Months after becoming Olympus’s first non-Japanese president and then CEO in 2011, British executive Michael Woodford called for an investigation into allegations that the tech company had covered up losses dating back to the 1990s. Although he was forced out of the company, a $US1.7 billion accounting scandal soon unravelled that took down his opponents on the board and caused Olympus’ stock price to fall more than 75%. Woodford recounts his experiences in “Exposure: Inside the Olympus Scandal: How I Went from CEO to Whistleblower,” now out in paperback, with a movie on the way. His comments on the rise and fall of corporate Japan are excerpted below.
From the ruins of war Japan had proved the most amazing industrial success story. And it wasn’t just cars at which they excelled: cameras (Olympus’s first was brought out in 1936, the ‘Semi-Olympus I’), the video recorder, the CD player, the Walkman — all had their origins in Japan.
So by the early 1980s, when I joined KeyMed, the Japanese were the commercial and manufacturing envy of the world. They had to do something with their cash surpluses and the response was to go on a spending spree abroad. In the 1980s Japanese firms made overseas direct investments of $US280 billion, then equivalent to buying the whole economy of Australia or India. Sony bought Columbia Pictures in 1989, Fujitsu bought the UK’s International Computers Ltd (ICL) in 1990. They picked up Hugo Boss, the Turnberry Hotel and golf course in Scotland, and something similar in California at Pebble Beach. And, in a far smaller deal, Olympus purchased KeyMed from its founder and my mentor, Albert Reddihough.
KeyMed proved an extremely successful investment and by 1990, after Olympus had taken full control of the company, it was clear that Britain was the favourite destination for Japanese direct investment. By this stage the UK accounted for 38 per cent of Japan’s $US42 billion investment in Europe. Toyota moved into Derbyshire, Honda to Swindon and Nissan to the North-East. Sony made TVs in South Wales, Oki made computer printers in Glasgow, and Olympus became one of the largest employers in Essex. France, incidentally, was the recipient of a mere 7 per cent of Japan’s investment — maybe this had something to do with the views of people like Jacques Calvet, boss of Peugeot-Citroën, who called Britain an offshore aircraft carrier from which the Japanese could launch their attack.
Such was the perceived threat of their success that Michael Crichton’s “Rising Sun,” published in 1992, shot to the top of the bestseller lists. Its cover blurb stated that the thriller followed a head-long chase through a maze of industrial intrigue — the Japanese versus the Americans. A no-holds-barred conflict in which control of the electronics industry is the fiercely coveted prize and the Japanese saying ‘Business is War’ takes on a terrifying reality.
The underlying reality was more subtle. Japan had hidden weaknesses. In the 1970s and 80s Japan appeared to boast a superior form of capitalism and management: one that seemed more egalitarian than the ‘tooth and claw’ variety practised by the Americans and British.
Japan’s share of world exports peaked in 1986 and then a malaise set in. Questions were asked about the real nature of the Japanese system and what its weaknesses might be. These are forcefully high-lighted in Michael Porter’s book “Can Japan Compete?“, which the celebrated Harvard professor co-wrote with two Japanese collaborators, Hirotaka Takeuchi and Mariko Sakakibara. It is unusually readable for a business textbook.
The strengths of Japanese business and its corporate model had for years been drummed into every MBA student: high quality and low cost; a wide array of models and features; lean production; regarding employees as assets; permanent employment; leadership by consensus; strong inter-corporate networks; long-term goals; internal diversification into high-growth industries; and staying close to a supportive government.
One by one Porter went through these attributes. He showed how they had been found wanting, as world markets changed, or perhaps, as he suggested, they were not so powerful in the first place. He found companies, including Olympus’s camera business, chasing market share at the expense of profit. He found that leadership by consensus (usually with elderly men at the helm) led to conformity and lack of innovation. He found ‘competitive convergence’, something that occurs when, he said, all the competitors in an industry compete on the same dimensions. The more rivals source from world class suppliers, often the same ones, the more similar they become. As rivals imitate one another’s improvements in quality, cycle time, or supplier partnerships, competition becomes a series of unwinnable races down identical paths.
What concerned Porter most was that many of the most successful Japanese companies made consistently low returns on investment. This lack of profitability was widely tolerated because nobody wanted to rock the boat. Unlike their Western counterparts, and in the absence of pressure from shareholders, large Japanese compa- nies often maintained unprofitable divisions indefinitely. Japanese executives euphemistically called these ‘healthy red divisions’. Much of corporate Japan is unable to produce a commercial return on cap- ital. This is the most basic indicator of flaws in the system. None of this was news to Japan’s near neighbours, the ultra-competitive Koreans, who were waiting for their turn in the spotlight.
Such flaws became painfully apparent in the 1980s. The country amassed so much cash that the yen grew strong, while the US dollar began its long downward slide. For a while the Japanese had never known it so good. Pumped up by the success of their exports, the asset bubble began to inflate. Then, inevitably, it burst.
The lead the Japanese had held in electronics was especially impressive. Who bought a Korean Samsung rather than a Sony or Panasonic television in the 1990s? But the lost decade took its toll and the dive since has been astonishing. Between 2000 and 2010, Japan’s electronics production fell by 41 per cent and exports tumbled by 27 per cent. Japan’s global market share fell by almost half to 10 per cent by 2009, whereas Korea’s rose to nearly 10 per cent.
A month before I took over as president, it was confirmed that China had overtaken Japan to become the world’s second largest economy after the US. It lost the number two spot after nearly five decades as runner-up to the Americans. This was what I had walked into as the new president of Olympus — a company and a country in trouble.
Reprinted from EXPOSURE: Inside the Olympus Scandal: How I Went from CEO to Whistleblower by Michael Woodford with permission of Portfolio, a member of Penguin Group (USA) LLC. Copyright (c) Michael Woodford, 2012.
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