By Ethan Vera · On March 27, 2017
In search of growth, Japanese corporate culture must adapt to support successful Merger & Acquisition activity
When DaimlerChrysler acquired a controlling stake in Mitsubishi Motorsin in 2000, it created one of the world’s largest automobile manufacturers. And in a typical –but problematic- fashion, many investors viewed the pro-forma company’s behemoth size as a proxy for its future success. Yet, just a few tumultuous years later, the very same strategic partnership that had been so lauded at its announcement ended with both companies worse off. Today, with the advantage of having hindsight as a tool for post-merger forensic analysis, the DaimlerChrysler merger presents itself as a useful case study in the failures of large-scale M&A. While there are the usual suspects at the heart of any poorly executed M&A transaction –namely unrealizable synergies, an unmanageable capital structure, or an inability to integrate- there is one factor that often gets overlooked: corporate culture. As a softer, less quantifiable, “Factor X” so to speak, incompatible corporate culture can lead to the demise of mergers that are otherwise perfectly rational. This is particularly true in cross-border transactions and is even more pronounced in mergers with Japanese companies.
The importance of corporate culture becomes evident when we stop viewing it as derivative to an organization’s purpose and start understanding it as a manifestation of a corporation’s ethos or raison d’être. On a deeper level, corporate culture emerges against the backdrop of often deeply entrenched national principles, traditions, and histories. Capitalism, for example, is not merely an economic system of allocating resources. Instead, it is a political, moral, and economic ideology that largely elevates the self by assuming rational self-interest. Thus, it makes sense that the Western notion of capitalism fails to translate perfectly in Eastern countries like Japan, where the culture is vehemently against self-interest. These differences in national identities also extend to corporate cultures. Whereas Japanese corporate culture is centered on respect, understanding and warm employee relationships, German corporate culture is built on cold industriousness.
In the case of DaimlerChrysler, the management team failed to understand the nuances of Japanese hierarchy and instead merely exported their German organizational structure to Japan. Rolf Eckrodt the recently appointed German COO of Mitsubishi Motors, had many visions for turning around what he saw as a failing company. This included encouraging Mitsubishi to move away from a culture of engineering dominance. However, the Japanese dominated board preferred to see the company as an equal to DaimlerChrysler rather than one requiring rescue. Ultimately, after many cultural clashes, the Japanese subordinates were reluctant to take orders, which led to huge inefficiencies and one of the largest failed acquisitions in history.
DaimlerChrysler is an illustrative example of some of the broader challenges that many Western and Japanese companies face when seeking to pursue M&A. In a recent survey, Baker & Mckenzie (2016) examined how various companies fared following a merger or acquisition. It reported that 64 percent of US and European companies believed that the merger exceeded their expectations; however, only 52 percent of Japanese companies said the same. Baker & Mackenzie attribute this largely due to the differences in incentive structures for both compensation and internal promotion. Japanese corporate culture places emphasis on seniority, and thus links both compensation and promotions to how long an employee has been with the company. In turn, there is a high degree of employee loyalty and low worker turnover. Conversely, the North American and European model is mostly merit-based. It is not uncommon for executives to be younger than the employees who report to them. Combining the two models can be very difficult: an older Japanese executive would not appreciate people receiving quick promotions, while an American or European employee would most likely be dissatisfied if a co-worker were to be promoted without merit. Moreover, many American and European companies are increasingly moving towards a more loosely structured working environment. Businesses allow employees to work from home, on off hours or in remote locations. Most Japanese employees work non-flexible hours in the office. This presents problems for project teams working to organize when and how meetings are conducted.
While it is admittedly difficult, finding a common corporate common ground has never been more important. Outside of the automobile industry, Japanese companies are remarkably less global than their international peers. Their percentage of revenues outside of the domestic market, overseas assets and stock ownership outside of Japan, are far below the average. But with a shrinking domestic consumer market and a stagnating economy, Japanese companies are being forced to look abroad to obtain new growth. Many of these companies have also been acquiring assets in Europe and North America. Largely made possible thanks to an influx of capital from Abenomic policies, Japanese companies spent 11.18 trillion Yen on mergers and acquisitions of foreign companies in 2015, signifying the greatest foreign spending in history.
In order to successfully acquire companies and unlock synergies, Japanese executives must build a strong degree of understanding for local corporate culture. From a high level, cultural differences can be mitigated through strong communication and openness to different working environments. An important metric of an acquisition’s success is the retention rate of top talent. In the same study by Baker & McKenzie, it was also found that Japanese companies were only 59 percent effective at retaining top talent, compared to 68 percent for US and European companies. Japanese corporate culture is very top-down, with senior employees responsible for hiring and staffing decisions. As Japanese companies venture into global M&A activity, they must begin to involve lower-level employees in retention decisions. By involving various levels of employees in retention decisions, Japanese companies will have a better chance at keeping top talent in their acquired firms. As more Japanese companies operating in industries with stagnating domestic growth continue to look to M&A as a way to expand their operations, learning from other post-acquisition integration techniques will be crucial for their success. If cultural differences can be mitigated, increasing activity in global M&A can unlock the potential for Japanese companies to enter new markets, increase their global presence and competitiveness which will ultimately benefit consumers.