Report No.19
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Japan Entrepreneur Report No. 19 May 2004
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- Loan guarantees need to go
- Todd Budge on financial reform
- Why delinquents make the best employees
- Tokyo entrepreneurship event, other bytes
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Loan guarantees need to go
He was used to banks demanding personal guarantees for company loans, but
the Tokyo-based entrepreneur was still appalled when a vendor strode into
his office, contract in hand, and said, 'You're a foreigner. Put your
children as well as yourself into this contract as guarantors of your
debts.'
"Get the hell out of my office!" the New Zealander shouted, flinging the
papers at the flummoxed vendor. The business owner, who said he had
never felt so insulted, found alternate financing.
Instead of judging businesses and adjusting their rates to charge risky
ventures more, many creditors in Japan still feel entitled to 100 percent
assurance of payback, despite fledgling finance reform and a growing
understanding of the relationship between risk and reward. Small business
owners seeking bank loans face a 50-year-old dilemma: Japan's banks
require smaller borrowers to personally guarantee repayment, with their
own money if necessary. That daunting requirement casts a long shadow
over entrepreneurial dreams.
"Personal guarantees contradict the very essence of incorporation," wrote
Koreda Nobuhiko, CEO of leading financial software maker Miroku Jyoho
Service in a recent Nikkei Business article. "The corporation in a
capitalist economy is designed so that managers aren't forced to bear
unlimited responsibility. That's why a company gathers funds in the form
of 'risk money' from many different people who believe in its business."
Personal loan guarantees force managers to bear all responsibility, says
Koreda. They face the prospect of spending the rest of their lives paying
off debt should their companies collapse with large loans outstanding.
In true financial markets, risk is dispersed in small bits among many
people when they buy stock. Under Japan's bank-centered system, one
entrepreneur risks everything. The personal loan guarantee system goes a
long way toward explaining Japan's unending succession of suicides by
failed businesspeople and the nation's last place ranking in the Global
Entrepreneurship Monitor's 37-nation evaluation of entrepreneurial
activity.
"Loans are good for stable, predictable companies, regardless of size.
Venture capital firms can't earn high returns on stable, slower-growth
companies, yet too many Japanese venture capitalists invest in companies
that ought to be getting loans," notes SunBridge CEO Allen Miner. "By the
same token, venture capital is appropriate for high-growth, high-
potential companies or pre-profit startups. Yet too many Japanese banks
lend money to companies that should either be financed with venture
capital or allowed to go bankrupt. The division of labor between venture
capital firms and banks isn't very clear in Japan."
Thankfully, more banks are taking a clue from entrepreneurial competitors
such as Suruga and Tokyo Star (<www.japanentrepreneur.com/200404.html#2>).
And the personal loan guarantee system is on its slow way out.
This month we take a last look at finance, with Todd Budge explaining why
loan guarantees will eventually go away. Finally, we'll learn why you
should consider hiring the misfits rather than the fit-ins.
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Todd Budge on financial reform
Following JER's story about Tokyo Star Bank's rise last month
(<www.japanentrepreneur.com/200404.html#3>), CEO Todd Budge was kind
enough to grant a 35-minute telephone interview. Following are excerpts:
- Please comment on the personal guarantee requirement for small and
midsize business loans.
That's traditionally how banks did business with small and midsize
companies, mainly because banks hadn't figured out how to manage risk.
The easiest thing to do was get a guarantee. But that's definitely
changing. Even the bigger banks are now starting to provide funding to
smaller and medium sized companies. As the competition heats up and
people start to see how profitable that segment can be, it simply won't
be competitive to require personal guarantees. Over time you will see
more options for small and medium sized companies that don't require
personal guarantees.
- Tell us about an "Aha!" moment at Tokyo Star Bank--when you saw fortune
turn or knew things were going to work out.
In my first thirty days, I realized it was going to be very difficult to
turn the bank around with the way things were going. So I sat down with
the shareholder and said, 'Look, this is my take on what needs to be done.
Unless we make some bold moves and tough decisions on people and
structure, we aren't going to get the results we need.' They immediately
agreed. In fact, they said, 'Wow, it took you only thirty days to figure
that out? That's pretty good! That's what we sensed, but weren't
confident it was the right direction.'
They immediately gave me full support and implemented many of the changes
I recommended. That's what led to me becoming president, I suppose. I had
been involved in several business integrations in Japan, and was
convinced certain things had to happen, otherwise it would take too long
or simply wouldn't be effective. That's when I felt like we were going to
have a chance. That experience with our shareholder was a turning point
for me.
- What were the problems that Tokyo Sowa had that made it a good
candidtate to take over and fix.
Many issues were cultural and organizational. We had the wrong people in
some jobs, positions where we hadn't delegated enough authority, and so
on. Human Resources in Japan tends to be a command and control function;
HR people decide where and how long you are going to work. They tend to
rotate people around and act like powerbrokers rather than enablers who
support the organization and the people. So applying best practices in
terms of HR and people management was a big area of opportunity for us.
Risk management was another one. The bank didn't have a true retail risk
management function, and its corporate risk management was antiquated, so
bringing best practices to the risk management area was crucial. Process
management and quality control was another area. In Japan, quality
control is highly advanced in the manufacturing sector, but in the
service sector it's far behind world standards.
- Why is process management so common in manufacturing and so absent from
the service sector?
Manufacturers compete globally; it's extremely competitive. They need
world class standards to survive, whereas the banking industry is
domestic. Banks were highly regulated and protected from outside
competition. That's the way things go if you have no competition and
aren't exposed to global competitors. There's no incentive to implement
somebody else's practices.
- How much do the bureaucrats actually interfere with retail banking
operations?
They're much more hands off than they were five or ten years ago. There's
a lot less red tape, a lot less bureaucracy, a lot more freedom to
introduce new products, open new branches, and so forth. We've just been
through audits by the Ministry of Finance and Financial Services Agency,
and we have a very good, open relationship. In fact, they encourage us to
innovate. They want us to show the way, in a sense?to put pressure on
the bigger banks to innovate and change.
- What are some areas of opportunity in finance for smaller companies and
individual entrepreneurs?
There's a trend towards outsourcing. As banks try to become more
competitive and reduce costs, they are looking to outsource much of what
they do internally today. In IT, for example, I think there are
opportunities for entrepreneurs who develop offshore programming
capability to support banks. There are opportunities on the consulting
side, to consult banks on marketing strategy. Banks tend to be weak
marketers, especially direct marketing to retail consumers. There's
opportunity on the collection side. Banks historically, haven't been very
good at collection. In the U.S. there is a whole industry around
collections.
I've met many entrepreneurial fund managers looking to work with banks to
help turn around small and medium size companies by getting the right
management expertise. Maybe take an equity stake in a struggling service
sector Japanese business, provide U.S. management talent, then enjoy the
upside when they are successful.
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Why delinquents make the best employees
Faced with choosing between a straight "A" college graduate and a high
school dropout, Sugihara Isatsugu hires the dropout every time.
Mr. Sugihara likens the difference between a rebellious misfit and a
studious graduate to the distinction between wild fish and those bred on
fish farms.
Aquaculture fish grow up in protected ponds, with keepers feeding them.
But in the wild, fish must forage for food. In people terms, the
aquaculture fish are those who run along a preset track laid down by
parents and teachers, but possess little vitality of their own. Wild fish,
on the other hand, make their own decisions and enjoy tremendous energy,
Mr. Sugihara said in a recent issue interview in Nikkei Venture magazine.
School dropouts, former gang members, and misfits who crashed and burned
while chasing their dreams make the best employees, Sugihara says.
"When they catch fire, the power they unleash is fearsome," he says.
"Wild fish" learn faster, know how to improvise, and are more customer-
focused, Sugihara believes.
Mr. Sugihara's success supports his counter intuitive personnel theory.
Tamagoya, the bento boxed lunch producer he leads, distributes 55,000
bento per day, twice the industry average on a per-employee basis. Using
Sugihara's unconventional hiring strategy, Tamagoya has thrived in a
ferociously competitive industry. Today, annual sales approach U.S. $60
million.
That begs the question: How can ambitious entrepreneurs attract employees
who are, well, a little more...bad?
That's a real challenge in a nation whose citizens aren't exactly born to
be wild. As Tokyo economist Jesper Koll remarked at a seminar earlier
this month, Japan faces a severe problem with NPY: Non-Performing Youth.
Fifty percent of the population aged 35 or younger has never held a full-
time job, according to Koll.
Maybe they could benefit from an internship at Tamagoya.
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Bits and bytes
Carl Kay will lead a group of Tokyo-based entrepreneurs in a discussion
of "Creating Value for Customers and Owners: What Does It Mean to Create
Value?" Panel members will include ValueCommerce Founder Tim Williams,
IGC Japan President Lance Lee, and Alexandra Press founder Caroline Pover.
The June 9 event will celebrate The Entrepreneur Association of Tokyo's
one year anniversary. See <www.ea-tokyo.com> for details.
Three months of focusing on finance is enough. Next month I'll be on a
new kick--maybe tourism, leisure or another topic suited to sun, fun and
travel in the month of June. Stay tuned.
Replacing Management Department: Democrats Abroad are active in Japan.
Check their Web site for the latest events:
<www.demsjapan.jp/geeklog/public_html>.
And before we sign off, what's the best-named punk band gigging in the
U.S. this month? "A bombin' nation."
Tim Clark
Senior Fellow
SunBridge Corp.
Voice (U.S.) 503.235.4419
Fax (U.S.) 503.235.4429
clark@sunbridge.com
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