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A Selection From 'Running Money'
What is with these Asians? Twice now, they have whacked our fund. Just as things started rolling, some currency gyration would give risk a bad name and we'd be back to break even. This was starting to annoy me.
Long ago, I figured out that I would never invest in Asia. Once a year, I used to travel to the Far East as an analyst for Morgan Stanley. Like William Kaye in Hong Kong, I don't think they ever made any money. I always figured that was their problem, but the world is interconnected, like dominoes, so in reality, it was my problem too.
Osaka, Japan - December 1991
I almost missed out on the most startling revelation of the secret to the supposed success of the Japanese. Across a small conference room in Osaka sat an overweight, middle-aged Japanese man, with a thinning mop of jet-black hair. But his most distinguishing feature was one of his front teeth. It pointed straight at me, like a loaded gun. It was perfectly perpendicular to his face and jutted out from his gums instead of hanging down. And like Mona Lisa, it always stared directly at me. I snuck looks at it while sipping green tea and all I could think about was how he was going to drink from his teacup without drooling it all over his shirt. I couldn't pay attention to much else but his bayonet tooth, but luckily some of his words stuck. He spoke with a huge smile, and -- without realizing it -- explained why Japan was doomed.
Traveling at 250 miles per hour on the bullet train from Tokyo to Osaka, I wasn't sure whether to be scared shitless or impressed by Japanese efficiency. Instead, I struck up a conversation with my colleague, Takatoshi Yamamoto. We had met at the main Japanese train station on a brisk evening in December of 1991. I was always in Japan around Pearl Harbor day, maybe because most Americans avoid it.
Like everyone else scurrying around the station, we loaded up on supplies. He bought what looked like a comic book to read and suggested we buy some food. He picked out two bento boxes from a vendor at Track 5 and then headed to a vending machine and asked if I wanted a can of Pocari Sweat (which turned out to be something like Gatorade). I wasn't drinking anyone's sweat, so I politely declined and scanned what else I could have. I settled for coffee in a can.
We were headed to Osaka to visit Sharp Electronics and I was just trying to figure out how Japan works. Yamamoto-san was the electronics analyst for Morgan Stanley Tokyo, which made him the mirror image of me. We got along well. He set up several days of meetings for me with chip companies, consumer electronics companies and even Nintendo.
"So tell me about Sharp," I said.
"Sharp is one of my favorite stocks. They are a big player in memories and also in liquid crystal displays. I set up meetings with the president of both of these divisions."
"Great, I look forward to meeting them." There was a glut of memory chips on the market, and everyone was bleeding red ink -- I couldn't believe that anyone was making money at it, in Japan, Korea or the U.S.
Just the day before, we had gone to Toshiba in Tokyo and met this tall, handsome, gray haired president of their memory division. I knew that both Texas Instruments and Micron were getting killed selling memory chips, and wondering how Toshiba was doing, so I asked. A stern look crossed his face as he shot a why-did-you-bring-this-American-fool-in-my-presence look to Yamamoto-san.
"Mr. Kessler. You must understand that we are big players in memory, and we must meet our commitment to MITI (Ministry of Industry and Technology) for production. It is in all of our long term interest to sell memories." Yamamoto-san was nodding.
"Mr. Kessler," the man from Toshiba continued, "you must appreciate the power of the Japanese." The word "power" was thrust at me, almost spit as "p-HOW-er." Yamamoto-san smiled and mentioned there weren't any markets in which Japanese couldn't outdo American manufacturers. I got the point. But Japanese or not, this guy was also losing money hand over fist selling memory chips.
I was fascinated by LCDs, which Toshiba also made, but I didn't get to ask anyone about them, so I was looking forward to the meetings at Sharp.
Laptop sales were booming, and someday, computer monitors would be replaced by LCDs -- once they got cheap enough. I had done some homework on how LCDs were made. Basically, they take giant pieces of glass, a couple of feet on a side, and then use the same techniques as chip making: print and deposit the transistors to turn on and off pixels, right on the glass. A light behind red, green and blue tinted glass is either blocked or allowed through for each of the million pixels. But dust was a killer. With chips made on six-inch diameter wafers, 80% or 90% of the chips worked, a very high yield as they say in the industry. Dust or other defects kill the others. With LCDs, dust could kill every display on the giant piece of glass. Yields were more like 5-10%. Tough to make money, which is why no American manufacturers even tried. Shareholders hate money-losing businesses.
The coffee in a can tasted like a used kitchen sponge, and I began jonesing for Yamamoto's can of Sweat. I learned that Sharp was originally a maker of mechanical pencils, hence the name. They ventured into other markets like TVs and VCRs just as those markets were booming in the U.S., Europe and Japan. Now they make everything from laptops to camcorders to cordless phones.
As the train pulled into Osaka, I got a sense of a city of farms and railroad lines interspersed with giant modern factories. It looked like a drab version of Atlanta.
Lots of sushi and Asahi Super Dry's helped launch me into a fitful sleep.
In the morning, we took a taxi over to Sharp Headquarters. The white-gloved taxi driver spoke fluent English. "You American? I get lots of Americans, I take them all over Osaka. Here are some of my American friends." He handed me a stack of business cards. I politely shuffled through them, and noted with amazement that I knew a few names, including Scott Cook, the CEO of Intuit who I had met with a few weeks earlier. Small world.
We entered the lobby, which was filled with visitors. I was handed a five-page application to fill out to enter the building, promising not to steal any of their secrets. I noted with suspicion that Yamamoto-san had a 3x5 card to fill out.
We walked for what seemed like a half a mile to a conference room, passing giant rooms filled with huge tables and people sitting around them, yapping away to each other or on phones. They were like Wall Street trading floors, but without screens.
"This is all marketing," I was told by our guide. I noted maybe one personal computer off to the side in these giant rooms.
We got to the end of the hike and entered a small conference room. They all look the same with furniture from the 1960's. A green couch on one side, two chairs on the other side and another facing the center. I sat in one of the chairs and got a quick "Tsk, tsk" from Yamamoto-san.
"Sorry, Japanese custom, you must sit with your back to the window, and the hosts will face you."
In walked two gentlemen. We shook hands and exchanged cards. I got good at the two-handed grab the card and stare at it a while with interest, which always pleased. But I passed on the bowing. One gentleman ran the memory chip division and the other the LCD division.
We started with memories, and it was clear after a few minutes of listening that they were losing tons of money, probably $100 million a year. But I already knew that. We moved onto LCDs, and that's when I almost stopped listening. Years and several children of mine later, I would sit through multiple screenings of the animation Land Before Time. The baby Tyrannosaurus Rex is named Sharp Tooth, and it would always make me chuckle.
In Osaka, my Sharp Tooth was one of the smartest, most articulate Japanese managers I had ever met. He walked me through their production plans, screens per glass substrate, costs, market prices, overhead, yields, fully loaded depreciation and anything else I asked for. It took me a while, but I figured out that he was dropping between $1.5 and $2 billion a year in operating losses.
Still shaken from the "p-HOW-er" meeting the day before at Toshiba, I was very nervous about how I asked questions. Plus, it was hard to look up from my paper. I chose my words carefully.
"So, this product line is in investment mode?" I asked.
"Yes, I see what you are asking. Of course it is in very big investment mode, but so too is it in investment mode for everybody else. No one is in profit return mode, if you understand my choice of words."
I think he just admitted that he is losing lots of money, as are all of his competitors.
"Either we do this important market, or it will be in Korea or worse, in Taiwan. It is our imperative to invest, as you say, in LCDs."
"And a billion dollar annual investment is what it takes?" I asked.
"Well, Mr. Kessler, probably more like two."
"But isn't there some return expected, from, you know, from the stock market?"
"That's not an issue. Someone else can figure that out. We as a corporation and a nation have priorities." He gave me a smile that I will not forget, for a lot of reasons.
Yamamoto-san and I were then escorted to a large but austere office and introduced to Haruo Tsuji, the President of Sharp Corporation.
"What do you think of my company?" Mr. Tsuji asked. "It's quite impressive," I stammered out. I thought I was going to be asking the questions. "You are clearly a leader in LCDs." "Yes, this is our most important product strategy. Every American will soon carry a notebook computer with one of our color displays." "It is an expensive strategy, yes?" "Of course. But we have the resources and financial strategy to dominate." "Can you elaborate?" He must not have heard me. "Thank you for coming," he said as he handed me a small wrapped gift. "A financial strategy?" I thought. "Aren't you supposed to just make money and eventually show a profit?"
* * *
We next got a tour of the company museum next to the lobby. There was the first mechanical pencil, some old TVs and giant VCRs from the late '70's, and some new projection TVs. At the end of the tour, they had a 17-inch LCD TV playing video of some Japanese golfers and, I think, a Pocari Sweat commercial. It looked pretty good -- I had never seen video on an LCD, but something was wrong. It was too slow between frames. It's hard to describe, but my eyes started to hurt, because some of the previous images were still there as the video played, the golfer's club was still in mid-air as the ball was hit. Very weird.
Three women with clipboards accosted me as I was leaving.
"What do you think?"
"Very nice," I replied. "It's a beautiful museum."
"You like the TV?"
"Yes, the TVs were great, I think I have a Sharp TV at home," I lied as I tried to get away. "And what about the last one?" "The last what?" "The last TV, that one." One woman pointed to the LCD TV. "Very nice," I said. They all scribbled something on their clipboards. "You like?" "Yes." "No, no. What you like?" "I liked the commercial."
"Good TV?"
I figured I would never get out of there at this pace. "Well, if you really want to know, the screen is a little small. I have a 27-inch TV at home."
I heard a few "tsk, tsk"s and more clipboard scribbling.
"And," I continued, "it's a little slow between frames, bad hysteresis, I think." I forgot what hysteresis meant, something from college physics about lags in fields. It sounded good and I figured that would throw them for a while to get me out of there.
I got to the lobby, and we waited for a taxi back to the train station. I picked up an English version of Sharp Electronics' annual report, and noted that the company was making money and had made increasing amounts of money for the last 10 years.
Our next stop was Nintendo. This meant a bullet train to god-knows-where and then a couple of slower trains to Kyoto.
Nintendo was in a white, non-descript one-story building next to some railroad tracks. It could have easily been a warehouse on the south side of Chicago. Management rarely met with investors, but we were able to meet with a few hardware designers in a conference room near the lobby.
Nintendo was fascinating. It was the most valuable company in Japan, maybe even the world. Why? Because it was the most profitable company in the world. They were selling tens of millions of Super NES platforms -- which, at $99 apiece, were almost certainly sold at a loss. But they sold hundreds of millions of game cartridges at $40, which cost them $6. Nice business if you can get it -- and they had twitchy fingers around the globe addicted. It struck me that this was the first Japanese company I had spoken to that actually sold software; the rest were just manufacturers with huge factories.
The hardware designers gave me a 12-page document with a big red symbol with Japanese kanji characters inside of it stamped on the front page. I skimmed through it and it looked like the design and specifications of their next game platform. I got excited -- maybe this was some giant scoop that I could take back to investors in the U.S., and point to some part or another in the next Nintendo game machine.
On the taxi back to the train station, I asked Yamamoto-san "So what does this mean?"
"The meeting?"
"No, this red symbol and Japanese words inside of it."
"Oh, that means top secret, do not distribute outside the company."
"Really. Wow. Can you help me translate the rest of the document?"
"I could, but it's not worth the bother."
"Why not? This is hot stuff!" I screamed, barely able to bottle up my excitement.
"Kessler-san. Do you think they would really just hand you secret documents? They have been trying to figure out for the last 18 months what their next platform will be and have been bouncing ideas off of everybody. They just want feedback."
"Why give it to me?" I asked.
"Because maybe you can get it in the press in the U.S. and competitors will pick it apart, and then Nintendo learns valuable things. I would just throw it out if I were you. Not everything is what it seems in Japan."
I was learning that more each day.
* * *
We finally headed back towards Tokyo and my flight back to NY from Narita. I scanned the headlines of the only English language paper I could get my hands on. One article that caught my eye, but just barely, was about the Japanese Fair Trade Commission, whatever the hell that was, signing a consent decree with Nomura Securities, Daiwa, Nikko, and Yamaichi, who promised never to compensate their clients for stock market losses again.
"Again?" I thought. "Protection against stock market losses? Who gets that? What's this all about?"
The JFTC reminded these firms, the article continued, that if they were caught in similar offenses again, it would lead to criminal charges.
I asked Yamamoto-san, who once worked for Nomura Securities, what this was all about. He shrugged. The Nikkei had peaked at 40,000 a year before, and was now 23,000. He said most people figured it was a wrist slap -- a little house cleaning is good, and the Nikkei would be back.
* * *
A few years later, with the Nikkei at 15,000 and dropping, Yamamoto-san came to Morgan Stanley offices in New York. He looked like he had been through a monsoon.
"You OK?"
"Things very tough."
"What do you mean?"
"Lots of money disappear. You remember our visit to Sharp?"
Who could forget? There were already a few sequels to the Land Before Time animation.
"Yeah, sure. How are they doing?" I asked.
"Big problems. They had $2 billion dollars, about a third of their cash, at a non-bank bank."
"A what?"
"Non-bank bank. It's really just an investment fund. They were speculating with Sharp's cash, in the stock market and in real estate. They used lots of debt."
"Go on."
"Well, with Nikkei down and real estate down, the non-bank bank failed. That $2 billion is gone."It hit me right then and there. This is what Sharp Tooth was telling me, but I didn't know what he was saying. It seemed to me that not only did Sharp lose $2 billion, but they lost all their earnings. Nomura potentially rigging the Nikkei by paying clients back for losses meant every company could count on a rising stock market. Speculating was a one-way street, and paper profits could be washed through their income statement as earnings. No wonder Sharp was profitable.
LCDs were losing money, but the company was profitable because they were showing speculative stock market and real estate gains as if they were the company's profits from operations. But it was bogus, a sleight of hand. Sharp didn't make money at all. Ouch. If that's true, the entire Japanese electronics business was, well, a profitless pit. Turns out it was worse than that.
The day's not over here on the US east coast yet. Perhaps we'll see one later. I know posts don't stop for me until later in the day.
what?
Am I the only one that thinks the "E" in the Dell logo looks an awful lot like the "E" Enron logo?
Is it some sort of hidden sign?
I have a little spare karma, so I feel like venting.
You didn't get an answer as earthstar so take the hint. Or learn how to use Google.
Either way, beat it.