Heirless Japan Businesses Lure China Reviving Graying Nation
Date July 2014
Featured in Bloomberg
Takeshi Kaneko searched for nine years to find someone to take over the dried-food store his parents opened after they fled the rubble of Japan-occupied China at the end of World War II.
“I started thinking about it when I turned 60, since my three children are all girls and they left home when they got married,” Kaneko, 71, said at his one-story shop in Shizuoka city near Tokyo. “We used to make so much money that we had to stuff 100-yen bills in hemp sacks to take home. But now our sales are only about an eighth of the old days.”
After talking to local banks and getting no good leads, Kaneko tried a program run by the prefecture’s chamber of commerce that helps business owners find successors and assists with the paperwork. He received 26 applications. Kaneko’s choice: Kotomi Shinya, a 41-year-old woman who was interested in food retailing. Having worked with Kaneko and begun learning the ropes, Shinya says that she intends to buy the shop.
Family-run businesses with aging owners and no successor like Kaneko’s are increasing in Japan as the population shrinks. The nation of 127 million people is home to almost one million small businesses with 10 or fewer employees, while people in their seventies made up the biggest proportion of the self-employed, government data show. Investors from Citic Capital Partners to Gordon Brothers Group LLC are stepping in to buy such businesses with the view that new blood can help them grow.
Prime Minister Shinzo Abe included help for heirless companies in his economic growth plan released last month. A record 28,943 small- to mid-sized companies went out of business last year, according to Tokyo Shoko Research Ltd. Failure to find successors was a big reason for the increase, said Nobuo Tomoda, the executive director at the credit reporting company.
Citic Capital Partners Japan Ltd., the private equity unit of China’s state-backed Citic Group Corp., considers about 200 to 300 Japanese companies a year for possible investment, and around 80 percent of those have succession issues, said Hironobu Nakano, a senior managing director at the financial firm.
Higashiyama Film Co., a touch-panel film manufacturer that Citic Capital bought for 1.5 billion yen ($14.8 million) in 2010, was a family-run company without an heir, according to Nakano. Citic consolidated the company’s three plants in China and quadrupled profits to 2.4 billion yen in 2013 compared with 2011, he said.
Gordon Brothers, the U.S. debt and equity financing company, plans to invest as much as 10 billion yen to buy stakes of smaller Japanese companies including those without successors, according to Kenji Tanaka, the president of its Japan unit. Gordon Brothers is looking at retailers and apparel companies, and also plans to assist with sales of company assets including inventories, Tanaka said in an interview.
While more aging company owners are starting to sell their business, that approach remains uncommon, government data show. In 42.5 percent of cases when an owner retired, a family member took over. Almost as often a non-related employee succeeded as the boss, and someone outside of the company was recruited in 14.6 percent of the cases, according to a survey by Japan’s Small and Medium Enterprise Agency. Acquisitions occurred in 4 percent of the cases, an increase from 2.4 percent 25 years ago.
“In a place like the U.S. where M&As are commonplace, there’s nothing strange about company owners changing, but in Japan, the M&A market is still not very mature,” said Nobuo Sayama, the representative director in Tokyo at Integral Corp., a Japanese private equity fund.
The number of smaller companies in Japan has decreased 20 percent from 1999 to 2012, reducing the number of employers in regional areas where many of the firms are based, according to Kenichiro Oyama, a Small and Medium Enterprise Agency official.
“The chamber of commerce here is putting in a lot of effort to revitalize the region,” said shop owner Kaneko. It’s helping him get a loan to buy retail space next door, he said.
The population of the world’s third-biggest economy declined for a third year in 2013, according to government data. People 65 or older made up a fourth of the total, the highest-ever proportion, while children as old as 14 made up just 13 percent.
If the trends continue, “the regional economies will be hard to support,” Oyama said in an interview at the agency, which is part of the Ministry of Economy, Trade and Industry.
“Many smaller companies that have been around for a long time have unique technologies,” said Junko Nishioka, the chief Japan economist at Royal Bank of Scotland Group Plc. in Tokyo. “The biggest problem from this for the economy is that these technologies aren’t passed down.”
Shinya, who will take over Kaneko’s shop, is a successful example of the government’s efforts to prevent businesses from folding because they lack heirs.
She became keen on running Kaneko’s store after listening to him speak two years ago at a seminar for would-be entrepreneurs organized by Shizuoka prefecture’s chamber of commerce. Shinya was then an office worker at a metal-processing company, and wanted to start a food business.
“I wasn’t interested at all at first,” said Shinya, sitting next to stacks of dried mushrooms, beans and seaweed. “But then I began to think I could do something new.”
Now she plans to convert a vacant shop next door into an eatery where she will cook red-bean soup and sweets. “It would be a shame if this store closed,” Shinya said. “I think we can succeed by changing the way we do things.”