come on guys, let's get real and think a bit harder about the target market and what motivates it.
Government-sponsored whaling to disappear
Following their loss in the International Court of Justice at the Hague, the Japanese government has announced that it will call off this season's whale hunt in the Southern Ocean. This is the first time since Japan started its "scientific whaling" strategy in 1986, that it hasn't sent ships to Antarctica to hunt whales. The decision to cease Antarctic whaling does not extend to Northern Pacific whaling, however, which apparently will continue. ***Ed: Until now, the North Pacific catch has been much smaller. One hopes the whalers don't try a substitution approach.** (Source: TT commentary from nytimes.com, Apr 3, 2014)
Novartis swaps out its senior management team
After a major scandal involving falsified and hidden adverse test data for company drug tests conducted in Japan, Novartis headquarters has decided to fire its top 3 managers and replace them at least temporarily with foreigners. In what must have been a humiliating experience, the head of the firm's global pharmaceuticals business, David Epstein, personally came to Japan and made a formal apology at a press conference this week. Epstein said that while he'd have preferred to put in experienced Japanese managers there wasn't time to recruit the right candidates, so foreign managers pulled from elsewhere were parachuted in. (Source: TT commentary from wsj.com, Apr 2, 2014)
Apple to buy Renesas?
It's not often that you see Apple step in to protect its supply chain, preferring instead to see its suppliers duke it out and keep them competitive. However, when your main supplier of mobile screen chips is about to be bought by your main competitor, it's probably time to take action. Nikkei says that Apple is looking at paying around JPY50bn to buy a 55% controlling stake in Renesas SP Driver division. The Japanese company has been losing money for some time, but it is the world's largest independent supplier of screen chips. ***Ed: Who knows, maybe Apple can show the Japanese how to make money out of chips again...?** (Source: TT commentary from reuters.com, Apr 2, 2014)
Plenty of cash, fewer lenders
A Bank of Japan index indicates that the willingness of companies to take on additional loans is at a low point, even as banks try to make more loans. Apparently the index shows that the availability of money to mid-sized companies in particular is at a 17-year high. The problem is that most companies are already cashed up and don't need more debt, although there was a 2.2% increase in lending in February compared with the same period last year. But the rate of lending is still significantly less than for 2007, before the Lehman Shock. Similarly, companies listed in the Topix index are now sitting on a cash pile of US$636bn, about 50% more than before the Lehman Shock. (Source: TT commentary from bloomberg.com, Apr 3, 2014)
Rules change to permit weapons exports
In sync with China's recent aggressive moves over the Senkaku Islands and other territorial disputes, the Japanese government has decided to allow weapons exports this week, the first time they have done so since WWII. Although the new rules still include "rigorous reviews", they will allow exports if such transfers "contribute to international peace or help strengthen Japan's security". UN embargos will still apply. Exports are expected to mostly be seaplanes and ocean-going vessels to Asian countries and Australia. The global arms market is worth around JPY40trn (US$383bn), while the Japan-only market is worth around JPY1.6trn. (Source: TT commentary from asia.nikkei.com, Apr 2, 2014)
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That was Terrie's Take.
What's yours? Let us know down below.